Crofter meets HMRC four times a year in new digital tax world
Philip McNeill, ICAS Head of Taxation (Tax Practice and Small Business Taxes), outlines the four foundations of digital tax and what the new tax world means for crofters and other small businesses.
Digital transformation is here. The instantly blogged photo of a curled octopus on the creel boat cabin; the rural community hitting the national press with unusual wildlife sightings; visitors coaxed to remote communities with daily updates of rural life – involvement by proxy.
But HMRC too has spotted the advantages of digital: more information, sooner, and with less processing. To a service which has been asked to do more with less, digital looks like an attractive option.
Doing more with less
Between 2010-11 and 2014-15, HMRC staff numbers in personal tax were cut from 26,000 to 15,000. Unsurprisingly this resulted in a fall in customer service, but there was also an increase in costs to taxpayers seeking help.
“Taxpayers seeking telephone advice from HM Revenue and Customs faced an increase in costs by around 50% and a collapse of customer service following staff cuts."
So saving HMRC money can mean that someone else picks up the tab. The digital revolution could be a similar model.
The four foundations of digital tax
In its Making Tax Digital Roadmap, the Government sets out the broad framework and timetable for a fully digital tax system by 2020.
The four foundations are:
- Tax simplified - taxpayers should not have to give HMRC information that it already has.
- Tax in one place - by 2020 taxpayers will be able to see their complete financial picture in their digital account.
- Making tax digital for businesses - businesses should not have to wait until the end of the tax year, or even longer, before knowing how much tax they should pay.
- Making tax digital for individual taxpayers - individual taxpayers will interact with HMRC digitally at any time to suit them.
These objectives seem laudable enough, but looking to the detail, there are challenges:
In particular, digital record keeping and quarterly on-line reporting will be mandatory from April 2018, for all self-employed individuals, unless:
- Gross income from self-employment (such as from crofting and B&B) and property rentals are under £10,000 pa.
- The individual cannot report digitally. This is not a question of preference. Based on exceptions for other mandatory on-line tax reporting, we can expect exceptions only where broadband is unavailable, disability makes digital reporting impracticable, or the individual is ‘a practising member of a religious society or order whose beliefs are in-compatible with the use of electronic communications’.
Consideration is being given to delaying introduction of these requirements for 12 months (until April 2019) for an, as yet unspecified, group of businesses with gross income of over £10,000 pa.
This means that you will be expected to report income quarterly to HMRC, and on-line even if you have no tax to pay. For those whose main income is employment or a pension, with crofting and other self-employment as a subsidiary income under £10,000, there is likely to be an annual on-line update to a digital tax account.
If you do not want to ‘go digital’, HMRC’s first option will be ‘assisted digital’ – you will be given support to go on-line. To be exempted from digital filing and record keeping requirements is not going to be simple.
There are many questions unresolved and consultation documents are due out after the European Referendum; but the basic challenge remains, how much will this cost and what additional administration will it involve?
We are told that the system is ‘mandatory’ so this will mean penalties at some stage, even if there is a ‘soft landing’ initially.
What you are being asked to do
Making quarterly reports of information to HMRC means that book keeping will need to be up to date – no leaving things to the end of the year – or taking a few months off administration during the lambing season.
Do you feel confident to file figures on-line to HMRC? Do you have an accountant and would you want your accountant to review any figures first? Can you manage digital book keeping? Do you currently keep hand-written records?
What are the possible cost implications in terms of accounting software, computing equipment and broadband? Unfortunately, lack of a computer alone is not going to be a reasonable excuse for non-compliance.
With fibre Superfast Broadband only likely to reach 84% of Highland households in the near future, crofting communities could find themselves disadvantaged as compared with the rest of the country.
Costs and revenues – setting the context
If this seems worlds away from crofting, just compare some figures. The Report on the Economic Condition of Crofting 2011-2014 suggests an impressive £85.8 million in revenue generated through crofting. But bring this down to the level of an individual croft and margins are tight.
The figures suggest an average household involvement of 11.7 hours per week in crofting-related activities, with average annual revenue of £4,900 and £3,900 in crofting-related costs. Economic survival is through diversification, with B&B accounting for around half of the on-site business diversification.
This means that the impact of making tax digital could vary from croft to croft, depending on the mix of self employed income. The relatively high costs associated with crofting, mean that the £10,000 gross income exemption will soon be passed. For example, £5,000 of gross crofting income plus another £6,000 from B&B would bring an individual into the world of digital record keeping and quarterly submissions.
Looking more broadly at crofting households, total, average non-crofting income for crofting households was £27,500 pa. Now factor in the challenge of digital reporting each quarter.
HMRC has indicated that free software may be available for the ‘simplest businesses’; but small doesn’t always mean simple. Crofters can be involved in many different activities and build an impressive portfolio of income sources. Farming activities alone are complex – with high capital and repair costs, seasonal variations, the need for stock valuations and likely involvement in common grazing activities.
Take a realistic look at the possible impact of Making Tax Digital. Could it involve additional costs on a one-off or an ongoing basis?
With tight margins, how are any costs going to be managed? Think about book keeping assistance and digital expertise. Is there anyone within your household or community who would be able to help? Will you need additional help from an accountant and how could this be provided in cost effective manner?
Should representation be made to Government and HMRC to highlight the specific needs of crofters to try to obtain concessions or exemptions? Without evidence, Government plans are unlikely to change - so are you willing to give your views?
The HMRC consultations can be found at GOV.UK. The consultation period runs until 7 November.