Making Tax Digital: A business burden too far?

Businessmen using tablet
Donald-Drysdale By Donald Drysdale for ICAS

30 August 2015

As a chartered accountant, chartered tax adviser and chartered IT professional, Donald Drysdale thinks 'Making Tax Digital' should not be mandatory. The views expressed below are his own and not necessarily those of ICAS.

The pros and cons of IT

On holiday this summer I was amazed at the number of youngsters rushing around searching for Pokémon monsters. For the most part this activity seemed harmless - until I saw mobile-clutching teenagers running heedlessly across busy main roads.

Pokémon GO is a game people play on smartphones. You don’t have to play it, but it’s apparently fun to do so and therefore very popular. Nonetheless, it does cause casualties and (reportedly) encourages crime. There are lessons here for HMRC, which they should take into account in addressing points set out in this and my next article.

Making tax digital

In his March 2015 Budget, the then Chancellor George Osborne set out his vision of a transformed tax system and the end of the tax return. He proposed that by 2020, most businesses, self-employed people and landlords would be required to keep track of their tax affairs digitally and update HMRC at least quarterly via their digital tax account.

These changes, referred to as ‘Making Tax Digital’ (MTD), were to be introduced for some businesses from April 2018, and would be phased in by 2020, supposedly giving businesses time to adapt. In spite of this the proposals were seen as extreme and are causing widespread concern.

Public consultation

HMRC have now launched six consultations on MTD, seeking responses by 7 November 2016. ICAS is keen that its members should share their views on the proposals, and has called for input here. Personally, I’d go further and suggest that every small business should consider the likely impact of MTD and respond to the consultation expressing their views.

Why mandatory?

Online self-assessment, an undoubted success, has never been compulsory for unincorporated businesses. Taxpayers and agents favour digital submission of tax returns, and the system generally works well.

MTD will end self-assessment as we know it, and replace it with a much more intrusive tax regime. But why should it be imposed mandatorily? In an increasingly digital world, a well-designed online system (like self-assessment, or even Pokémon GO) should attract eager users without compulsion.

The impact of Brexit

With Brexit looming, businesses of all sizes face massive uncertainties. If there was ever a time for business proprietors to concentrate on maximising profits and creating jobs, this is it.

Any far-seeing government should already have conceded that Osborne’s MTD plans would take business eyes off the ball, and this alone justifies calls from various quarters for the project to be postponed.

De minimis exemption

After representations that MTD would be unduly burdensome for small businesses, we are now told that it won’t be mandatory for unincorporated businesses and landlords with annual turnover below £10,000. While any de minimis exemption is welcome, restricting the let-out to such tiny businesses is derisory. Many such concerns pay no tax anyway because of the personal allowance.

Typically many businesses significantly above that cut-off point would have no idea in advance whether or not their turnover would exceed the limit. Anyone operating or advising a business that trades close to the VAT registration threshold already understands the difficulties involved in monitoring turnover levels near the margin. It is unrealistic to suggest that such nano-businesses could do this to establish whether they’re in or out of MTD.

I have an alternative suggestion. If MTD is imposed at all, it should be mandatory only for businesses with turnover expected to exceed the VAT registration threshold. The existing VAT rules for this are already well understood by most businesses of that size. They work tolerably well and should be used for MTD purposes too. If you agree, then perhaps you could echo this view in your response to the consultations.

Deferral of implementation

We are told that MTD will be deferred for some businesses and landlords with annual incomes above the £10,000 threshold, so HMRC clearly acknowledge that implementation may be burdensome for smaller business. However, eligibility for this deferral has not yet been defined – creating additional uncertainties.

The fact that HMRC has suggested such a deferral supports widely-held views that MTD should be introduced first for the largest businesses, and only later for smaller concerns. The majority of large businesses already maintain their business records in digital format, and are likely to have the resources to enable them to meet the quarterly online reporting requirement.

Software selection

Choosing appropriate software for MTD is likely to be beyond the skills of many small businesses proprietors. Experience to date, for example with iXBRL-based corporation tax online filing, has shown that HMRC’s claims of offering help to businesses in selecting software are without substance.

Many businesses currently rely on spreadsheet software to maintain their accounting records and exchange data with their agents. Such businesses now face uncertainties because HMRC have not yet indicated whether they will be able to continue doing so. Facilitating the continued use of spreadsheets has proved instrumental in enabling many small companies to file iXBRL-compliant accounts and computations, and is likely to do likewise for many small businesses forced into MTD.

The role of accountants

Businesses that rely on annual help from their accountants may now find themselves needing to do so quarterly, with consequent impacts on management time and accountancy fees. HMRC disingenuously suggest the opposite, claiming that MTD will allow businesses to cope with less input from their accountants.

Unfortunately, some businesses may try to cut costs by dispensing with professional advice or using unqualified accountants instead, without appreciating the risks involved. It is important that not only businesses but also their accountants respond to the consultations on this point, to ensure that a balance of views is obtained.

Conclusion

Don’t get me wrong. It is in our interests to support the introduction of a modern tax regime in which digital technology helps businesses comply with their tax obligations. However, the detailed MTD proposals confirm that the government has no understanding of the way small businesses operate, or the way they prepare their accounts.

There is no justification for such a system being imposed mandatorily. On the other hand, a robust system, well designed to meet the needs of taxpaying businesses, could attract widespread support from those able to benefit from it.

Article supplied by Taxing Words Ltd

Topics

  • Tax

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