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Where Taxpayers and Advisers Meet
How I Learned to Stop Worrying and Love Making Tax Digital, The Tax Gap and HMRC's Unquenchable Thirst for Data
16/02/2018, by Lee Sharpe, Tax Articles - HMRC Administration, Practice & Methods
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TWebEd muses on how much fun tax agents are likely to have in 2018...

Introduction

Well, January's finally over. Who knew caffeine withdrawal could be so... fun?

It being February, I doff my glass and raise my cap to the many tax agents out there, for whom a January ski holiday remains a New Year's resolution perennially unfulfilled. But now is the time to ask, "what tax wonders will 2018 bestow on us?"

Making Tax Digital

I have been loth to blight TW's pages with mention of this outrageous waste of time, money and brain cells, which HMRC seems hell-bent on foisting on an unwilling population of taxpayers, without any proper consideration of (or care for) the problems it will cause. I can say this because:

HMRC's first Impact Assessment was laughable ("it will be a doddle, really, because preparing accounts at least four tmes a year is scientifically proven to be significantly easier and faster than just once annually; we reckon it will be saving taxpayers somewhere between £85million a year and £250million collectively a year, by 2020/21, because no way will software costs increase by more than 2% overall - in fact, most software houses will be giving their MTD product away for free, because we've told them to")

HMRC's second Impact Asseesment was risible ("It will cost each business on average £280 in total one-off costs to move to MTD, but they'll be basking in a collective saving of £100million a year by 2020/21")

HMRC's third Impact Assessment was no longer funny but downright insulting ("OK, so it is going to cost businesses money, but according to our calculations, no more than £30 per business, per year, once things have settled down")

I will admit that I have paraphrased just a little - or maybe just cut to the chase. But if you can be bothered to spend a few minutes (but no more than c£30'worth of your time, of course) reading the Impact Assessments, then some things do become clear:

"HMRC used the well-established Standard Cost Model (SCM) methodology together with internal customer insight and information obtained from engagement with stakeholders to derive the MTDfB impact assessment estimates."

Three times, and each time with a different result. (OK, a little harsh, because the third time will have cut out all the smaller sub-VAT businesses that were no longer mandated, and which were likely to be doing most of the saving... no, on second thoughts, if HMRC actually thought that micro-businesses would be benefitiing most from MTD, then thrice-shamed it is).

"The government is committed to ensuring a free product is available for businesses with the most straightforward affairs. HMRC has clearly signalled to developers that free software products, with free updates, must be available alongside a breadth of additional products catering for the wider market"

i.e., we are absolutely confident that software companies, who are in business to make money from selling software, will happily spend vast amounts of time and money creating software to give away, that complies with a set of standards we have not yet decided upon, because we have been giving off "signals". And because we understand so well how busineses work, we know that these signals will be sufficient, to ensure they give their work away. For free.

"approximately 60% of the small business population of about 3.4m businesses (about 2m businesses) will be entitled to, and will take up, the free software on offer"

Yup, still banging on about that free software in the second Impact Assessment - hold on a second, though, what's this report from the ICAEW that in a meeting in May 2017 between the ICAEW, HMRC and those sofware providers, the last were recorded as saying that they were "yet to identify a business model that will make free software a viable proposition"? 

I wonder if anyone might now want to hazard a guess at the real reason why HMRC decided to drop MTD for the smallest businesses? Was it:

a) Because HMRC carefully listened to businesses, agents and basically the rest of the world who wasn't HMRC, repeatedly telling it that MTD was a bad idea and would be a car crash to implement, for about a year, and then suddenly decided to apply MTD only over the VAT threshold, or

b) Because HMRC's grasp of fundamental business concepts like "profit" is so far ahead of that of actual busineses that it has finally accepted that it might have to wait a few years before slowcoach software companies catch up and smell the coffee that giving their product away for free is actually the best way to generate revenue, and turn a profit?

Of course it's (a).

