2Background
The End of the Tax Return?
5.In the March 2015 Budget, the then Chancellor heralded “the end of the tax return”. He said that:
“12 million people and small businesses are forced to complete a self-assessment tax return every year. It is complex, costly and time-consuming. So, today I am announcing this. We will abolish the annual tax return altogether. Millions of individuals will have the information the Revenue needs automatically uploaded into new digital tax accounts. A minority with the most complex tax affairs will be able to manage their account on-line. Businesses will feel like they are paying a simple, single business tax – and again, for most, the information needed will be automatically received. A revolutionary simplification of tax collection. Starting next year. Because we believe people should be working for themselves, not working for the tax man. Tax really doesn’t have to be taxing, and this spells the death of the annual tax return.”5
6.At the same time, the then Financial Secretary to the Treasury articulated the vision in more detail a paper entitled “Making tax easier: The end of the tax return”:
“In future, people will only need check their tax information online to know how much they owe. Millions of people will no longer have to complete a tax return at all — while those with more complex tax affairs will be able to use their account to declare income and pay tax in year. It will also be a major help for small businesses, which will be able to link their accounting software to their personalised tax account and have the option to pay as they go. This will give them more certainty about what they need to pay and when, so they can manage their cash flow better.”6
“Making Tax Easier” becomes “Making Tax Digital”, and concerns mount
7.On 14 December 2015, HMRC published a “roadmap” that made clear that for the first time that the new process would be mandatory for most businesses:
“By 2020 most businesses, self-employed people and landlords will be required to keep track of their tax affairs digitally and update HMRC at least quarterly via their digital tax account. These changes will be introduced for some businesses from April 2018, and will be phased in by 2020, giving businesses time to adapt.”7
8.It is notable that the title had changed from “Making Tax Easier” to “Making Tax Digital”.
9.The 2015 Autumn Statement linked this with the Government’s plans to:
“invest £1.3 billion to transform Her Majesty’s Revenue and Customs (HMRC) into one of the most digitally advanced tax administrations in the world, with access to digital tax accounts for all small businesses and individuals by 2016-17”.8
10.The roadmap said that the government would consult on the details in 2016. At different places in the document, it promised this consultation in “spring 2016” and in a timeframe of “January to June 2016”9.
11.The initial welcome for “Making Tax Easier” quickly dissipated, and by the beginning of January, the Treasury Committee had been made aware of enough concerns for the Chairman to write to the Financial Secretary10. An online petition11 received enough signatures to warrant a debate, which took place on 25 January 201612.
12.Correspondence continued over January and February13, and written evidence submitted to the Committee in March included the following concerns:
“Pursuing the mandating of the digital agenda without simplifying the tax system will and already is causing consternation across the small business community, especially among those who are not able to complete tax returns online.”14
“We also have very considerable concerns that mandating every business to keep its records digitally is wrong in principle and that this should be a business led decision”15.
“We are concerned that implementation of Making Tax Digital will be rushed, when in reality it will be both challenging and costly for individual taxpayers and businesses to comply with, and will likely require many corrections post-implementation. We question whether the hoped-for benefits of reducing the tax gap by ‘forcing’ smaller businesses to keep better records by more frequent reporting are sufficiently large or reliably estimated to justify departing from what would be the more ‘standard’ approach; to roll it out starting with the larger businesses and willing volunteers and ironing out problems with that population before extending to those with fewer capabilities.”16
“We have concerns about the likely impact on agents and taxpayers and around the role and resourcing of HMRC. In particular we believe some small businesses (and individuals) are likely to be pushed into non-compliance due to an inability to use the mandatory digital systems in this over-ambitious timeframe. We are also concerned about the negative messages about tax agents which are being suggested by publicity around Making Tax Digital and the current exclusion of agents from viewing their clients’ online accounts. We believe agents are vital to implementation and every effort should be made to work with agents.”17
“Whilst we support the long-term ambitions of the Government’s Making Tax Digital agenda, greater clarity of this agenda is still needed and moreover, technology should equally enable HMRC at the frontline to be able to add value and interact with its customers more effectively and innovatively. [...] In a global context, we encourage HMRC to collaborate with other tax authorities on this agenda, to prevent the overall administrative burden on businesses increasing as different digital approaches and interfaces are adopted around the world.”18
