In the 2015 Autumn Statement, the Chancellor announced that the Government was going to invest £1.3 billion into HM Revenue and Customs to transform the UK into one of the most digitally advanced tax administrations in the world.
By 2020, most businesses, self-employed people and landlords will be required to keep track of their tax affairs digitally and to update HMRC at least a quarterly basis through their digital tax account.
This is pitched as a trailblazing reform towards a new target to reduce the costs to business of tax administration by £400 million by the end of the 2019-20 tax year.
Setting aside the natural scepticism of the HMRC being able to deliver such an ambitious IT project to time, indeed HMRC have confirmed that the initial technical consultation that was to set to start this month has been deferred until after the EU referendum on 23rd June, the course is set.
Despite all the concerns and misgivings and the unanswered questions, this tax revolution will happen as it is ultimately part of a process to accelerate the collection of business and personal taxes.
As such, it represents both one of the biggest challenges and opportunities to the accountancy profession.
Gone will be days of the traditional historical approach of preparing the books on an annual basis. Instead firms will need to offer real-time resources that are compatible with the digital age.
Whilst the HMRC publications and the pronouncements of the Financial Secretary to the Treasury, David Gauke MP, seem to suggest a fundamental misconception of the role an accountant performs, they raise a valid point that reporting on events that, at the extreme, happened twenty-one months previously is not compatible with the times that we live in.
However, Making Tax Digital faces some serious challenges the most fundamental being what constitutes ‘digital’.
Rt Hon Andrew Tyrie MP, Chairman of the Treasury Committee, has taken David Gauke MP to task on this matter in a letter sent on 26th April 2016 in which he wrote:
“Until last month there was a general understanding among most tax professionals that businesses could use their own choice of package for their record keeping, as long as it was digital.
Digital had not been clearly prescribed and was understood to include, for example, Excel. It was only recently that HMRC’ s apparent intended meaning – that businesses will be required to use particular software, and systems that are compatible with HMRC’s – has become clear.”
Given that an independent survey by ICAEW found that 75% of all businesses and 82% of sole traders would need to change their record keeping systems to be compliant, he goes on:
“If this sample is representative, and if their fears are borne out, then it seems implausible that MTD could generate large savings to business – as the Government is forecasting.
On the contrary, the vast majority of businesses may face increased compliance costs. This would be a cause for serious concern”.
As yet, any reply has not been placed in the public domain. However, it appears counter-intuitive that changing the current system annual reporting to one that requires quarterly reporting is going to reduce the administrative burden and cost to small businesses and sole traders.
For instance, in order to submit accurate information, a retailer would need to complete a stock count and valuation or a manufacturer would need to assess the cost of Work in Progress four times a year.
In addition, asset purchases, capital allowances, depreciation, accruals, prepayments, deferrals and bad debt provisioning would need to calculated through.
This is where the Treasury is displaying a naivety on the role that an accountant performs. There is much more to it that just ‘bean counting’.
There also appears to be an underlying assumption that businesses work on a linear basis whereas the reality is that, to a greater or lesser extent, there is some seasonality in most companies.
For instance, a marquee company could generate 75% of its revenue in the summer months which covers the costs in the winter where there is little or no revenue. Reporting on an annual basis smooths this out but quarterly reporting will provide a distorted picture, the more so if it is used as the basis for tax payments.
As Mr Tyrie rightly says in the conclusion of his letter “A thorough impact assessment is the minimum required before proceeding with the Government’s proposals to make digital record keeping compulsory.”
Nonetheless, neither the Treasury nor HMRC have shown any inclination to be deflected from their Making Tax Digital programme.
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