A couple more points about MTD:

1) If digital record-keeping really is the best thing since sliced bread, then why does HMRC have to expend so much time and effort forcing busineses to adopt it? Surely not all businesses are as dopey as software companies?

2) The following comes from the initial consultation on MTD: "At Autumn Statement 2015, the Chancellor announced a target for HMRC to reduce the costs to business of tax administration by £400m by the end of 2019/20." If HMRC has finally, through gritted teeth, admitted that MTD is going to cost businesses admin money, year in, year out, then why are we still even talking about MTD?

Oh, and if MTD is really going to cost VAT-registered businesses only £30 a year each, then can we not just each pay HMRC £30 a year and forget about MTD? Of course, only a fool would ask such a stupid question. Well, this fool and 15% of the small businesses interviewed by IPSOS MORI for HMRC, who said they'd rather pay a fine than deal with MTD

It's the Tax Gap, Stupid

I must thank the ICPA's Tony Margaritelli for drawing my attention to the comments made by a senior HMRC representative in response to questioning by the Public Accounts Committee, (PAC), which are so informative as to warrant quoting directly, and reading more than once (although do bear in mind you've only got £3.62 left out of this year's £30 allowance)

"The largest part of [the Tax Gap] is really the small businesses. That poses a number of big challenges for us. First, there is a very large number of small businesses, so, case by case, it can be a relatively small amount and therefore it can be very difficult to tackle that in a cost-effective way. Also, the way that we have traditionally tackled that issue could be quite intrusive and stressful for a small business, because it involves in-depth investigation. And we are seeing in the economy a movement away from employment towards small businesses, so the underlying pressure is people moving out of an area of taxation that is highly compliant into an area that is highly non-compliant. That is a key challenge for us. We want to find different ways of tackling that, other than the traditional method of having a lot of boots on the ground investigating a lot of small businesses, although that will always be part of it. A key measure that Parliament has passed in the last couple of weeks is Making Tax Digital for business, which is starting to modernise the small business tax system and drive out some of the error and failure to take reasonable care. We can build on that in future. There are a couple of other areas where we can make a big difference. First, there is a new set of intermediaries in the self-employment arena. You have had eBay and Amazon here before you, and there are also taxi and takeaway apps, and we need to look to exploit these intermediaries more in the future to help small businesses to comply and prevent opportunities for them not to. Secondly, there is the tax agent industry, which has a very high level of penetration into small business taxation, yet its clients are often presenting as non-compliant. We need to drive up the value the tax system gets from agents in the system."

[PAC] "Mr Harra, you mentioned Making Tax Digital, which will presumably bring in a lot of those non-compliant small companies. You ought to be able to close the tax gap when that measure is introduced. Is that correct?"

"Yes; it is certainly our intention. As I say, there is also an underlying pressure that would tend to increase it, but the yield from that measure comes from closing the small business tax gap."

There's a lot in those few paragraphs - for agents in particular. I note that Tony was not alone in being spurred to write: the CIOT issued a press release in response to the PAC's 2016/17 HMRC Report that warned of the risk of stigmatising SMEs without any published evidence as justification.

There is also the rather obvious question of how on Earth HMRC's respresentative thought he could assure the PAC that MTD would close or even narrow the SME tax gap, given that MTD is essentially forcing businesses to do homework that will never actually be marked. Businesses' MTD submissions will never be examined by HMRC, nor can they be checked against the submissions that businesses would have made in the absence of MTD, so it will be impossible to do more than claim that MTD's effect has been indirectly to reduce errors by forcing businesses to review their records more frequently. (Or perhaps HMRC will whip out the same magic calculator it used to derive 3 different answers to the MTD Impact Assessment, as noted above?)

There is also the rather obvious point that, given that there are literally millions more SMEs than any other kind of business (note HMRC seems to measure the PAYE tax gap by employers, not employees), blaming SMEs for the tax gap is a bit like blaming the volume of traffic on the road on "everyone who owns a car". True, there are lorries, and there are buses, but yes, obviously, cars are the real, er, problem, when it comes to the number of cars on the road today.

