156.This chapter considers the relationship between simplification and digitalisation in the tax system, and the role of the Office of Tax Simplification in the MTD proposals, to set the context. It then goes one to examine the detail of the simplification measures announced on 31 January—the extension of the so-called ‘cash basis’ of accounting to businesses with a turnover up to £150,000 and to property businesses—and the published draft legislation that would enact these changes.
157.Everyone submitting evidence to this inquiry shared a desire to simplify the tax system. However, they had concerns about the timing and extent of the simplifying measures proposed. Most of that evidence argued that it would have been better to simplify the tax system first, and let those changes bed in, before embarking on a reform of tax administration as fundamental as MTDfB.
158.The Chartered Institute of Taxation (CIOT) shared this view and was also concerned that the proposed changes might not be noticed by businesses in the transition to MTDfB noting that:
“Ideally, measures to simplify the taxation of small businesses would have taken place before MTD is introduced. The simplification measures also need to be widely publicised, in a matter which will reach the small businesses which are intended to be the main beneficiaries.”
159.In its response to the consultation, HMRC acknowledged concerns about “whether businesses had the capacity to understand multiple changes at once”, but claimed that the software and apps that will be available can mask or overcome complexity in the tax system and enable taxpayers to deal with the simplifications that are proposed.
160.However the evidence we received is less confident about the ability of businesses to cope successfully, particularly in the light of our assessment of their readiness for MTDfB, discussed in Chapter 5 above.
161.Most respondents therefore welcomed the decision to defer, for further consultation, the introduction of proposed changes to the current basis period rules for allocating business profits for tax purposes. The ACCA, for example, commented that there was no immediate need to change those rules, and “welcomed HMRC’s announcement that further time will be taken to ensure that any changes made properly implement the intended policy outcomes”.
162.However, the NFU argued the changes had not simplified matters for many of the agricultural businesses it represented. It commented that the focus so far had been mainly on simplifying tax for the smallest, simplest businesses. The NFU also observed that, “far more work is needed to develop MTD for partnerships, those deemed to have multiple businesses for income tax purposes, and VAT registered unincorporated businesses.”
163.The Institute of Chartered Accountants of Scotland (ICAS) made similar points, emphasising the lack of overall coherence in HMRC’s approach to simplification. The fact the consultation response document published by HMRC in January 2017 did not address these questions “fuels our concern, highlighted above, about the lack of a coherent approach to MTD.”
165.We agree with the Government’s decision to defer the introduction of the further simplification measures it had proposed. Whilst they may be welcomed in due course, introducing them at the same time as businesses have to focus on their transition to MTDfB would have added to their burden.
167.This Sub-Committee’s inquiry into draft Finance Bill 2016 covered the draft legislation putting the Office of Tax Simplification (OTS) onto a statutory footing and recommended that the statutory remit be extended to give it an integral role in tax policy design. Although this recommendation was not accepted by the Government, we asked John Whiting of the OTS, what role they had played in developing the MTDfB proposals. He reported that, “We have been involved and we have talked to HMRC. Have we really been able to influence? Not as much as I would like, I have to say.” He added that “it would have been good to look at” the current proposals for unincorporated businesses “far more coherently.”
168.Mr Whiting did however suggest that the OTS might make a greater contribution to any measures paving the way for companies to join MTD in 2020, stemming from a project the OTS already has underway on simplifying and streamlining corporation tax computations.
169.As part of the roadmap, we recommend that the Government considers, with the Office of Tax Simplification, which measures from that Office’s current reviews into the VAT and corporation tax regimes might be introduced before MTDfB is applied to them.
170.At present trading businesses, other than landlords, are required to calculate taxable profits according to either:
171.The draft Clause and Schedule entitled “Calculation of profits of property businesses” propose to extend the application of the cash basis of determining taxable profits to property businesses. These changes were proposed as part of the August 2016 consultation, and the draft legislation was published for further consultation on 31 January 2017. A point that was not consulted on, was that, in contrast to trading businesses which have to opt into it, for MTDfB purposes, the cash basis will become the default basis for calculating taxable profits for property businesses. They will have to ‘opt out’ if they want to use the accruals method.
