Cost and difficulty of making tax digital ‘underestimated by HMRC’

A leading group of accountants and law firms has warned HMRC that its drive to make tax digital will fail unless it adapts its proposals to better suit businesses.

The report from the 150-strong UK200Group membership organisation comes after HMRC closed its consultation on the project, which is aimed at creating a modern taxation system to fit with the digital age.

Reservations noted regarding the HMRC proposals include:

  • The timescale for implementation is too short for full consideration and resolution of the issues
  • The principle of Self-Assessment, and the HMRC-taxpayer relationship, will be fundamentally changed
  • HMRC does not seem to understand how accounts are prepared and used by businesses. They seem to regard tax as the primary purpose of accounts, and to seek to alter processes for the convenience of HMRC without regard to the needs of other users of accounts
  • Taxpayers’ appetite to engage with Making Tax Digital (MTD) is small, and the proposals seem to offer few benefits to offset the costs
  • Taxpayers’ ability to engage has been overestimated, and the cost and difficulty of overcoming the obstacles has been understated

By 2020, businesses, self-employed people and landlords earning over £10,000 per annum will manage their tax affairs through a digital, online account, and will be required to update HMRC at least quarterly.

These digital tax accounts will be a more sophisticated version of the personal tax accounts which are already in use for individuals, and allow taxpayers to see their PAYE position, tax credits and National Insurance Contributions, plus an estimate of state pension on retirement. However, by 2018, banks and building societies will be required to report interest payments to HMRC to be included in digital tax accounts, and individuals will be able to report additional sources of income digitally.

Digital tax accounts for businesses will show an overview of income tax or corporation tax, VAT and National Insurance Contributions, plus income and expenses on a quarterly basis.

Taxpayers will be expected to use software accounting systems to record day-to-day transactions, categorise them into different types of income and feed back to HMRC.

Andrew Jackson, head of tax at UK200Group member Fiander Tovell, chair of the UK200Group Tax Panel, and member of the consultative committee of the Office for Tax Simplification said: “HMRC officials think that getting small business to use accounting systems will reduce errors, and if people are making fewer errors they should have a more accurate idea of how their businesses are performing. That’s got to be a good thing.

“However, they don’t seem to appreciate why people aren’t using accounting systems at the moment. I think what they’ve failed to identify is that businesspeople aren’t doing it now because of the cost of implementing an accounting system – this isn’t just financial, but includes the time and effort spent learning how to use it and keeping it up to date. It’s not just a case of putting a few numbers in various boxes – it takes a whole new set of skills to use these programs properly.

“This is going to affect small businesses more than it affects larger ones because the overheads for setting up accountancy systems are going to remain broadly the same, regardless of turnover. A complex accounting system, for example, is also massively over-engineered for a lot of the UK’s businesses, which might only have half a dozen clients or customers.”

The UK200Group has made a number of recommendations to HMRC, which include:

  • Digital tax accounts be set up now, providing a central place for a taxpayer to see the information HMRC currently possesses about them and a mechanism for providing HMRC with information simply and automatically (reducing the need for phone calls and letters)
  • HMRC should consult on the future design of the tax system. Changes in the rights and responsibilities of various parties, and in particular new obligations on taxpayers, should not be introduced until that consultation is complete and the necessary technology has been tested over a full compliance cycle (one year of interim reporting plus the end of year procedures)
  • Simplifications of accounting should be optional, for tax purposes only
  • Clear benefits for taxpayers should be identified, incorporated, and publicised

Updates on the progress of MTD are expected from HMRC shortly.

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