Making tax digital: who said anything about it being easier?
Accountancy & Tax As part of the Government’s grand Digital by Default plan, HM Revenue & Customs (HMRC) has embarked on its ambitious Making Tax Digital [MTD] programme.
At its heart of the Making Tax Digital [MTD] programme plan is the vision that every taxpayer who has to report their income to HMRC will do so quarterly. Different groups of taxpayer will enter the system on a phased basis with everyone included by April 2020.
Currently, taxpayers report their income and gains to HMRC in an annual tax return. For individual taxpayers who choose to file in paper form, the deadline is 31 October. Those who choose to file electronically have another three months - their deadline is 31 January, almost ten months after the end of the relevant tax year.
Of the 10.39 million 2015 returns filed by midnight on 31 January 2016, 89% were filed electronically and 11% were filed in paper form.
Figures published by HMRC show that of the 10.39 million 2015 returns filed by midnight on 31 January 2016, 89% were filed electronically and 11% were filed in paper form. HMRC see those figures as demonstrating general acceptance of electronic filing but that overlooks the fact that many returns are filed electronically by tax advisers on behalf of their clients. It also ignores the position of the 1.14 million taxpayers who still file paper returns, some of whom are genuinely ‘digitally excluded’.
The central element to the MTD concept is the replacement of the annual tax return with quarterly reports. HMRC’s vision is that every taxpayer will have a personal tax account. Taxpayers will report details of income and gains throughout the year on a quarterly basis. That information, together with data already available to HMRC from other sources (bank interest, employment income, pensions, etc) will enable the account to show the person’s tax position at any time in the year. HMRC believe that the new process will speed up tax collection, particularly from businesses and that it will help to reduce errors and aid early identification of possible problems.
HMRC envisage MTD leading to businesses reporting their income to HMRC in real time. Taken to its extreme and assuming that everyone has the right electronic gadgetry, if a self-employed musician pays for a taxi to a gig where they are performing, the fare will immediately pop into their tax account as a business expense and into the tax account of the taxi-driver as a business receipt. And before the musician gets home, their pay for the gig will be shown as a receipt in their tax account and as business expenditure for the venue.
HMRC believe that the new process will speed up tax collection, particularly from businesses and that it will help to reduce errors and aid early identification of possible problems.
But what if everyone does not have all the gadgetry with which to make cash-free transactions and to link with their tax account? What if the musician buys expensive new equipment towards the end of the tax year which virtually eliminates their profits for the year? Or what if some of their expenditure relates to annual items like insurance or subscriptions where at the end of their accounting year they will have prepaid some of next year’s expenditure. Will all smaller businesses be obliged to adopt the ‘cash-basis’ accounting in order to fit in with HMRC’s MTD programme? And will the musician’s tax adviser expect a bigger fee if they have to advise on how to make their client’s record-keeping fit in with MTD and prepare quarterly reports to HMRC instead of annual accounts and an annual tax return?
An HMRC publication in December 2014 entitled Supporting Small Business carried the sub-title Making tax easier, quicker and simpler. In March 2015, the Chancellor heralded “a revolutionary simplification of tax collection” and HMRC published Making tax easier: The end of the tax return. By the autumn of 2015, HMRC programme had been rebranded as Making Tax Digital. I wonder why.