Making Tax Digital: The future and the virus
Philip McNeill contrasts the impact, focus and roll-out of the Coronavirus Job Retention Scheme and Self-employed Income Support Scheme in the context of Making Tax Digital.
COVID-19 Schemes managed by HMRC
Coronavirus Job Retention Scheme (CJRS) and Self-employed Income Support Scheme (SEISS) have been implemented in record time by HMRC. The extraordinary effort that has been put in HMRC must be acknowledged.
The impact of these schemes will be immense in terms of economic recovery in the UK. If we look at the detail however, we begin to see divergence in how the schemes have been effected and their ability to provide targeted support to the workforce.
On the face of it, income base for CJRS and SEISS initially looks similar at 80% of basic earnings for CJRS and 80% or average profit for SEISS. But looking at the detail shows remarkable differences.
The starting point for CJRS is the employee’s last pay period before 19 March 2020. Whereas for SEISS it is the three year average from 2016 to 2019.
This means that CJRS payments are likely to relate fairly closely to an employee’s current financial circumstances, whereas by contrast SEISS may bear little relation to what is going on now.
The SEISS base is unlikely to reflect applicant’s current economic circumstances for a number of reasons:
1.Many self-employed businesses are relatively short term
The SME sector is very volatile and many ‘leavers and joiners’ – therefore many businesses will be gearing up or winding down. Three-year averages based on what was happening back in 2016-17 is very unlikely to reflect current economic performance.
This affects both eligibility and trading income:
- SEISS eligibility requires trading in 2018-19 to 2020-21 as a minimum and will take into account income from 2016-17 to 2018-19 where this is available
- This means between three and five years trading is taken into account. Yet many do not last more than a few years, with around half lasting 4 years and the 5 year survival rate even lower (it was 43% across the UK in 2017)
- Businesses starting after 5 April 2019 are ineligible, and for those starting before then, the lower-earning start-up phase is included in the total
- Many new businesses make a loss for tax purposes due to investment in equipment. Losses are deducted from income in the SEISS averaging calculation. So business investment reduces the income used to assess the grant
- Trading income is likely to be low in the start-up phase, and may be supplemented from savings or by employment income. Yet the lower income figure is included in the SEISS average, without allowance for any other contemporaneous income sources
2.Use of taxable profit and not accounting profit
Many tax rules, from cash accounting to capital allowance Annual Investment Allowance mean that reported taxable income is not a clear reflection of economic business performance.
- Accounting profit would be a better indicator of economic performance
- Example – a painter and decorator replaces their van every 5 years and writes off whole costs under Annual Investment Allowance. If SEISS three year average includes the year of write off, then economic performance profits would be understated; if not then they would be overstated.
3.Commencement and cessation dates are not taken into account
- This means that average profits are based on a full 12 months, even when a business has only been trading for part of a year
- Eg T started trading in October 2018. Profits were £12,000 in the six months to 31 March 2019. For SEISS this counts as an average income of £1,000 a month (£12,000 ÷12 months), giving a maximum grant of £3,000. But T’s profits were actually £2,000 a month (£12,000 ÷6 months)
- Eligibility is also affected by this approach. An individual moving from employment to self-employment at the start of the tax year might well pass the 50% of income from self-employment eligibility test. But someone with the same earning profile moving into self-employment later in the tax year may fail
- Eg S earned £2,000 per month in employment and moved into self-employment with profits of £2,000 a month. If this happened at the end of June 2018, then income from employment is £6,000 as against £18,000 from self-employment. S is eligible for SEISS – at least 50% of their taxable income is from self-employment
- If S had moved into self-employment at the end of November 2018, no SEISS would be available – income from employment would be £16,000 while self-employed income is only £8,000 for 2018-19 tax year. This applies even if S has been in continuous self-employment from November 2018 to date.
One conclusion that could be drawn here, is that something nearer real-time reporting might have provided better loss of earnings indicators. Until this is available an alternative scheme, such as Universal Income, might have provided timely assistance, particularly to those in low-income self-employment.
Real-time reporting under RTI enabled HMRC to have up to date, relevant information as well as assurances against fraud. HMRC already held information on which individuals were normally on the payroll, which agents normally submitted returns and it held a track record of submissions from employers.
This provides a significant degree of independent verification against opportunistic claims and scams.
Multiple jobs and modern earning patterns
Modern work patterns can be complex involving multiple employments, self-employment and other sources of income such as pensions and property income. Often, self-employment is used as a top-up to employment. This may be a response to a high cost of living in particular areas of the country or to balance a relatively low-paid or unstable employment.
