With the summer finally coming to an end, I made time this week to look at one more of the tax consultations issued in August: HMRC’s Bringing business tax into the digital age, part of the Making Tax Digital programme. These proposals, requiring businesses to keep records using digital tools, have generated a significant amount of comment in the tax professional press, and I started to ask myself some fairly fundamental questions on reading them.
My thoughts don’t follow the 44 questions in the condoc. The only one to which I would have a specific response is the proposed turnover threshold of £10,000, which seems far too low to let out many genuine businesses (as opposed to those with relatively small amounts of self-employment income). Instead my concerns are with the bigger picture.
What’s the rationale?
- Why does HMRC want to require businesses to use digital tools to keep their records? I’m not questioning the legitimacy of HMRC’s need to require businesses to keep sufficient records to enable them to calculate their tax liability; there are already rules setting out those requirements, and the condoc suggests they will remain in place. But these proposals go way beyond this, setting out how business transactions must be recorded (i.e. using digital tools), on an ongoing basis from day to day. That arguably crosses a line between running an efficient tax system and seeking to dictate how a business must be run: businesses do not exist in order to pay tax. The government assures us in paragraph 2.5 that the decision wasn’t taken lightly, so there must surely be a very strong rationale before such a step is taken.
- A clue to that rationale is given in the next paragraph, 2.6, which sets out why the government has decided to mandate the use of digital tools rather than making this optional:
An optional approach to keeping records digitally would have given rise to a number of challenges. In particular, the return on the £1.3bn investment in transforming tax administration would not have been realised as those most motivated to adopt the new processes would be the ones least likely to be making mistakes currently.
That seems fairly plain: businesses must be required to keep their records using digital tools in order to realise HMRC’s return on its investment. Is that a good reason for dictating how businesses should be run?
- Apart from the £1.3bn investment, are any other reasons given? There are references to how businesses would “lose out” if the system weren’t mandatory, and paragraph 2.7 explains that digital tools will allow them to “gain greater control, certainty and confidence” over their tax affairs. Some of the rhetoric in this section of the document, in addition to its overtones of the referendum, conveys an almost evangelical zeal for the new app-enabled world. My own experience of using digital tools is that they may bring greater speed and convenience, and have a range of other benefits, but seldom inspire a sense of control. In any event, the rationale here seems to amount to no more than an assertion that businesses may not know what’s best for them and must therefore be required to do what the government decides is in their best interests.
- There’s also a passing reference in paragraph 2.4 (and in the impact assessment at the back of the condoc) to reducing the tax gap due to error. But let’s examine this concept a bit more closely: why does genuine error give rise to part of the tax gap? If it’s genuine error, then surely it would be likely to go in either direction – both for and against the taxpayer – rather than consistently in their favour so as to lead to a tax gap? If there’s a systematic bias in favour of the taxpayer, then surely this is due to something more than genuine error – and how can we be sure that behaviour will be addressed by requiring businesses to use digital tools? I return to this theme below in point 7.
- Of course, if Parliament decides to legislate a requirement for businesses to keep digital records, it can do so. But the reasons given for requiring such a change in the day-to-day running of businesses seem quite far removed from the “imposition, repeal, remission, alteration, or regulation of taxation”. Those words are relevant because they are part of the definition of what constitutes a “money bill” for the purposes of Parliamentary procedure, money bills being subject to a curtailed process of scrutiny in the House of Lords. So: are provisions requiring the use of digital tools appropriate for a Finance Bill, and would a Finance Bill including such provisions be certifiable as a money bill? Not necessarily show-stoppers, but worth considering. [Update 4 October: Finance Bills are not always certified as money bills under Parliament Act 1911, and in fact many recent ones haven’t been certified. If they aren’t, they are generally nevertheless “supply bills” (under rules dating back to the 17th century) and subject to a similar curtailed procedure in the Lords. Tax administration can be included in a supply bill – but I would still question whether proposals to require sweeping changes to business record-keeping fall within that description.]
