Making tax efficient

Following significant changes to HMRC’s Making Tax Digital plans, Tina Riches reviews what is now proposed and what it means for businesses.

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Cherry Reynard
Published: 01 Aug 2017 Updated: 13 Jun 2022

The benefit of listening prevails. Well done to the UK government for listening carefully to the concerns around making tax digital (MTD) raised by the Treasury Select Committee, parliamentarians, including the House of Lords Economic Affairs Committee, and stakeholders. These groups largely support the move to digital systems but not necessarily the pace of change or early mandation, as previously proposed.

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Rt Hon Mel Stride MP, the new financial secretary to the Treasury, in a move welcomed by stakeholders, issued a written statement on 13 July, which outlined the updated plans for MTD. The government still intends to reintroduce the MTD clauses, dropped from the original Finance Bill 2017, into the next Finance Bill, which is now due to be published after the summer recess.

What’s now proposed?

There will be some key policy changes, apart from for VAT. The new timetable confirms that:

  • only businesses with a turnover above the VAT threshold (currently £85,000) will have to keep digital records and only for VAT purposes, making submissions through MTD compliant software;
  • they will only need to do so from 2019; and
  • businesses and landlords will not be asked to keep digital records, or to update HMRC quarterly, for other taxes until at least 2020.

Businesses and tax agents had repeatedly stated that there was too little time to get ready for MTD and too little detail provided on the requirements, so it was difficult to get ready. Earlier consultation on the timetable might have anticipated such general concerns, but we seem to have now reached a better place.

The new plans mean that MTD for VAT will be trialled for at least a year before mandation and will effectively be available on a voluntary basis for businesses with turnover under the VAT threshold; that is those who have registered for VAT voluntarily.

For other taxes, the changes mean that the system will be available on a voluntary basis until 2020 or beyond. This is perhaps the best of both worlds, as MTD also involves better use of data by HMRC, digital tax accounts and improved digital interaction between HMRC, agents and taxpayers, yet businesses will be able to opt in for other taxes when they are ready.

The government has indicated that it will not widen the scope of compulsory MTD beyond VAT before the system has been shown to work well, and not before April 2020 at the earliest. However, the government has not ruled out mandation in 2020 or at a later point.

In addition to the amended Finance Bill clauses, the updated regulations are impatiently awaited – these may give a better indication as to how the revised plans will pan out.

What does this mean?

As a number of stakeholders proposed, businesses, their agents, software companies and HMRC will have at least one full cycle from April 2018 to April 2020 to try out MTD. This will give plenty of scope for businesses to work at a more sensible pace with their agents to identify the best way for them to change their processes and streamline any data exchange.

The problems expounded by stakeholders were previously highlighted by Lord Carter of Coles, when he carried out a review of online tax services over a decade ago. In his 2006 report (Review of HMRC online services), he recommended that to deliver ‘robust, high-capacity, services HMRC should build in more rigorous testing’ recommending that services, end to end, should be tested at least a year before implementation and if not successful the service should be deferred. The revised MTD timetable now permits more thorough piloting. Lord Carter should be proud that his legacy survives.

There is also more time for digital record keeping to become more widespread, particularly among smaller businesses. This is a key aim of HMRC, given the evidence it has that digital records updated at least once a quarter generally tend to be more accurate.

One suspects that if the majority of businesses successfully migrate to digital record keeping and reporting, then the need for mandation may reduce. Self-assessment now has a very high online take up, which has resulted in the call for compulsory online filing to dissipate.

One could envisage that digital record keeping, coupled with the seamless transfer of data electronically through MTD compliant software, often through agents, to HMRC at least annually may work reasonably well. The $50 million question though is who would want to report to HMRC on a voluntary basis more frequently?

As far as many businesses are concerned, there seems to be little purpose in quarterly reporting, in itself, apart from taxpayers being able to prove that they have ‘done their homework’. Yet there are other less obvious advantages. It would enable HMRC to link data about businesses obtained from other sources to gaps in quarterly reporting, to help HMRC identify more quickly areas of the hidden economy. Given we all pay for this indirectly in higher taxes and unfair competition, we do all have an interest in this.

In addition, memory fades, so doing something within three months is likely to be more accurate than doing it over a year later. For the many represented taxpayers, it will enable earlier sharing of data, which could significantly help their tax advisers and accountants provide more proactive advice and also better spread their workload so as to cap the costs and risks associated with peaks in workload.

Whether all this is sufficient to warrant the cost of making quarterly returns needs to be properly considered, but I can envisage that there could in due course be an overall benefit to UK plc. In the meantime, many people would feel far more comfortable with MTD if it only extended to digital records and annual reporting from taxpayers with a much improved service from HMRC. This potentially provides an opportunity for an overall increase in efficiency through better use of technology.

Many firms are already looking at improved systems and better integrated workflow; for example, more software is coming onto the market that will automatically grab data from an accounting system in one location and import it into separate tax software at another location.

A call for action?

Yes, this will require upfront investment in IT and new processes. But will businesses merely put off the ‘evil day’ because they now can? Some no doubt will consider that because digital record keeping and quarterly reporting is not (yet) mandatory, they can leave this for a year or so. But there are at least three very good reasons not to do that:

  • Firstly, without a widespread move to digital record keeping, the likelihood of mandatory quarterly reporting being introduced increases
  • Secondly, having listened to stakeholders, and having given everyone time to move forward at a more measured pace, if and when quarterly reporting is introduced, HMRC may be less patient with stronger sanctions for the non-compliant
  • Thirdly, is there a business that could not at a press of a button do quarterly reporting today that can honestly say their systems cannot be improved and made significantly more efficient?

Rather than having to prove you’ve done your homework, should we not just get on with it? Businesses and their tax agents have been thrown a lifeline. Surely now is the opportunity to grasp it to ensure a smooth transition to making tax efficient.

This article first appeared in the Tax Journal.

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.


This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.