In the spring Budget 2015, George Osborne expounded his vision for a digitally transformed tax system and the end of the annual tax return.
Around the same time, the Treasury published a document, Making Tax Easier: The End of the Tax Return, which announced the introduction of digital accounts for millions of individuals and small businesses. The document claimed taxpayers will be able to “understand quickly and easily what they need to pay – without ever having to complete a tax return again”. The document went on: “This is a big leap forward in modernising our tax system, putting good customer service at its heart, and making it as easy as possible for individuals and businesses to pay the right tax at the right time.” Then, in December 2015, a more detailed document covering the same ground, Making Tax Digital, was published. Note the change of language: the reference to the concept of making tax easier had been dropped!
I buy into the concept that we are in the midst of a digital revolution, and there’s no reason why we shouldn’t bring tax in line with that. But it’s not just about making the digital platform more central to the tax system – there’s something else going on and, having talked to HMRC and the Treasury in my role as ATT president, I’ve got a sense of what it is. Ministers are worried about the so-called ‘tax gap’. This is the difference between what HMRC actually collects and what it thinks should be collected. Based on the most recent figures, for 2013-14 the gap is about £34bn.
If you look at the figures carefully, quite a bit of the gap is down to SMEs (about £16.5bn) and individuals (about £2.9bn). The taxes at stake are primarily income tax, national insurance contributions and capital gains tax (together about £14bn), and VAT (about £13.1bn). So here’s the dilemma for ministers: they are politically committed to making tax easier for small businesses, but they also need to introduce extra measure to close the tax gap. HMRC has been given the task.
The Making Tax Digital document says: “HMRC will collect and process information affecting tax in as close to real time as possible to stop tax due or repayments owed from building up. From April 2018, businesses, including everyone who is self-employed and those letting out property, will update HMRC at least quarterly, where it is their main source of income (or a secondary source of income above £10,000 and their main income is from employment or a pension).”
This is the bit that I don’t get. If the government wants to make tax easier (by removing the need for an annual tax return), how is that achieved by making small businesses and individuals report at least quarterly? The only explanation in my mind is that, under pressure to close the tax gap, quarterly reporting appears to be part of the way home. I don’t think either HMRC or the Treasury knows what quarterly reporting will actually look like. When they have a better idea, no doubt they will share it with us, as both AAT and ATT are helping them shape that vision. However, the bit that’s missing, in my opinion, is not quarterly reporting – it’s quarterly payment. This is the element that will bind everything together and help close the tax gap. One without the other doesn’t add up.
Room for improvement
Let’s hope that digital accounts work better than access to HMRC’s online services did on 9 January this year – right in the middle of the tax-return month from hell – when hundreds of agents couldn’t get onto HMRC’s online services through the front page of the HMRC website. It had been changed to deny agents access, without notice. This was then compounded when the HMRC online services helpdesk said that it had
not been told of the changes and was having to deal with a flood of complaints. Yes, the problem got fixed over the next few days, but this is the sort of service delivery that lets HMRC down. So here’s my message to HMRC: get your own house in order before you go careening down the pathway of further change.
Michael Steed is co-chairman of the ATT's tax Technical Steering Group and columnist for Accounting Technician magazine.