Submission of data to HMRC
- When we get to Chapters 5 and 6, on providing updates and annual submissions to HMRC, another potential rationale for mandation suggests itself but is never fully spelt out. The original announcement last December caused concern that the government was moving to “quarterly returns”, but there has been some rowing back from this. The condoc makes clear (box on p.6) that only summary data must be transmitted to HMRC quarterly, “not transaction records”. What wasn’t clear to me from the condoc (and I may have overlooked something in the 78 pages) was whether the end-of-year submission also includes purely summary data, or whether the full transactional record must be submitted at that stage.
- If the latter, then a further – and possibly more substantial – rationale for the proposals would be that they will provide HMRC with an enormous amount of additional data from each business, to feed into risk assessment and other compliance work. If the intention is for this raw transactional information to be fed into HMRC’s systems, there could also be a significant deterrent impact on businesses currently tempted to understate their profits.
- This would also start to make sense of the significant amount of additional yield scored from the proposals: estimated as rising to £920m a year when they were originally announced last year, a figure which has now (according to the Impact Assessment in Chapter 8) risen to £945m because of increases in forecast tax receipts. I remain puzzled by this, however, as last year’s costings document ascribes this yield to a reduction in “error” rather than anything more sinister.
- I’m conscious that the last couple of paragraphs are premised on a series of “if’s”, and am hesitant to conjure shades of Orwell on that basis. But at the very least, the Government needs to be clearer about the amount of transactional data that will need to be submitted annually, and about the source of the additional revenues.
- We have no way of knowing if the technology of today will be the technology of the future, so how can the requirements be future-proofed? The proposals are framed in terms of today’s technology of apps, smartphones, tablets etc, but they are clearly intended to represent a long-lasting change in the requirements imposed on businesses, and in many instances will require significant long-term investment and changes in the way businesses are run. How does HMRC know they will stand the test of time?
- Most of the discussion of security in the condoc relates to HMRC’s systems and how businesses will interface with them, assuring readers that HMRC will continue to have the most stringent standards of security. There’s a fairly cursory reference at paragraph 2.34 to businesses continuing to be responsible for the security of their own operating systems and software packages, some suggestions for routine security measures such as not divulging passwords, and a promise to review the need for further guidance. But this surely underplays the legitimate concerns businesses may have about their own security risks in moving to digital record-keeping.
- Finally, the question of timing has caused significant disquiet, with calls for delay in the professional press. The proposals are intended to apply to unincorporated businesses from April 2018 – just 18 months away – though a deferral is suggested for businesses below an unspecified threshold of turnover.
- We are currently in the throes of one of the most uncertain periods I can recall in my lifetime, following the June referendum. HMRC no doubt has a designated team working on the impact of Brexit, separate from officials working on MTD. But small businesses and their representatives cannot compartmentalise their concerns in this way. Expecting them to undertake such a fundamental shift in behaviour at the same time as navigating this uncertainty can only risk further damage to the economy.
- At a more mundane level, while paragraph 2.11 makes light of concerns about broadband speeds, recent experiences on holiday in the Lake District and Scotland, coupled with tales of woe from friends living in pockets of Hertfordshire, give me little confidence that all businesses will have the access required in order to comply within 18 months.
Some of the points made in this blog now feature in an interview with Rebecca Cave in AccountancyWeb.
3 thoughts on “Why, how and when? Some fundamental questions on HMRC’s proposals to Make Tax Digital”
SME Tax gap = £6.5bn
Approx 5m SMEs (just over)
Average tax gap = £1,200 (very, very roughly)
At average rate of 20%, means £6k of mistakes in profit (yes, I’ve approximated wildly to get an easy number)
That of course is an average £6k in the taxpayer’s favour; as Judith points out, if some errors are in HMRC’s favour then the average of actual missed *profits* must be higher than £6k (Presumably HMRC are just as concerned about the overpayments of tax, and have accurate figures for all the overpayments their random enquiry programme identifies?)
I’m not convinced that either a) every SME, including the <£10kpa and <£30kpa T/O populations, is hiding/losing £6k from HMRC or b) most are getting it right or overpaying, but a small minority are hiding/losing more than that.
Wherever that £6.5bn is going, it's not falling out at a rate of £6k of "accounting errors" average per business in the <£30kpa population, or even the <£83kpa population – if it is, British Business is either utterly mendacious or utterly incompetent.
Excellent article with much food for thought.
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