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Sudeley Castle LLP
MAKING TAX DIGITAL – MAKING A MISTAKE?
George Osborne first announced the introduction of digital tax accounts in his 2015 Budget. The system, dubbed ‘Making Tax Digital’, will eventually replace annual returns and will be adopted by millions of individuals and businesses. Over the next four years HMRC expects a full range of services to be available to taxpayers through their digital tax accounts, and it offers HMRC huge opportunities for making efficiencies by transforming the way it administers tax. Employers, pension funds, banks and other institutions will all send more information to HMRC online, and this information will then be used to calculate individuals’ tax liabilities, which they may view online themselves.
Fears have been raised that this new digital system will require taxpayers to submit tax returns on a quarterly basis, but the Government denies this. It has reassured taxpayers that Making Tax Digital doesn’t mean four tax returns a year, but rather the introduction of quarterly reporting of income and expenditure by businesses and landlords, which the Government claims will come into effect in 2018.
All this may sound great in theory, but the full implications of rolling out this new system are worrying many professionals and businesses. A shift to a more software-orientated tax system is going to cause headaches for many small traders who currently rely on spreadsheets to manage their accounts. Making Tax Digital is likely to place the emphasis on cloud accounting, using associated apps and add-ons to help comply with the proposed quarterly reporting. Sole traders don’t necessarily have the budget to adopt these cloud accounting tools – even if they like the sound of HMRC’s desire for universal real-time tax information, this won’t stop the costs being prohibitive to them. A recent study by accounting body ICAEW suggests that 75% of all businesses and 82% of sole traders will need to change their record keeping systems to comply with the proposals, resulting in increased compliance costs.
Further concerns have been expressed about rural broadband access, which may effectively exclude many businesses and individuals from accessing HMRC’s digital services. Although 95% of the UK is covered by the Government’s current plans for the roll-out of broadband access, the 5% of the nation left uncovered could equate to almost 1.5 million taxpayers unable to gain electronic access to their tax affairs.
It’s probably also worth bearing in mind that HMRC hasn’t had the best track record in delivering new IT projects. When rolling out its digital strategy for personal online tax returns (which were aimed at reducing demand for telephone and postal contact), HMRC cut jobs from 26,000 in 2010/11 to 15,000 in 2014/15. This proved to be very ill-timed, as the overall impact of its complex transition meant that demand for telephone advice was as high as ever. HMRC has since had to recruit additional staff to drastically improve its declining customer service levels. A recent report from the National Audit Office has warned HMRC to take lessons from this experience. Head of the NAO, Amyas Morse, said:
“HMRC needs to move forward carefully and get their strategy back on track while maintaining, and hopefully improving, service standards.”
HMRC hopes to anticipate some of its inevitable implementation problems by holding five consultations with key groups. However, it has recently made an announcement that this consultation process will be delayed until after the EU referendum on 23rd June. This has now raised fears that such a delay could shorten the time frame for the parties involved to respond. Rather than holding the consultations in stages, the Association of Tax Technicians has now predicted that the Government may try to issue all five consultations in one go, with simultaneous deadlines, in order not to delay the start of beta testing and the planned launch of a public testing phase by April 2017. The ATT has pleaded with HMRC to delay the introduction of quarterly digital reporting by at least a year, to avoid the potential embarrassment of the project going wrong.
The overall consensus appears to be that Making Tax Digital should be a good thing. It promises great potential advantages, and already works well in other countries such as Denmark and Australia where it has existed for over 10 years. However, the real test will be how HMRC copes with delivering this new system – how realistic will it prove to be about balancing its ambition with the complexity of the programme it is intending to implement?