TaxCalc Blog

Making Tax Digital – Quarterly Updates, Petitions, Debates and Research

I doubt that it will have escaped the reader of this blog that the Government has recently been extolling the virtues of its radical digital agenda. Back in the Autumn statement last December, it dropped something of a bombshell in the form of quarterly updates of accounting information for the self employed and, although rarely mentioned, for landlords too.

Rather than provide explanation as to how this could all work, the detail is still to follow. Indeed, various publications have recently been released by HMRC but they don’t exactly put much meat on the bones. There’s been research, which I’ll discuss later, but (at time of writing) we are still waiting for preliminary consultation, which will be followed by further consultation later this year.

And, of course, consultation generally only focuses upon one thing at a time. So there appears to be separate consultation to be had on quarterly updates, on the alignment of business activity to tax payments, on the penalties regime and so on.

Quite rightly, there has been much hubbub in the media and amongst both the accountancy practice and self employed industries. Again, I doubt it will have escaped you that there was a petition started to challenge “quarterly returns”. Having gained over 100,000 signatures, Her Majesty’s Government was required to debate the issue.

The debate

Before it took place, the Government invited the public to suggest matters that it should discuss in the debate. Of course, this being the digital age, comments had to be delivered via Twitter. Although it’s hard to explain nuanced argument with 140 characters (or less), we still took part and of our six tweets, two made it into the official debate primer documentation.

Despite the limited communication medium, I was heartened to hear many of the issues we thought pertinent were raised eloquently by other MPs. Some had run a small business in the past and quite often went into some significant detail about their experiences of the tax system.

The biggest issue, precipitated by the wording of the petition, was what exactly was it that HMRC were after? HMRC and Government ministers kept referring to an “update”, not a “return”, so what did this mean?

Was the requirement to be a full return in all but name, a tax-adjusted quarterly profit or just plain and simple accounting information? And if it were the latter, would this be a submission of detailed transactions or just a summary?

The matter of seasonality came up many times as did whether tax liabilities would be tied to quarterly submissions. If tax payments were to be levied upon the results, could a taxpayer make a reasonable adjustment for an anticipated annual profit? If this were not the case, I doubt that many businesses, their accountants and their bank managers would relish the idea of effectively loaning HMRC useful working capital only to receive it back at a later date.

There was discussion at one point about further reliance upon accountants to deal with this increased administrative burden placed upon their clients’ businesses. A figure had previously been cited in the Spending Review 2015 that businesses would be able to save £400m on tax administration – one I doubt few reading this article, as did some MPs, would agree with.

Mr Gauke once again touted the end of the tax return as we know it. However, it is apparent that there would still need to be tax adjustments and the tax system would remain an annual one.

Outcomes of the debate

The issue of what HMRC meant by “quarterly update” was dealt with pretty quickly: they will want an update of summarised accounting information. Essentially, they want to force all businesses to keep quarterly records and to prove it, they want evidence submitted to them.

The Financial Secretary to the Treasury, David Gauke MP, stated that “…around £6.5bn of tax goes unpaid because of mistakes made by small business when preparing and filling in their tax returns”. Explanation revealed that this was largely caused by the loss of accounting records and basic accounting errors. Once the new regime were put in place, it was anticipated that there would be additional tax revenue received of £920m a year by 2020 and £600m a year thereafter.

For those businesses that did not currently keep digital records, whilst there was talk amongst MPs about HMRC providing free software (something we would oppose since it would completely distort the market), Mr Gauke did mention that there were already six free apps available that had received some 30,000 downloads. Indeed, I can think of a handful more of bookkeeping products that operate under a freemium model. Hopefully this demonstrates to HMRC that commercial markets will solve this problem and that they have no justification to release free software and thus distort an otherwise free market.

Finally on this point, Mr Gauke mentioned that HMRC would initially go easy on businesses that didn’t comply except in the most deliberate cases.

On the matter of whether these submissions would result in tax charges being levied, there was no answer although it was noted that it was a vexed issue. Preliminary consultation would commence in the spring, with further consultation to take place thereafter.

Simpler Payments

During the debate, various statements in defence of the strategy were made. Apparently, research shows that quarterly reporting and the possible alignment of tax payments to business activity is something that small businesses would desire.

So I headed off in search of this research. I believe I eventually found it in the form of HM Revenue & Customs Research Report 398: Understanding the Impact of Taxation Cycles.

In this document, some 40 (yes, just forty!) businesses took part and of them, 16 discussed matters further. Six of the participants were businesses that turned over between £1m and £39m! It’s mentioned that some used accountants and some didn’t.

Even though the questioning appeared to be reasonably thorough, I’m sure that you would agree that the sample is hardly representative of the millions of businesses in the UK, especially those at the lower end of the spectrum for which the potential changes would hit hardest.

Now, it’s easy to pick and choose quotes from such a lengthy document but here are some of the key matters raised, verbatim where it makes sense to do so:

1. “More frequent reporting held little initial appeal, being associated with administrative burden and seen as ‘controlling’ by simple businesses.”
2. “Smaller, simple businesses valued their autonomy and straightforward cycles…”
3. Businesses were generally already keeping records and were meeting their tax obligations.
4. For some, a more frequent payment schedule was welcome. Others, which had more seasonal businesses, identified that they would lose flexibility to dip into money set aside for quieter periods.
5. “Simple SMEs and more complex and structured SMEs took little interest in more frequent reporting and payments.” It only held “appeal among SMEs who had experienced issues managing their cash flow and tax obligations historically.”
6. “…few businesses saw advantages to more frequent reporting, which was associated with the type of administrative burden that SMEs actively sought to avoid. Where accountants were used, businesses saw a potential cost, as well as time implication.”
7. “For CT particularly, reporting (in larger organisations especially) involved more complex calculations and in some cases, involvement of auditors. Added to the lack of obvious benefit, most businesses were satisfied with the current level of reporting, so had little appetite to increase it.”
8. “As well as the practical barriers, for some (in particularly small) businesses reported and paying SA only, it also raised negative feelings towards HMRC, as it was perceived to be ‘controlling’ and a change for HMRC.”

I think the document overwhelmingly suggests that businesses just aren’t interested in such a regime change. Any benefits to cash flow by making smaller, more regular payments is rendered moot by the administrative burden.

Our relationship with HMRC

I have to say that we software companies enjoy a good working relationship with HMRC, especially those being BASDA members. Indeed, we have spent years building a mutual respect for the teams that we work with in the development of TaxCalc.

As with any Governmental ambition, it’s only reasonable that plans that appear impractical or give conern to our customers are challenged. That being said, there are many parts of the digital strategy that we completely and wholeheartedly agree with. The digital tax accounts and new Application Programming Interfaces (APIs) are two brilliant examples. Quarterly updates concern us greatly and we know how much they concern our customers too.

We don’t wish to criticise unfairly but unless there is evidence to the contrary, we do feel justified in our concerns. We do think that HMRC need to be challenged and will continue to do so in an effort to obtain the best outcome for all concerned.

If you are concerned, there is much you can do as well. On a direct level with HMRC, the organisation is to embark upon a series of consultation meetings up and down the country (Google “Making Tax Digital” to find out more). Attendance means you can provide your thoughts first hand.

As already mentioned, we software companies have a relationship with HMRC. Again, you could write to your software provider such that your views are known and hopefully voiced should the opportunity arise.

On a professional level, the accountancy bodies in the UK are liaising with HMRC officials at a senior level, so you could speak to your own regulatory body to pass on your thoughts.

And finally, we live in a democracy. So why not write to your MP? After all, it is they that would be voting to bring all of this into existence.