“‘Making Tax Digital’ is an overly ambitious project, given the suggested timescales, and there are very genuine concerns that forcing digital record keeping on small businesses and landlords in such a short timescale will have a potentially disastrous effect on the UK tax system. “19
“We support the Making Tax Digital (MTD) initiative as we view it as a necessary part of ‘future proofing’ the tax system. It is the logical ‘next step’ and should be undertaken” but “the timetable for implementation is ambitious which makes it more imperative that the input from various stakeholders is sought and used.”20
Consultation offers some concessions but still major concerns persist
13.In the March 2016 Budget, the Government reiterated its intention to consult on the proposed changes21. However, the expected post-Budget consultation was delayed because of the EU Referendum22. During that period, further information came out informally, which did little to assuage the fears of bodies such as the Institute of Chartered Accountants for England and Wales. For example, HMRC suggested that businesses would be required to do all their record keeping in a prescribed digital format and that spreadsheets might not be acceptable.23
14.The consultation papers were finally issued on 15 August, with a closing date of 7 November24. At the time of publication, the Government announced some concessions. Its press release on 15 August 2016 said that
“The decision to exempt the smallest businesses and landlords from digital record-keeping and quarterly updates follows months of constructive engagement with business and agent groups.
The government is also considering deferring digital record-keeping and quarterly updating for a further group of small businesses and will explore options to assist businesses with the transition. Finally the consultation documents confirm that those who cannot go digital will not be required to.”25
15.These concessions were initially welcomed by the Federation of Small Businesses:
“Removing small firms and the self-employed with modest turnovers altogether from the proposals will now mean that in addition to the 1.6 million small businesses and landlords that were already excluded, as a result of these changes announced, a further 1.3 million small firms and landlords will no longer be in scope. This means that half of the UK’s 5.4 million small businesses will not be affected by quarterly tax reporting. The expansion of cash accounting, a longer lead-in time for implementation and the offer of direct financial assistance will also help. “26.
16.One of the consultation papers was about “voluntary pay as you go”. The voluntary nature of this system made it clear that there was no intention to use MTD to enhance cash flows to the Treasury by requiring tax payments earlier than would otherwise have been the case. But there will be an option for businesses to pay earlier than necessary if they want to avoid large tax bills at a later date.
17. During the consultation period, the Treasury Committee held two oral evidence sessions with small businesses and with tax professionals, including the Policy Director of the Federation of Small Businesses and the Chair of HMRC’s “Digital Advisory Group”27.
18.Following each of these hearings, the Chairman wrote to the Chancellor, emphasising the key points made in evidence to the Committee:
“It is tantamount to prescription by HMRC, for the first time, of a particular form in which accounting records must be maintained. […]
“There will be an exemption for people whose income is less than £10,000. But this is below the level of the Personal Allowance. So it appears that this concession will only be for those who do not pay tax, including new businesses who would otherwise be obliged by MTD to notify HMRC within four months of starting a business. In such cases, there would be no benefit, to the businesses or to HMRC, if they were to submit quarterly reports. […]
“Those businesses with a turnover of just over £10,000 (and with profits of far less than £10,000) will be hardest hit if they are obliged to change their working practices; those who currently employ a book-keeper once a year to prepare their tax return might find themselves having to employ the book-keeper four times a year. […]
“There may be a case for delaying the implementation of MTD. A year’s extension for an unspecified group of businesses may not be enough.
“There may also be merit in piloting the systems in a number of areas. From this, the lessons from customers’ experiences can be learnt, and well before digital reporting is made mandatory.”28
“The Federation of Small Businesses’ estimate was “that implementing MTD will cost £2,770 per business per year on average. […]
“A fully costed impact assessment is essential. […]
“It is clear from the evidence that the Committee heard that HMRC needs mandatory MTD to fulfil its business case for much needed investment in its IT. But it is equally clear that businesses will have to pick up the bill for this. […]
“Given these points, the evidence we heard suggests that the introduction of MTD should not be rushed. Every effort should be made fully to pilot its introduction, perhaps over several years. Only after the lessons have been learned from the pilot should consideration be given to a mandatory scheme.”29
19.In addition to its 15 face-to-face roundtable events and 14 webinars (with over 3,000 participants), HMRC has received over 600 responses to the key consultation paper on “Bringing Business Tax into the Digital Age”.30 The main professional bodies have published their responses on their websites,31 as have a number of bodies which represent taxpayers rather than accountants32.
