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HMRC’s proposals were published in six consultation documents, yet awareness of HMRC’s grand plans for transforming the tax system remains low. This LITRG piece tries to provide clarification.

Introduction

A major step in HMRC’s drive towards digitalisation of the tax system was made on 15 August 2016 with HMRC’s publication of six ‘Making Tax Digital’ consultation documents. Comments were invited by 7 November, yet awareness of HMRC’s grand plans for transforming the tax system remains low. Do you know what it means for you?

LITRG has been carefully studying HMRC’s detailed ‘Making Tax Digital’ plans, and a link to its responses to each of these appears at the end of this article. As LITRG is aware that many people do not understand the extent of HMRC’s plans, this article aims to make sense of them and say how LITRG has responded.

Key proposals and responses with an illustration

First, the key proposals and LITRG’s responses are highlighted. Then there is an illustration of how they might affect even those earning relatively small amounts using an example – Julie, a self-employed cleaner.

HMRC’s proposals – in a nutshell

• By 2020 – Most businesses, self-employed people and landlords with annual turnover (income from sales) above £10,000 will have to keep track of their tax affairs digitally, and to record transactions digitally as close as possible to ‘real time’.
• From April 2018 – The changes will start for unincorporated businesses, self-employed people and landlords.
• Quarterly updates – Businesses will also be expected to update HMRC at least quarterly (rather than annually) using their digital tax account.
• Use of software – Businesses will send HMRC information direct from their software. As HMRC do not plan to produce their own software, taxpayers will have to choose from commercial providers. Free software is only promised for those with the ‘simplest’ affairs. A simple spreadsheet is unlikely to meet HMRC’s requirements.
• Helping people to ‘go digital’ – HMRC plan to provide some ‘digital assistance’ (and perhaps even financial support) for people to move to the new system. They also anticipate that some people will get help from the tax profession, friends and family and the Voluntary Community Sector.
• Exemptions for disabled people, older people, those in remote locations and for other reasons will be available, though the detail of what alternative services will be provided for those who are exempt is not clear.                                       

LITRG’s responses – in a nutshell

• HMRC should delay the start of Making Tax Digital until the design, including how people will be supported through the transition and ongoing process, has been completed and fully tested. Otherwise, people may lose faith in the system, make mistakes and unintentionally fail to comply with their tax obligations.
• HMRC should not force people into it – If Making Tax Digital is as good as HMRC say it will be, then people will naturally migrate to it and will not have to be forced or ‘mandated’ to do so.
• The proposed £10,000 annual turnover exemption is far too low – If Making Tax Digital is to be forced on to people (which LITRG does not agree with), then the exemption level must be much higher. We believe it should initially be set at turnover equal to the VAT registration threshold (currently £83,000) and never drop to below half this level. Businesses for whom the requirements may be more problematic will then be below the exemption level, and HMRC will not be overwhelmed by people’s need for digital and financial support.
• HMRC should provide free software rather than rely on commercial businesses to do so.
• People who may be exempted for reasons such as lack of broadband due to remote location, age, or disability must be made aware of the exemptions and they must be easy to claim (with any HMRC refusal to allow exemption being appealable to the tax tribunal). HMRC must provide those so exempted with alternative services and support that are at least as good as the digital equivalent.

So how might these plans affect people in the real world?

Example – Julie, a self-employed cleaner

Julie is 47. She has two school-age children. She finds self-employment easier than being employed at a job as she can flex it around the children’s needs. She does her work during the day, evenings and weekends – either when the children are at school or her husband is at home to look after them. She has very little spare time as both she and her husband work full-time hours, and money is tight. Her mobile phone is years old. She sees no need for a new ‘smartphone’. The children and her husband have smartphones and they have got a home laptop but Julie herself does not have the time to use it – she did not really grow up with computers and is not comfortable with them. She does not do internet shopping, instead she goes to the 24-hour supermarket late in the evening when she has finished work.

Julie charges £9 an hour to her various clients and averages 35 hours a week of work. In 2015/16, her income was £15,200. She incurs mileage expenses travelling between jobs. This worked out to 2,000 miles in 2015/16 @ 45p (a £900 tax deductible expense). Other sundry items of cleaning equipment and protective clothing added up to £400 in 2015/16. So her taxable profit was £13,900. She picks up most things she needs, such as protective gloves, at the supermarket or in town when doing the family’s shopping, so business expenses are jumbled in with personal items.

How Julie currently keeps records and deals with her tax

Julie keeps a paper diary of where she is working and how many miles she drives. She hand-writes ‘invoices’ on a duplicate pad – a simple timesheet of how many hours she has worked and the total due. One of her customers pays her in cash; the others all pay by internet banking direct transfer these days. Julie is glad about that as she does not have to take cheques to the bank all the time. She still gets paper bank statements so that she can tick off when her customers have paid her – she does that once a month when the statement comes in, then puts them in a file.

Currently, Julie puts her receipts in a shoebox. There are not that many of them and she circles business items on the supermarket receipts so that she can easily identify them later.

After the end of the tax year it takes her an afternoon to add up all of her invoices from her duplicate pad, add up how many miles she has driven for business purposes from her diary and add up her expenses from the receipts in her shoebox. Her husband helps her do her tax return online, filling in ‘three line’ accounts – income, expenses and profit.

How Julie will have to keep records and deal with her tax under Making Tax Digital

Making Tax Digital means Julie will be required to keep digital records of her income and expenses as close as possible to the point of the transaction. Essentially, HMRC want her to keep the records in ‘real time’. She could do this in various ways, for example by ‘taking pictures’ of her invoices and receipts and logging mileage on a smartphone App; or by recording the transactions in software on the home computer.

But Julie does not have a smartphone and cannot afford to upgrade to one – she currently has a pay-as-you-go simple mobile which she uses only for the occasional phone call and text message. Julie is also less-than-familiar with the household’s laptop and generally it is monopolised by the children doing their homework and so on. As noted above, Julie does the shopping at a 24-hour supermarket on her way home from evening work so the last thing she wants to be doing is booting up the laptop at midnight to scan and log her timesheets and receipts.

Julie cannot see any benefit to her in keeping digital records. She is worried that it will take up time that she simply has not got and that she will make mistakes. She understands the simple system she uses now and it works very well for her.  

The other aspect of Making Tax Digital – reporting quarterly figures of her income and expenses to HMRC online – might be of some benefit to Julie if it provides an estimate of her tax bill and helps her to budget for it. But this is only because her business is relatively straightforward and her income builds up evenly across the tax year. Anyone in a seasonal trade, for example, is unlikely to get an accurate estimate of their tax due from quarterly figures.

Julie is just one example of how some people would seem to be disproportionately burdened by the Making Tax Digital plans, as compared to the likely ‘benefit’ of the scheme.

LITRG submitted responses to all of the consultations detailed below

Bringing business tax into the digital age
Simplifying tax for unincorporated businesses
Simplified cash basis for unincorporated property businesses
Voluntary pay as you go (VPAYG)
Tax administration
Transforming the tax system through the better use of information

Useful links

HMRC’s ‘Making Tax Digital’ plans 
LITRG submissions on Making Tax Digital