If you thought Making Tax Digital was just bad, you haven’t been paying attention. It is horrendous, warns TaxationWeb's Lee Sharpe.
Let’s face it, forcing people to pay for something they didn’t ask for, don’t want and will cost them a fortune was always going to be hard to sell. To understand how bad MTD really is, it’s probably easier to start with the assumption that HMRC has little short of contempt for taxpayers, and positively hates agents. And then work downwards.
Let’s not forget that MTD was originally sold on the basis that HMRC had been tasked with reducing – I repeat, reducing – the administrative burden on businesses by £400million a year. That was an incredible claim. And when I say incredible, I mean exactly that – not believable. After several attempts, even HMRC has admitted that MTD will cost taxpayers money. The commitment to save taxpayers money has been quietly dropped from HMRC’s now-revised Single Department Plan 2015-20. Because committing to save “customers” money while costing them a fortune would appear to be a challenge too great even for HMRC.
Some readers will recall that HMRC set out a couple of years ago to “bust some myths” about MTD – by replacing those myths with some of its own. Once we were finally able to get to see the legislation, and in particular the regulations governing the finer detail, it became clear that HMRC’s denials were false – or at the very least highly misleading. I suppose it is, strictly speaking, correct for HMRC to say that “MTD for Income Tax does not mean 4 tax returns a year” because actually, it means 5. And actually, it means at least 5, because a taxpayer is supposed to file 4 quarterly returns for each business he or she runs, as well as his or her Self Assessment. So, MTD could easily mean more than a dozen returns a year.
This is clearly a sore point for HMRC, which has been so desperate to convince people that these are not tax returns, that the word “returns” in the legislation has been changed to "information filed in response to the notice to file or in any end of period statement for the year of assessment provided to HMRC by the person". It seems HMRC found it quite difficult to replace the word “return” with something that doesn’t sound too much like “return”.
If you’re wondering why HMRC is so desperate to skirt around the word “return”, the following may help:
“…the Board shall have regard to the desirability of securing, so far as may be possible, that no person shall be required to make more than one return annually of the sources of his income and the amounts derived therefrom. “ (TMA 1970 s 113(1))
So, for those who are unfamiliar with the legislation, that is a reasonably explicit instruction to HMRC, not to burden taxpayers with more than one return per year. I would guess that, 50 years ago, people thought that doing something several times a year was likely to be more expensive and time consuming than doing it only once, so would be difficult to justify. The fools.
HMRC’s enthusiasm for MTD has been matched only by software houses. In fact, HMRC has enjoyed a huge amount of free advertising thanks to software companies’ endlessly promoting how great and simple and easy MTD will be. But nothing in life really comes for free: software houses can barely contain their enthusiasm for a captive market running to millions of businesses – although they have been notably more reticent about making good on HMRC’s promises that basic MTD software would be free.
Software houses are, of course, much more amenable than tax agents, who have a duty to their taxpayer clients. Software houses do not ask difficult questions but are more concerned with doing as HMRC says. For example, many tax agents take issue with the fact that, three years after they were announced, HMRC still cannot make the so-called Dividend and Savings Allowances work properly in their tax calculations. But every year, software companies diligently and dutifully follow HMRC’s Income Tax calculation template – despite its being riddled with errors – because otherwise, their online submissions are rejected and they lose their accreditation. In other words, software houses prefer to put up with HMRC’s failings rather than work out someone’s tax bill correctly. No wonder HMRC prefers software companies’ company to that of pesky tax agents, when implementing MTD!
Working on the premise that HMRC finds it easier to issue regulations than it does to follow legislation that has been around longer than I have, we find that MTD Income Tax draft regulations require the taxpayer to digitally record – in a manner prescribed by HMRC – every single transaction “that occurs in the course of the business”. And here’s me thinking that HMRC should be concerned only with establishing a person’s tax liability – silly me.
But perhaps I premised too soon, because as I read through the Consultation Document and later updates published by HMRC, it said explicitly that it would amend the legislation to enable HMRC to make a discovery assessment in relation to the End of Year declaration, which seems fair enough, until I read pending TMA s29 (6)(aa), which specifically provides for HMRC to be able to make discovery in relation to the other 4 new quarterly returns. I don’t think that is what most people would have inferred from reading the ConDoc.