I'll leave you with two perhaps less rather obvious lines of thought: One for agents, and the other for anyone who thinks personal privacy is important.

Consider "We need to drive up the value the tax system gets from agents in the system", as above, with this gem from the latest Impact Assessment:

"For those moving to [making tax] digital, especially those needing additional support, our customer support model will include a multi-layered customer support model [I know] stretching across agents, third party software support.." I do not read this to mean HMRC support for agents, but rather agents supporting taxpayers for HMRC.  To be clear, I shall never be a cheerleader for MTD, while it achieves nothing meaningful for taxpayers, and I most certainly shall not be doing so just to make HMRC look good. 

And finally, "There are a couple of other areas where we can make a big difference. First, there is a new set of intermediaries in the self-employment arena. You have had eBay and Amazon here before you, and there are also taxi and takeaway apps, and we need to look to exploit these intermediaries more in the future to help small businesses to comply and prevent opportunities for them not to."

I have previously warned that HMRC's safeguards against "reverse engineering" its already vast data-gathering powers under FA 2011 Sch 23 to assess individuals' expenditure were basically non-existent, and limited to assurances such as "HMRC will use these powers to identify businesses who are failing to register with HMRC or under-declaring what they owe, not to track customers’ purchases." Given the scope of data HMRC is entitled to ask card companies, websites, app companies etc., for, and that it is largely impossible for many such data gatherers to exclude non-business transactions (as HMRC has always known), I'd wager that the limit on how long it will be before every electronic financial transaction a person makes is logged and weighed against HMRC's record of that person's income is more a function of processing power and computer reources, than any legislative restriction - from memory, there is none. I am just not comfortable with any government agency having that degree of knolwedge about each and all of its citizens. Thank goodness for one's Human Rights, eh?

Happy 2018!

Best,

TWebEd

About The Author

Lee is TaxationWeb's Articles & News Editor and writes for TaxationWeb. He is a Chartered Tax Adviser with experience of advising individuals and owner-managed businesses over a broad spectrum of tax matters.
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Comments

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Lambs 17/02/2018 11:14

R,<br /> <br /> In my opinion, HMRC labours under no illusion re: the effects of MTD. You have to ask if the reason why it took 3 goes before they found it would actually be a net cost to business was because they realised that it could not then be justified in the context of a cost-saving measure as per the original brief. It surprises me that so few parties appear to have made the connection. HMRC made the same "mistake" with RTI PAYE reporting, as recent reports have found - i.e., that it underestimated cost to businesses, and brought them (businesses) no benefit, while making HMRC's life considerably easier. You then (arguably) have to ask to what extent HMRC considers its "customers" merely a resource to be exploited, in order to justify its own existence in current form. Should you carry on regardless, if what you are doing damages the people whom you are supposed to serve? I am thoroughly in favour of the implementation of IT. However, the cardinal rule is that it enable and facilitate, rather than divert, distract and impede. I wonder how insulted would your average taxpayer be, if he or she realised that they are being forced to do all this additional work for nothing? It serves no real purpose - HMRC will not even read the returns - except to reassure HMRC that we are all being diligent little taxpayers. It's like being forced to take your driving test every 3 months, but the government's examiner can't even be arsed to turn up.

Rasalom 16/02/2018 17:00

Excellent bit of polemic highlighting the Kings New Clothes attitude of HMRC to MTD. I've been wondering how those taxpayers who (for instance) are excellent cabinet makers but who sign their names with an "X" will cope with being shepherded toward the digital age with the gentle hand of HMRC's electric cattle prod. Whilst there is the stench of inevitability over MTD, it would be good for the dissenting voices to be heard and hopefully some of the harsher effects ameliorated.

Tony Talks - 

HMRC emails, MTD for VAT errors and VAT Software