172.Also published in January was the draft Clause “Cash basis: treatment of capital” which aims to simplify the cash basis rules for trading businesses. The current provisions disallow capital expenditure unless it would qualify for plant and machinery capital allowances, the rules for which can be complex. The new provisions aim to set out a clear list of allowable and excluded capital expenditure.
173.A further measure to be published in Finance Bill 2017 is expected to extend the cash basis to businesses with annual turnover up to £150,000.
174.The introduction of the cash basis for property businesses was generally welcomed. Indeed a number of contributors reflected that they did not consider property businesses should have been excluded from the provisions when they were introduced in 2013. The Association of Accounting Technicians (AAT) observe “many unrepresented unincorporated landlords already report their letting property income and expenditure on a cash basis largely due to a lack of awareness of existing legislation.”
175.The decision to make the cash basis the default basis for calculating taxable profits for property businesses, with effect from April 2017, came as a surprise to many commentators. The Chartered Institute of Taxation commented that “having different rules for each cash basis might lead to confusion amongst taxpayers who could end up making inappropriate decisions”.
176.They considered HMRC guidance and communication urgently needed, in particular as “these changes are coming at the same time as other significant changes to the rules for loan interest relief for buy-to-let landlords”.
177.The extension of the cash basis to businesses with turnover up to £150,000 received a mixed welcome. LITRG expressed caution arguing “the cash basis … is not necessarily the best way to understand how a business is doing. ”
178.The AAT members’ survey favoured retaining the turnover threshold at £83,000, a position shared with the Chartered Institute of Taxation, which was disappointed that the proposed simplifications did not go as far as relaxing the current restrictions on loss relief and finance costs.
179.A further point raised concerned unnecessary confusion that was likely to arise from the differences between the cash basis rules used for tax reporting and those used for universal credit claims.
180.The ongoing distinction between revenue and capital expenditure in the cash basis means some complexity remains. As a result, although it is a relatively minor measure, questions have been raised as to whether the rules as drafted do in fact constitute simplification. It is telling that witnesses have requested that HMRC publish accompanying guidance to assist interpretation of the measure.
181.We support the Government’s plans to extend the cash basis for trading businesses and to include property businesses from 2017/18. However, some businesses who qualify for the cash basis may need the fuller financial insights provided by traditional accounts and they should be made aware of the consequences of opting for the cash basis.
182.The difference between the rules for choosing to apply the cash basis to trading income and to property income is a potential source of confusion and error for many businesses, especially those with income from both sources.
183.We recommend that HMRC develop a plan to communicate the cash basis changes to property businesses and to ensure that trading businesses are clearly informed of the advantages and disadvantages of traditional accounts as compared with opting for the cash basis.
150 Written evidence from the Office of Tax Simplification ()
151 Written evidence from the Chartered Institute of Taxation ()
152 HMRC Guidance Bringing Business Tax into the Digital Age: legislation overview, 31 January 2017: [accessed March 2017]
153 Written evidence from HM Treasury and HMRC ()
154 Written evidence from Low Incomes Tax Reform Group ()
155 Written evidence from Association of Chartered and Certified Accountants ()
157 Written evidence from the Institute of Chartered Accountants of Scotland ()
159 Economic Affairs Committee, (2nd Report of Session 2015–16, HL Paper 108)
160 (Mr Whiting)
161 (Mr Whiting)
162 (Mr Whiting)
163 Written evidence from the Association of Accounting Technicians (); see also (Douglas Haig).
164 Written evidence from the Chartered Institute of Taxation ()
166 Written evidence from the Low Incomes Tax Reform Group ()
167 Written evidence from the Association of Accounting Technicians ()
168 Written evidence from the Chartered Institute of Taxation ()
170 Written evidence from the Low Incomes Tax Reform Group ()