Draft Finance Bill 2017: Making Tax Digital for Business Contents

Chapter 2: Development of Making Tax Digital

Initial announcements

7.The Government’s intention to replace self-assessment tax returns with digital tax accounts by 2020 was first set out in Making tax easier: The end of the tax return, published with the March 2015 Budget 3. Further details were outlined in the 2015 Autumn Statement, which included a roadmap with a timetable for consultations from early 2016, and for the various changes envisaged by 2020.4

8.The proposed changes included:

(1)establishing a digital tax account for each taxpayer, showing income information from employers, pension providers and other third parties and enabling the taxpayer to report any additional income as it arises;

(2)making more frequent adjustments to PAYE codes to collect tax due more accurately than at present and, where outstanding tax cannot be collected through PAYE, enabling taxpayers to settle their liabilities as they appear on their digital tax accounts; and

(3)requiring businesses (both self-employed and incorporated) to use digital tools to keep records of income and expenditure and send updates to HMRC every quarter, as well as completing an annual statement and calculation of tax liabilities as they do now.

9.This report is concerned with this third set of changes. The first two are already being implemented in stages in HMRC’s systems. The 2015 Autumn Statement estimated that these changes would help to reduce the tax gap,5 contributing an additional £920 million to the Exchequer by 2020–21.6 The basis for these and later figures is discussed in Chapter 4.

Finance Act 2016

10.The Finance Act 2016 took the first steps towards the new system by introducing a new provision to enable HMRC “to issue an assessment (a simple assessment) to individuals with straightforward tax affairs where HMRC already have all the information needed to calculate their tax position without the need for them to complete a return.”7

11.This Sub-Committee’s inquiry into the draft Finance Bill 2016 covered the draft legislation introducing simple assessments and commented on the longer-term transition to digital tax accounts. It recommended that the forthcoming consultations should include:

“a full assessment of the impact of the ‘Making Tax Digital’ proposals, including any new reporting requirements and compliance costs, on smaller businesses. This should address the significant concerns raised with us by business representatives, particularly the proposed quarterly reporting and the associated possibility of quarterly payments, and include any evidence to support the Government’s claims that digital record keeping will yield business benefits; … and a detailed outline of HMRC’s plans to educate and support taxpayers, particularly those not acquainted with, or without access to, new technologies, through the transition to and in the early years of the new system.”8

August 2016 Consultation

12.A major consultation exercise was originally scheduled to start in Spring 2016 but it did not begin until 15 August 2016 with the publication of six documents containing over 250 pages of proposals and related material.9

13.These documents outlined the Government’s proposals:

(a)on how the new mandatory obligations to keep records in digital form and to update HMRC at least quarterly would work, and how they would interact with an end-of-year statement to finalise the taxpayer’s tax liability;

(b)on who these obligations would apply to, initially unincorporated businesses and private landlords with an annual income above £10,000 who were not covered by proposed exemptions for those classified as ‘digitally excluded’; and

(c)on the timetable for their introduction: April 2018 for income tax and national insurance obligations; April 2019 for VAT obligations; 2020 for corporation tax obligations.

14.The many points on which HMRC sought views included:

(a)whether the low income threshold was correctly set at £10,000, on possible exemptions for charities and other non-profit organisations and on deferring the initial mandation of the digital record-keeping and quarterly reporting requirements for small businesses and landlords with an annual income above £10,000 but below some specified other limit;

(b)a new points-based penalty regime to apply to the new system;

(c)allowing more businesses to account for tax on the ‘cash basis’10 and various other potential simplification measures; and

(d)a voluntary ‘pay as you go’ scheme for settling tax liabilities in-year.

