Making Tax Digital: Let's hope HMRC will listen
As a chartered accountant, chartered tax adviser and chartered IT professional, Donald Drysdale calls on all businesses and practitioners to respond to HMRC’s ‘Making Tax Digital’ proposals. The views expressed below are his own and not necessarily those of ICAS.
Making Accounting Digital
I make no apology for starting this article by returning to the biggest issue currently facing most businesses and accountancy and tax practitioners – the topic of Making Tax Digital (MTD).
There’s growing consensus among business proprietors and professional advisers that HMRC have overstepped the mark in planning to impose mandatory MTD without regard to the extra costs and burdens businesses will face. The project, conceived by George Osborne and David Gauke to ‘transform tax administration so it is more effective, more efficient and easier for taxpayers,’ seems likely to have precisely the opposite effects and particularly so for small and medium sized businesses.
HMRC plan to spend £1.3bn forcing businesses to keep digital accounting records and report their results online at quarterly intervals, claiming that this will save the business community between £85m and £250m each year. Viewing this from another perspective, Accountancy Age quotes a leading practitioner who believes that 2.6 million small businesses affected will each incur costs averaging £1,250 on moving to MTD – that’s £3.25bn in aggregate. Thus, the pay-back period for their ‘investment’ could be between 13 and 38 years!
In recent days, both Microsoft and Apple have announced steep price increases for UK products because of the fall in the pound since the vote for Brexit. Other technology companies are expected to do likewise. Accordingly, all HMRC’s estimates of costs may have to be revised – costs upwards and benefits downwards.
If you’re in business, I hope you’ve told HMRC what you think of their proposals. Time is now very short – the consultation closes on 7 November. Details can be found in the ICAS summary of the consultations and HMRC’s overview. ICAS will submit formal responses, based on input from members. As an alternative or (better still) an additional way of expressing your views, you should raise any concerns you have by responding (however briefly) to HMRC’s MTD questionnaire.
In recent discussions with professional bodies and groups of interested practitioners, HMRC representatives have seemed intransigent in their views on MTD. Is this perhaps because Treasury Ministers have told HMRC what to do and say, so they adhere to an uncompromising ‘official line’ as though working mindlessly from a call centre script?
HMRC certainly don’t seem to be in listening mode. This flouts the Cabinet Office Consultation principles which advise government departments: ‘Consult about policies or implementation plans when the development of the policies or plans is at a formative stage. Do not ask questions about issues on which you already have a final view.’
If the Treasury has indeed insisted on cracking the whip, perhaps a greater concern is whether this undermines HMRC’s independence as a non-ministerial government department which ought to be operating without political interference. Is it appropriate that HMRC blindly follow instructions from Treasury Ministers, or should they be taking a more autonomous approach to carrying out their primary functions?
What is HMRC’s role?
Under section 5 of the Commissioners for Revenue and Customs Act 2005 (‘the Act’), the Commissioners of HMRC are responsible for (inter alia) the collection and management of revenues.
Section 11 of the Act provides that, in the exercise of their functions, the Commissioners shall comply with any directions of a general nature given to them by the Treasury. This applies to all the functions conferred on HMRC by section 5. It gives the Treasury the right, for example, to direct HMRC’s strategies and call the Commissioners to account for the overall effect of actions they take, but not to direct their day-to-day or operational decisions.
Are HMRC exceeding their remit?
Is it within HMRC’s powers to force every UK business of any significance to maintain their accounting records digitally, or would this be ultra vires? Businesses are already required by law to maintain records adequate to substantiate their accounts and tax computations. Dictating new ways in which this should be done, by turning the world of accounting upside down, seems to be going far beyond the mere ‘collection and management of revenues’.
It is recognised, of course, that HMRC require some element of discretion to administer the tax system. However, it may be going too far to accept that HMRC, staffed predominantly by civil servants with no real-world business experience, should dictate not only how businesses are to pay their taxes but also how they should be run. After all, until now the support provided by the accountancy profession, based on well-established accounting methods and delivered digitally where appropriate, has served businesses well.
The consultation documents fail to justify HMRC’s support for MTD. They claim that the mandatory imposition of digital record keeping is necessary to realise HMRC’s return on its investment – hardly a convincing justification! They also assert, without evidence, that digital tools will give businesses greater control, certainty and confidence over their tax affairs – exactly the opposite of the outcome I’d expect for many businesses.
HMRC suggest that MTD will reduce the tax gap caused by small business error. This seems improbable, because genuine errors should be evenly distributed between under-and over-payments of tax. Furthermore, HMRC say MTD will reduce the need for businesses to rely on their existing accountants, but this could encourage more errors.
The tax gap, as generally understood, is attributable to behaviour that favours taxpayers. There seems little reason to suppose that digital record-keeping would eliminate or even reduce such behaviour. In fact the opposite might well happen, with some businesses fading into the shadow economy to avoid MTD.
MTD will require businesses to invest in expensive hardware, software and services which they might not need for any other purpose. It will force businesses to divert valuable time from other duties to manage the transition, or pay their professional advisers to do so.
Technology develops and changes at a rapid pace. MTD will impose on businesses the time-consuming and costly task of keeping their facilities up to date with current HMRC requirements and best practice.
While HMRC see cloud based accounting services as a way forward for many businesses, they make no mention of the difficulties involved in selecting the most appropriate cloud service provider. They also fail to mention other risks, such as the serious data access implications that can arise when a cloud provider becomes insolvent.
The consultation documents largely ignore the data protection and security risks that will be faced by businesses forced online against their better judgement. Small businesses rarely have the skills or resources to manage and control such risks effectively, and for this reason MTD is likely to fuel a further explosion in the growth of cybercrime.
HMRC’s ‘hard sell’ of MTD seems irresponsible and inappropriate. I trust that you’ll respond to the consultations, and I hope that HMRC will listen carefully to the widespread concerns being expressed.
Article supplied by Taxing Words Ltd