20.The main concerns expressed to the Treasury Committee are outlined in the next chapter.
5 Official Report, 18 March 2015, Volume 594, Column 777
6 HMRC, Making Tax Easier: The end of the tax return, page 3
7 HMRC, Making Tax Digital, page 7
8 Spending Review and Autumn Statement 2015 (Cm 9162) November 2015, paragraph 1.288
9 HMRC, Making Tax Digital, pages 7 and 11
10 Letter from the Rt Hon Andrew Tyrie MP to David Gauke MP, 8 January 2016
11 House of Commons Petitions, scrap plans forcing self employed & small business to do 4 tax returns yearly
12 Official Record, Westminster Hall, 25 January 2016, Volume 605
13 Letters from David Gauke MP to Rt Hon Andrew Tyrie MP, 12 January 2016; Rt Hon Andrew Tyrie MP to David Gauke MP, 25 January 2016, David Gauke MP to Rt Hon Andrew Tyrie MP, 1 February 2016
14 Written evidence to the Committee from the Federation of Small Businesses for the Inquiry into UK Tax Policy and the Tax Base
15 Written evidence to the Committee from the ICAEW for the Inquiry into UK Tax Policy and the Tax Base, paragraph 32
16 Written evidence to the Committee from the Chartered Institute of Taxation for the inquiry into UK Tax Policy and the Tax Base, paragraph 2.6
17 Written evidence to the Committee from the Institute of Chartered Accountants of Scotland for the inquiry into UK Tax Policy and the Tax Base, Paragraph 44
18 Written evidence to the Committee from the CBI for the inquiry into UK Tax Policy and the Tax Base, page 5
19 Written evidence to the Committee from the Association of Taxation Technicians, for the inquiry into UK Tax Policy and the Tax Base, page 2
20 Written evidence to the Committee from KPMG for the inquiry into UK Tax Policy and the Tax Base, paragraphs 56 and 58
21 Budget 2016, HC 901, paragraph 1.185
22 Accountancy Age 12, May 2016
23 Letters from Rt Hon Andrew Tyrie MP to David Gauke MP, 26 April 2016; and David Gauke MP to Rt Hon Andrew Tyrie MP, 10 May 2016
24 HMRC, Making Tax Digital: consultations, 15 August 2016
25 HMRC and Jane Ellison MP, Digital revolution for the tax system to cut red tape for British business, 15 August 2016
26 Ibid
27 Treasury Committee Oral Evidence: Shifting Sands: an inquiry into UK tax policy and the tax base, HC 314, hearings on 6 September and 25 October
28 Letter from Rt Hon Andrew Tyrie MP to Rt Hon Philip Hammond MP, 15 September 2016
29 Letter from Rt Hon Andrew Tyrie MP to Rt Hon Philip Hammond MP, 27 October 2016
30 HMRC, Overview of Legislation in Draft, published on 5 December 2016
31 Chartered Institute of Taxation website, Press release: UK Government must review unrealistic timescales for delivery of digitised tax system, say experts; Institute of Chartered Accountants in England and Wales website, ICAEW representation 171/16 -making tax digital: bringing business tax into the digital age; Association of Chartered Certified Accountants website, Making Tax Digital: Bringing business tax into the digital age -Comments from ACCA to HMRC, November 2016 Ref: TECH-CDR-1428; Institute of Chartered Accountants of Scotland website, HMRC Making Tax Digital Bringing business tax into the digital age, 3 November 2016; Association of Accounting Technicians website, Association of Accounting Technicians response to the HMRC consultation “Making Tax Digital: Bringing business tax into the digital age”; and Low Income Tax Reform Group website, Making Tax Digital: Bringing business tax into the digital age HM Revenue & Customs (HMRC) consultation document Response from the Low Incomes Tax Reform Group (LITRG)
32 NFU website, Making tax digital - consultations; Country Land and Business Association, Countryside concerned over making tax digital, 4 November 2016.
11 January 2017