Making Tax Digital

13 June 2016

David Gauke has responded to concerns from the Treasury Committee that making tax digital is going to be a costly transition for all businesses if software has to be compatible with HMRC requirements.

At the end of April the Treasury Committee wrote to the Financial Secretary to the Treasury, David Gauke outlining their concerns. The letter refers to research conducted by The Institute of Chartered Accountants in England and Wales (ICAEW) which suggests that 75 per cent of all businesses, and 82 per cent of sole traders, would need to change their record keeping systems to comply with the Government's new proposals for Making Tax Digital (MTD).

The letter also quotes from a briefing by the Tax Faculty team at ICAEW which says that businesses would be required not just to submit information to HMRC online once a quarter, but that they would also be required to do all their record keeping in a prescribed digital format.

The Treasury Committee has now received a response from David Gauke where he addresses concerns and provides assurance to businesses, large and small. The letter can be read in full here but in summary:

The response acknowledges that there is no doubt Making Tax Digital is the future. The government is committed to reducing burdens for taxpayers and building a transparent and accessible tax system fit for the digital age.

The tax system has not kept up with the technological advances of the digital age. Currently, taxpayers have to review 18-month old records, stored in a variety of formats, none of which can interact with HMRC systems. Either they complete a lengthy HMRC form, re-entering data recorded elsewhere or they go to their accountants and drop off a carrier bag of records, getting them to complete their return on their behalf. When they pay their final tax bill, it is on money made up to 21 months previously. Clearly it is an outdated system designed for a world of paper and not fit for the 21st century.

Making Tax Digital will deliver greater control, certainty, and confidence to businesses. The software will do much of the work to provide HMRC with the required information for the quarterly updates, so submitting an update will feel very light touch. It will also provide nudges and prompts that flag up reliefs or allowances to which businesses may be entitled, and offer access to built-in help to enable businesses to get their tax affairs right. HMRC has already started testing proposals with businesses and they have been generally positive about the Making Tax Digital software, saying that it appears simple to use and much easier to submit tax information than the current system.

The government has been clear since the first announcement at Autumn Statement 2015 that the reforms would involve both digital record keeping and quarterly updates. Indeed the Making Tax Digital Roadmap (published in December 2015) sets this out -"Businesses will use software that compiles their tax data as part of their ordinary day-to-day activity, highlighting any possible errors . . .. offering prompts for information that might otherwise be overlooked. Once the software has compiled the relevant data, businesses or their agents will feed it directly into HMRC systems"

Since December, both HMRC and David Gauke have had a number of discussions with business representatives. In January, Mr Gauke set out to colleagues in a Westminster Hall debate that "updates will be generated from digital records. It will be much quicker, easier and far less burdensome than the current process. The agony of the annual tax return will be a thing of the past'. In a previous letter, David Gauke was also explicit that "businesses keeping paper records will need to switch to digital tools, for example an app on a smartphone, to record their income and expenditure."

Last September HMRC published its Third Party Software and Application Programming Interface (API) strategy. The aim of this strategy is to deliver the widest range of compatible and secure software products and enable providers to bring more sophisticated products to the market whilst ensuring their compatibility with HMRC systems. HMRC is already seeing this strategy deliver new and innovative products. For those businesses already using record keeping software HMRC is exploring to what extent anything new will be necessary or whether existing software packages will be sufficient with the aim of minimal disruption.

HMRC will publish an initial assessment of the impacts of the new requirements for businesses alongside an overview of the potential costs and savings for businesses as part of the planned consultations this year. This will include the contribution these reforms will make towards the £400m administrative burdens reduction target for business.

There will be an opportunity for interested parties to consider the initial assumptions behind the impact assessment when it is published, and the detail of the proposals when the formal consultation begins. HMRC will be working extensively with stakeholders throughout 2016 to develop their evidence which will inform the updated assessment in the Tax Information and Impact Note to be published alongside draft legislation.

These proposals will require a behaviour shift for many smaller businesses, but it is important to note that they go with the grain of what millions of businesses are already accustomed to doing -transacting online, including with the taxman. Research by the Department for Business Innovation and Skills in 2015 found that 97% of small businesses and 92% of micro businesses had access to the internet at work. It is therefore unsurprising that the overwhelming majority of returns for the main business taxes are submitted online.

Some two million small and medium sized business are already using software for payroll and VAT. In the last year the number of users accessing their digital tax account has more than doubled to over 5 million. Businesses therefore have a strong appetite for digital services, as do the agents who represent them. An overwhelming number of businesses already choose to maintain their records in a digital format even though there is currently no requirement for them to do so.

HMRC will ensure that compatible software products are available to suit the budgets and needs of all businesses, including some free products for those small businesses with the simplest affairs. Of those businesses not currently using software, HMRC will provide additional support to build their confidence in using digital tools for their business, simplifying their affairs and integrating tax into their ordinary day to day activity.

Most stakeholder groups have welcomed the vision of a transformed and fully digital tax system, but HMRC is aware that concerns about its implementation still remain. HMRC will listen to stakeholders who represent small businesses and their intermediaries ensuring that the final design takes account of their views and is fully informed by existing practices.

CIPP comment

As we have said previously and David Gauke also mentions above, there is to be a wide-ranging consultation exercise on Making Tax Digital which is due to start shortly – at least four separate consultations are to be published. The Policy Team will be reading and disseminating all documents to the payroll profession and will of course involve members and the industry accordingly for your invaluable input. Please do get involved if you are able to.