For example, an individual might have a zero-hours contract supplemented (if permitted) by part-time employment and occasional freelance work. This model of working is not well supported either under CJRS or SEISS.
SEISS has an eligibility criterion that trading income must be at least equal to non-trading income. For someone with multiple income sources, or top-up self-employment, this condition might be difficult to meet. Yet their circumstances reflect the modern workplace.
It is arguable that such individuals should be eligible for SEISS. Why should someone in full-time employment or full-time self-employment receive more support that someone in part-time employment and part-time self-employment? Both may be working full-time and both may be paying similar amounts of tax.
It is perhaps simply a feature of the lack of information available to HMRC, or a desire to exclude ‘hobby trades’. Again, it is arguable that real-time reporting might enable a different approach.
Yet there are challenges here. Until the basis period issue for trading income is resolved – and all income can be reported in real-time, real-time reporting of trading income alone will not provide the benefits of time-saving or certainty envisaged.
(The basis period issue is that for self-employment income, accounting periods, which may run to any month-end need to be matched to income tax years running to 5 April. The matching rule – that the accounting year ending in the tax year is treated as the income of that tax year – leads to a lag. For example, the trading year to 30 June 2020, falls in the tax year to 5 April 2021, but so does the trading year to 31 March 2021 – which started nine months later. Hence earnings in one tax year can be taxed in the following tax year – which means that real-time reporting will not of itself produce certainty over tax liabilities.)
Support for business owners
Business owners create jobs for others and energise the business economy. It is worth noting in passing that neither SEISS nor CJRS are particularly well targeted for the class of business owner operating via a close company (broadly ones with five or fewer main participants), partnership or sole tradership.
This is due both to differences in the schemes, historic remuneration structures and higher earnings patterns.
A key feature of CJRS was the involvement of agents. Payroll agents could apply for CJRS on behalf of the firms they normally serviced and deal with the associated administration. While some features of administration caused difficulties – primarily the lack of a bulk upload option for payrolls with under 100 employees – by and large the process has worked.
This must, at least in part, be attributed to the fact that there was an ‘existing peg’ on which to hang the scheme. The RTI system already existed. Payroll agents had, in most cases been duly authorised and had access to all the information and HMRC systems necessary. Security checks had been made and the system was ready to go.
This background digital environment must have assisted with the speedy roll-out of the system, which impressively delivered payment to employers within a remarkable short period of time. It is a credit to HMRC that the system was made operational on such a short timescale.
By contrast, agents were not permitted to make SEISS applications on behalf the self-employed clients. Whatever the explanations, this is a disappointment and source of frustration. Agents are being asked to do the impossible – to assist clients with interpreting the results of the SEISS eligibility checker, when they were not given access to the figures used in the calculations.
Agents found themselves trapped between clients who expected and wanted (or even needed) agents to make applications for them, yet being total unable to access the system.
Clients were faced with registering for Government Gateway, not a straightforward issue in many cases. Many reports have come through to ICAS of clients with non-UK passports, or without credit histories, lacking computers or internet access trying at breakneck speed to set up and operate Government Gateway accounts.
How much simpler this might have been if agents could have been enabled to take the role their clients would like them to have and which HMRC Customer Charter surely envisages, of the right to appoint your agent of choice to deal with HMRC on your behalf.
Revealing attitudes to digital
The comparison of CJRS and SEISS highlights the importance of digital taxation. So, what of the recently published HMRC research? In particular, what does it show about tax agents?
In the middle of March, HMRC published the result of eight research projects into Making Tax Digital covering the period from 2016 onwards. An overview of Making Tax Digital, focussing mainly on the introduction of MTD for VAT was also published.
While the detail has been reviewed in another article, it is clear that there is mixed messaging. Much of the focus is on direct taxpayer to HMRC contact, and while the importance of agents is noted, it is far from central. Given the central place of agents in the business community, the role of agents needs to be place clearly in the centre when it comes to digital tax.
Times of crisis are likely to stress-test systems, models and businesses. There is no time for preparation. It is necessary to use that which is at hand. The roll out of CJRS and SEISS has been impressive, yet one can’t but wonder if digital tax systems has been more agent orientated, whether some of the burden could have been more effectively shared.
For more information on the latest COVID-19 developments related to business and practice, visit the ICAS coronavirus hub.