Will MTD improve tax compliance?
While wishing to see tax compliance streamlined, Donald Drysdale has some concerns about the latest proposals for Making Tax Digital for VAT.
The third industrial revolution has been typified by digital devices replacing analogue electronic and mechanical devices. 2018 has begun on the cusp of the fourth industrial revolution, characterised by rapid innovation disrupting almost every industry in every country.
Technological developments are creating new inequalities between rich and poor – new gulfs between individuals or businesses with digital skills and resources and those digitally excluded. The tax profession is not immune.
Digital tax administration
Streamlining tax administration by capitalising on digital capabilities makes good sense. What is controversial is not the proposed direction of travel, but rather the manner and pace of change.
In 2017 Making Tax Digital (MTD) was perceived by many of Britain’s smallest businesses as a serious and imminent threat. As we enter 2018, MTD has not gone away, but its nature has altered – at least for now.
The ICAS role
The ICAS Tax Board envisages a tax regime that is easy for taxpayers and the taxing authority to administer, while allowing efficient access for digitally-aware and digitally-challenged taxpayers and for tax agents acting on behalf of their clients.
ICAS seeks to inform the general public about MTD and represent the public interest. It is working with HMRC to assist in the effective implementation of MTD – using its expertise (and that of its members) to engage in constructive challenge to develop the opportunities of a digital tax service, whilst recognising the broader constraints within which HMRC operate.
ICAS members are accustomed to change, but not necessarily the degree and speed of technological change which we face today. The Tax Board will support members in practice and business, seeking to maximise the benefits of MTD and minimise any negative aspects.
ICAS policy positions
ICAS does not support mandatory ‘online everything’ in the tax system. Instead, digital facilities should be accessible to all on the terms they want, and should be so good that everyone wishes to use them. ICAS members are well placed to encourage and support digital use where appropriate, but traditional means of access to tax authorities should not be replaced completely by digital services.
ICAS welcomes MTD as an initiative with longer term potential for streamlining the interface between taxpayers and HMRC, but urges caution in the pace and manner of its introduction. ICAS has published its strategy in relation to MTD. This supports HMRC’s goals, but raises concerns about shortcomings in digital access and capabilities of SMEs and highlights the need for appropriate support and alternatives for the digitally excluded and vulnerable.
Two principal difficulties need to be overcome, namely (i) how to achieve a simple interface which accurately reflects what is at present complex legislation, and (ii) how to cater for performance issues both of the software and of the digitally-challenged taxpayer without loss of public confidence.
The ICAS Tax Board’s tax policies were discussed here.They are aimed at addressing key issues, including how to improve tax administration. Full details of these policies can be found here, and you are welcome to contribute your views by contacting firstname.lastname@example.org.
MTD for VAT
The timetable for MTD for business was slowed down in July 2017. It now addresses VAT from April 2019, and other taxes no earlier than 2020.
In September the Government published an overview of the legislation it planned for MTD for VAT, and a consultation response highlighted ICAS concerns about this.
On 18 December HMRC published draft VAT regulations, together with a draft explanatory memorandum and draft VAT notice, for public comment by 9 February.
Given the high levels of unease about MTD among small businesses, one has to question whether HMRC’s consultation (over the Christmas and New Year holidays and the month leading up to the 31 January personal tax filing deadline) is likely to elicit useful input from key stakeholders – their tax agents.
The draft VAT regulations and related documents are complex and convoluted. ‘Functional compatible software’ (as defined) must be used to record and preserve prescribed VAT-related information. It must be used to hold the information electronically, submit information to HMRC using HMRC’s prescribed application programming interface (API), and receive information from HMRC using the API.
A business may use more than one functional compatible software program to maintain its digital VAT records. If it does so, the transfer of data from the mandatory digital records through to receipt of information by HMRC must be digital and the programs must be ‘digitally linked’.
An addendum to the draft VAT notice, apparently written by IT people and not at all user-friendly for business proprietors or tax professionals, describes the digital requirements in greater detail.
There is seemingly no need for relevant VAT data to be recorded electronically when each supply is made or each cost incurred. It must be recorded electronically before each VAT return is due or (if earlier) when it is submitted, and this may help to involve agents in the process.
HMRC refer to a soft landing without record-keeping penalties in the first year, but this may apply in only quite limited circumstances. In a separate MTD consultation, HMRC are inviting input by 2 March on options for aligning rules and rates for interest across the main taxes.
Implications for a small business
A business must comply with the new requirements of MTD for VAT if its VAT taxable turnover exceeds the VAT registration threshold (currently £85,000) for VAT periods starting on or after 1 April 2019. If its turnover subsequently falls below the threshold, it remains within MTD for VAT unless and until it de-registers.
A small business within MTD for VAT is likely to have two practicable options – either comply using third party software, or rely on its tax agent to comply on its behalf. For most small businesses, either approach will involve significant additional administrative costs.
Businesses may be attracted by cloud-based accounting solutions incorporating MTD functionality. However, choosing an appropriate service might be difficult. MTD is attracting new cloud accounting services into the market. Some may fail, resulting (perhaps) in the total loss of business records. Others may not comply with HMRC’s stringent requirements.
By amassing confidential data from multiple clients, cloud providers become attractive targets for hackers. Some may suffer leakages of sensitive personal data. Others may even offer inadequate security on links between accounting records and business bank accounts. In all such scenarios the client business, not the cloud service provider, may be legally liable for the consequences.
MTD brings serious risks for small businesses. It may also create significant opportunities for practitioners able to provide genuinely secure and responsive digital accounting services.
It is unclear what benefits (if any) will result from MTD as currently proposed for VAT. HMRC’s recognition that manual adjustments will be allowed within accounting software and spreadsheets undermines the concept of digital controls. Their insistence on digital linking seems little more than face-saving to justify MTD.
Regardless of concerns that exist, MTD will happen. Hopefully benefits will emerge for some businesses, especially once they get past the initial implementation phase. In the meantime, ICAS continues to engage with HMRC in efforts to smooth the path to MTD as much as possible. This cannot be done without input from ICAS members and affiliates, so please send us your views and share your experiences with us at email@example.com to help shape our representations.
Article supplied by Taxing Words Ltd