15.The documents also revised the estimated Exchequer impact to £945 million by 2020–21. They included an initial partial assessment11 of the ongoing impact of the MTD proposals on small businesses (incorporated and unincorporated) employing fewer than 20 employees based on modelling two alternative scenarios. They produced estimates of steady-state administrative savings amounting to £85 million and £250 million respectively, and HMRC invited help from stakeholders in refining those estimates and gauging the transitional costs to businesses.12

16.The consultation closed on 7 November 2016 by which time HMRC had received 618 written responses, 1200 completed survey questionnaires and held various public consultation events, including ‘roundtables’ and ‘webinars’ which attracted over 2000 participants.13 The Government cited the high volume of responses as the reason it was unable to announce decisions and publish draft legislation with the draft Finance Bill 2017 on 5 December 2016.14

Treasury Committee Report

17.The House of Commons Treasury Committee heard evidence on the MTD proposals as part of a wider inquiry entitled Shifting Sands: an inquiry into UK tax policy and the tax base launched in February 2016. The Committee’s conclusions supported the broad principles of the MTD proposals, but challenged:

(a)their suggested cost impact on businesses and their tax gap benefits to the Exchequer, arguing that the former had been underestimated and the latter overestimated;

(b)the timetable for implementing the changes, suggesting delaying a start until at least 2019/20 to give businesses, accountants, software houses and HMRC more time to prepare for its introduction; and

(c)both the proposed general mandation of digital record-keeping and quarterly reporting, and the scope of the proposed exemptions, particularly the £10,000 low income threshold which it suggested aligning with the current £83,000 VAT registration threshold.15

18.The Report recommended:

(a)a comprehensive, large-scale pilot to inform plans for implementing the new system;16 and

(b)the promotion of “a fully functioning market in appropriate software … to include adequate free software for smaller and less complex businesses”.17

19.Following the publication of the Treasury Committee report, the House of Lords Select Committee on Economic Affairs concluded that an inquiry into the Government’s response to the consultation and the expected draft legislation (including simplification and administrative measures) could make a further contribution to the public debate on the proposed changes. The Finance Bill Sub-Committee’s Call for Evidence was published on 17 January 2017.

3 HMRC, Making tax easier: the end of the tax return, March 2015: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/413975/making-tax-easier.pdf [accessed March 2017]

4 HM Treasury, Spending Review and Autumn Statement 2015, Cm 9162, November 2015: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/479749/52229_Blue_Book_PU1865_Web_Accessible.pdf [accessed March 2017]

5 The tax gap is the difference between the amount of tax that should, in theory, be collected by HMRC, and what is actually collected.

6 HM Treasury, Spending Review and Autumn Statement 2015

7 Finance Act 2016, Clause 155 and Schedule 23; Finance Bill 2016, Explanatory Notes, March 2016, para 19: https://www.gov.uk/government/publications/finance-bill-2016-legislation-and-explanatory-notes [accessed March 2017]

8 Economic Affairs Committee, The Draft Finance Bill 2016 (2nd Report, Session 2015–16, HL Paper 108) para 184

9 HMRC, Making Tax Digital: Consultations, 15 August 2016: https://www.gov.uk/government/collections/making-tax-digital-consultations [accessed March 2017]. The individual consultations were: (1) Making Tax Digital: Bringing business tax into the digital age; (2) Business Income Tax: Simplifying tax for unincorporated businesses; (3) Business Income Tax: Simplified cash basis for unincorporated property businesses; (4) Making Tax Digital: Voluntary pay as you go; (5) Making Tax Digital: Tax administration; and (6) Making Tax Digital: Transforming the tax system through the better use of information.

10 The cash basis of accounts is explained in Chapter 7.

11 HMRC, Making Tax Digital: Consultations, 15 August 2016: https://www.gov.uk/government/collections/making-tax-digital-consultations [accessed March 2017]

12 Ibid.

13 HMRC, Making Tax Digital: Bringing business tax into the digital age, summary of consultation responses, 31 January 2017: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/587433/Making_Tax_Digital_-_Bringing_business_tax_into_the_digital_age_-_Summary_of_responses.pdf [accessed March 2017]

14 HM Treasury, Autumn Statement 2016, Cm 9362, November 2016: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/571559/autumn_statement_2016_web.pdf [accessed March 2017]

15 Treasury Committee, Making Tax Digital (Tenth Report, Session 2016–17, HC 927)

16 Ibid.

17 Ibid.

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