Making Tax Digital: 7 issues for 2017
Philip McNeill reports on a recent meeting about Making Tax Digital (MTD) with ICAS firms at CA House.
During a wide-ranging discussion, staff from HMRC set out its approach to the transformation of tax administration through Making Tax Digital for Business (MTDfB). This included a review of how the four foundations of MTDfB: better use of information; tax in real time; single financial account; and interaction digitally, apply in practice.
Seven key themes emerged.
1. Business transformation at HMRC
HMRC is undergoing a digital transformation, which has taken four-five years so far to build capacity. This has involved new physical locations, new software, and a new platform. This is visible on your screens as the old turquoise HMRC banner disappears and the new black banner becomes familiar.
The old ‘heads of duty’ information is being ‘re-platformed’ into a strategic data hub. This will enhance HMRC capabilities for accessing and interrogating information across taxes. This has massive implications for how HMRC does business. Data will be in one strategic data platform and the opportunities for data analysis are vast.
2. Tax in real time
HMRC is ‘changing the rhythm of contact’ with taxpayers with the aim to bring it nearer real-time, closer to when transactions happen. This is designed to ‘bring forward’ the taxpayer’s view of their liability; part of the ‘Prevent’ element of HMRC compliance strategy: Promote – Prevent – Respond.
There are a number of practical issues which need resolving here – such as changes to basis periods, dealing with overlap profits and digital book keeping. The direction is clear and it will impact both businesses and their advisers. There have already been six consultations and more are scheduled.
Record keeping will move into real-time and the patterns of contact between agents and their clients is going to change. Firms will need to consider their delivery model as well as client capability to ensure that the new pattern of business can be met.
3. Target of a single financial account
The medium-term aim is that the taxpayer should have a single view through their Digital Tax Account across a range of tax obligations – similar to the online banking model.
This would see all business tax data visible to the taxpayer (and their agent) – from income tax and VAT, to CIS and PAYE. There is still some way to go to bring about the integration necessary for this to be possible.
4. Agent access
HMRC’s principle is that tax agents should be able to ‘see and do, all that their clients can see and do’. MTD brings in a new way of accessing client data held by HMRC. Access will be via a firm’s practice software.
Agent access is being developed by HMRC Agent Services. Agent Services will develop Application Program Interfaces (APIs) so that practice software suppliers can developed software which will enable agents to access HMRC services including subscribing their clients for MTD.
As MTDfB is rolled out, more APIs will be made available to the software suppliers, and more functions will be available.
There are challenges here as the different suppliers are likely to develop slightly different products and all practice software may not have the same functionality. Compatibility between client and agent software is also an issue.
In order to access HMRC’s MTD services for agents, each firm will need to ‘subscribe’ (register) with HMRC. The firm will then be able to access MTD services via their practice software. HMRC will obtain an overview of each firm and their clients.
Changes needed to Government gateway could be a challenge here with the current Gateway service scheduled to come to an end by March 2018.
5. Interaction in digital (digital by default)
As HMRC’s digital capacity is transformed, so digital becomes the standard means of interaction. Already there are around 3 million Business Tax Accounts and 8 million Personal Tax Accounts in existence.
The ‘Agile’ development methodology being used by HMRC means that digital products will be developed and modified in real-time. This has already started and is due to be expanded from April 2017.
In line with Agile development, the aim is for HMRC to have a ‘minimum viable product’ as soon as possible and then add in more modules. In due course, all sources in scope for MTD will be included.
Digital working brings challenges of access and data security. This is leading to new identity verification checks such as two-step verification. Two step verification includes security codes sent to a mobile phone, and security questions to access digital tax accounts. This can significantly impact agent work arrangements and staff access to client data.
Agile development avoids the ‘cliff edge’ of abrupt digital change; on the other hand, due to its very flexibility, it can be harder to map out the details of exactly how we reach the given destination.
6. MTD for individuals
MTD for individuals is based on Personal Tax Accounts. The key here is third party information – like PAYE data and bank savings income data.
A pilot is due to run from April 2017 – April 2018. Government Digital Service (GDS) will sign this off before it goes live to ensure that ‘it is fit for purpose’.
The pace of change is rapid and there are a number of issues still to be resolved. These include the practicalities of correcting errors in third-party data and how an individual’s tax position will be finalised.
There are concerns from agents that self-assessment will be ‘switched off’ before the new system is properly evaluated – especially as it is due to go live in April 2018. This is before a full tax submission cycle has been completed.
HMRC is suggesting an overlap period between self-assessment and MTD will be sufficient to ensure all customers have the capability to report all income as the transition is made.
The MTD pilots begin in earnest from April 2017. Initially in a controlled go-live phase in-line with industry practice then expanding from eight software suppliers with hundreds of volunteers to most software vendors and hundreds of thousands of volunteers. This is designed to enable HMRC to test everything works as intended and factor user experience into the design.
According to HMRC, there is around £8 billion in errors in the system as a result of ‘error’. HMRC considers that to correct this there needs to be a change in the way people keep records.
Many agents consider that the issue of data errors is more complex and is centred on good book keepers and adequate professional accountancy support. There will need to be changes in taxpayer behaviour and significant training to bring contemporaneous, accurate record keeping.
The MTD consultations issued in August 2016, received 3,000 responses. The short online survey had 1,200 responses.
While a move towards digital was generally supported, there was a wide range of differing views on the details. In particular, cost implications of MTD varied widely – ranging from HMRC’s estimate of £280 per taxpayer to the Federation of Small Businesses’ figure of £2,770.
The House of Lords Finance Bill Sub committee’s recent report raised concerns on costs and benefits, timescale, and scope.
As the mandatory, April 2018, deadline for unincorporated business and landlords with turnover above the VAT threshold approaches, have your say and get involved.
The remaining businesses with turnover above £10,000 will be required to enter MTD from April 2019.
The MTD Public Beta starts in April 2017 – please let ICAS know if your firm/clients would like to be involved. Details about how to join, and selection criteria, are not yet available. We can hold a reserve list until we know more.
Further meetings can be held with HMRC – please get in touch with us if you would be interested in attending.