I wonder if anyone else sees a delightful synchronicity with MTD, software houses offering to store taxpayers’ business records “in the cloud”, and HMRC’s burning desire to "modernise" its powers to inspect business records under FA 2008 Sch 36 – in particular, that really quite bothersome requirement to ask the taxpayer or a Tax Tribunal for permission to access business records from third parties? On the plus side, (for HMRC, of course), it will also mean HMRC will no longer have to worry about getting caught out asking for information it is absolutely NOT entitled to in its enquiry letters. Because it will no longer have to ask.
Of course, MTD was never really about saving taxpayers money, or easing their administrative burdens, but about giving HMRC very easy access to business records in a standardised format. This changes record-keeping that suits a taxpayer, and that HMRC might have to make an effort to understand, to record-keeping in a format that suits HMRC. Agents have been sidelined in favour of software houses, who act as cheerleaders.
Remember that HMRC has said that this exercise will close the Tax Gap. Presumably it means by raising more tax revenue. It would be rather "unfortunate" to find that this whole exercise narrowed the Tax Gap by proving only that HMRC had massively over-estimated the amount of tax lost to poor record-keeping. But the professional bodies have repeatedly asked for similar evidence from the ill-fated Business Records Check project several years ago, to no avail, so maybe we shall never find out.
I have set out below some of my findings in relation to MTD specifically for landlords, following my review of the legislation, etc., for Bloomsbury Online reference library. While it focuses on Buy-to-Let businesses, much will be relevant to other businesses as well.
Summary Implications of MTD for Landlord Businesses (and their Agents)
Many smaller businesses compile and prepare their records only as part of their annual tax return process (they generally have no statutory duty to do otherwise); they will now have to update their business records at least quarterly, which will in many cases mean more frequent accounts preparation routines.
Businesses will be using what in effect will be software ‘approved’ by HMRC (in theory, spreadsheets may be used but conveying that information without human intervention to HMRC’s computer systems will become increasingly impractical).
Each business will have to file separately under MTD, so for taxpayers with multiple business interests, this will mean even more returns each year.
Each business transaction must be recorded separately and categorised according to HMRC specifications (although there are exceptions for retail businesses). Aside from the additional work involved, it seems reasonable to infer that estimates – traditionally perfectly acceptable – will become much more open to challenge in the event a return is subject to enquiry
Every quarterly update will require the taxpayer, and potentially their adviser, to determine:
- If the business has ceased, or changed in nature.
- If there has been a change of business address or contact details – potentially of any co-owners as well.
- Whether or not the cash basis is applied.
- The number of properties rented out.
- The address of each property rented out (so that HMRC can tie in to landlord/letting data to be demanded separately from letting agents).
- Partners joining or leaving the business, where appropriate.
There are exemptions from MTD obligations such as for very low overall business income, on religious or similar grounds, or where digital access is impractical.
For a partnership to be excluded from MTD, however, all partners must be excluded.
When a business finds errors in the digital records, they will need to be amended and notified in the next periodic update; any amendments will be recorded and notified separately, which will provide HMRC with unprecedented information about changes to accounting records prior to finalisation, and by implication an entirely new metric by which to gauge business compliance.
HMRC will be able to enquire into the new annual summary ‘end of period statement’ (or Schedule A1 partnership return) alongside the ‘normal’ tax return, but there will be only one enquiry window (although it will start only once HMRC has received all of the annual information it requires). HMRC will not be able to enquire into the quarterly updates.
HMRC will, however, be able to use the information provided in quarterly updates in its attempts to discover underpayments in tax returns.
There will be a new, points-based penalty regime for late returns (including quarterly updates) which should mean initial failures do not automatically trigger a financial penalty.
However, more returns each year means more scope for late filing and therefore penalties, and taxpayers with multiple businesses will have even more returns to submit and thereby presumably even greater exposure to penalties
There will also be a new late payment regime, which will not penalise payments up to 15 days late, but will penalise any payment that is 16 days or more late, with additional penalties at 30 days and a new punitive interest rate from then onwards
There will be a new ‘Pay as you go’ regime to go alongside MTD which, while initially voluntary, the government is almost certain to try to make mandatory once MTD is embedded.
MTD represents a significant cost to business (despite the government’s initial claims it would save businesses money each year); HMRC subsequently admitted as much; the underlying reason for introducing it despite those costs is that HMRC is adamant that businesses are paying too little tax and that forcing them to update their business records more frequently will result in greater accuracy and a significant rise in tax liabilities.