Making Tax Digital: a new beginning

Donald-Drysdale By Donald Drysdale for ICAS

11 August 2017

Looking at the revised proposals for Making Tax Digital, Donald Drysdale wonders why the Government took so long to arrive at a sensible solution.

The storm that gathered

Since George Osborne’s March 2015 Budget, much has been written about the plans he announced for Making Tax Digital (MTD).

Osborne’s proposals attracted serious criticism. MTD was perceived as a further shift of compliance work from HMRC to taxpayers, a massive new burden on Britain’s most vulnerable businesses, and an over-reliance on easily-accessible, intuitive, self-checking IT tools that might not be available.

The plans generated fierce resistance. Those anxious to influence the outcome faced a daunting series of six huge consultations which elicited over 3,000 responses from professional and trade bodies, tax agents, other businesses and individuals. ICAS submissions made in relation to MTD in 2016 and 2017 can be found on our consulations and submissions page.

Many respondents were strongly opposed to the mandatory imposition of MTD on almost all businesses and landlords. Many of those who felt MTD was the right way to go expressed grave concerns about the short timescale proposed for testing such a fundamentally new system.

Reason wins through

On 13 July Mel Stride, the new Financial Secretary to HM Treasury, delivered a written parliamentary statement, setting out a revised plan for MTD.  On the same date the Government published a new timetable for the forthcoming changes – one that will allow the smallest businesses and landlords to move to the new digital system for keeping tax records at a pace that suits them.

Reason has prevailed, and it is a huge credit to Philip Hammond and his Ministers that they have listened to concerns raised by the Treasury Select Committee, parliamentarians and stakeholders.

The revised proposals

Provisions in the forthcoming Autumn Finance Bill and related secondary legislation will aim to ensure a smooth transition to a digital tax system. MTD aims to provide businesses with a modern, streamlined system for keeping their tax records and providing information to HMRC, but the roll-out of MTD has been amended  to ensure that businesses have plenty of time to adapt to the changes.

Only businesses and landlords with annual turnover above the VAT registration threshold (currently £85,000) will have to keep digital records. They will only need to do so from 2019, and only for VAT compliance purposes. For other taxes, they will not be required to keep digital records or update HMRC quarterly until at least 2020 – although they may be able to do so earlier if they wish.

MTD will be available on a voluntary basis for businesses and landlords with turnover below the VAT threshold. They will be able to choose whether to move to the new digital system and, if so, when.

HMRC have already begun piloting the MTD services and are committed to testing the system extensively with businesses. In response to widespread calls that trials should cover a full annual cycle of record-keeping and reporting, the revised timescale is designed to allow more than a year of testing before any businesses must use the system.

Will voluntary MTD attract users?

Already many businesses, large and small, rely heavily on technology. There are, of course, compelling arguments that digital record-keeping should benefit a significant proportion of them, including many businesses below the VAT threshold. Equally, for those capable of maintaining digital records, reporting quarterly to HMRC need not necessarily present undue difficulties if the system is well designed.

ICAS and other professional bodies have argued from the outset that MTD is a logical development in tax administration, and that a well-planned, voluntary, digital regime for tax administration would bring positive benefits to businesses and HMRC.

Compulsion should not be necessary. For example, voluntary online filing is now used by around 90% of individuals within self assessment. It is as simple as it can be – given the unavoidable complexities of our current tax laws – and delivers a direct benefit by giving users an immediate calculation of their tax liabilities. And as a bonus it even allows them an extra three months to lodge their returns, compared with taxpayers who submit on paper.

The Government’s U-turn on MTD has thrown down the gauntlet to HMRC, challenging them to create a new regime so attractive that businesses below the VAT threshold will flock to use it. If HMRC don’t manage this, the spectre of mandatory MTD for small businesses may return to haunt us.

The need for incentives

HMRC have argued that MTD would reduce the potential for errors and help taxpayers to get their tax affairs right first time. If these claims are accepted at face value, voluntary use of the new regime by small businesses and landlords will benefit the Exchequer and needs to be encouraged.

Making MTD available to small businesses and landlords on a voluntary basis offers the opportunity to maximise the advantages of the new regime, while not forcing it on those unable to cope. Inspired incentives are needed from HMRC to encourage volunteer MTD users, without unfairly penalising those unable or unwilling to use it.

HMRC must deliver the ‘revolutionary simplification of tax collection’ which Osborne promised back in 2015. They must underwrite the accuracy and effectiveness of third party IT applications which they approve for use with MTD. And from the outset they must recognise the role of tax agents in supporting businesses that use MTD, and allow for active involvement by agents in the MTD processes.

A lesson for Government

The MTD proposals caused widespread concerns and fears throughout the business community. Substantial private sector resources that could have been better devoted to maintaining profitability and employment have been diverted instead to discussions, consultations and campaigns seeking to persuade the Government to change its plans.

Common sense has prevailed. The more unacceptable aspects of the MTD proposals have been reversed, and the immediate threat to the smallest businesses and landlords has been lifted. But earlier consultation with professional and trade bodies on the proposals and especially on their timescale could have avoided much of the concerns, and thus engendered greater support for the concept of MTD from the outset.

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