Making Tax Digital, the initiative announced in the Autumn Statement 2015 that will force all small businesses including contractor limited companies to submit quarterly tax returns, can’t be reduced to simply ‘clicking send’, as the Government seems to believe.
In response to a petition that has attracted 104,257 signatures and forced a debate in Parliament, Scrap plans forcing self employed & small business to do 4 tax returns yearly, the Government’s official line says:
“Making Tax Digital will not mean ‘four tax returns a year’. Quarterly updates will largely be a matter of checking data generated from record keeping software or apps and clicking ‘send’.”
It goes on to say:
“These reforms will not mean that businesses have to provide the equivalent of four tax returns every year. Updating HMRC through software or apps will deliver a light-touch process, much less burdensome and time-consuming than it is today.”
Now, either a massive and unprecedented simplification of all the UK’s accountancy and tax laws that no one has told us about will take place between now and 2018. Or there is no one in the whole of Government, the Treasury and HMRC that has a clue about what completing annual company accounts and a corporation tax return actually involves.
Although we would all prefer the former, the evidence suggests the latter. The policy advisers who dreamt up the Making Tax Digital initiative have obviously never worked in a real life, functional business. Real businesses are like the real world – messy, sometimes complex and rarely fit into neat quarterly packages. Haven’t the centuries/decades of tax and VAT returns and the resulting accruals and corrections taught HMRC and its predecessors anything about their own rules and tax laws created by politicians?
The idea that, for most real world businesses, something as important as tax liability can be reduced to “checking data generated from record keeping software or apps and clicking ‘send’” would be laughable. That’s if it were not for the fact that you can bet any company getting it wrong would be fined by HMRC for filing incorrect tax paperwork.
In the real world, every business chooses its own accountancy solution. There are some simple sole trader businesses that indeed use an app, and would fit the Making Tax Digital model.
However, the vast majority don’t. There are even still a few businesses adopting a ‘black bin bag’ approach and hand a bag of records to their bookkeeper/accountant every quarter or every year.
Not all accountants and bookkeepers use a solution that will be updated in real time or overnight so they can just press send. Or their system might not have the capability to integrate with these new “tools” promised for HMRC by Government.
And is the taxman suggesting that we all use apps and software developed by HMRC? Depend on a public sector IT project for something as vital for your business as its management accounts, financial reporting and tax calculations? Erm, no thanks.
What may have happened is that a policy adviser looked at RTI and its relatively painless implementation and thought ‘why don’t we do this for all businesses (larger businesses and sole traders already pay on account), which would be just like Pay As You Earn (PAYE) for companies and we get paid our tax even sooner?’.
But from a tax perspective, most employees are much less complex than businesses, and that RTI ‘success’ is not one for HMRC. It is largely down to large and medium employers and their service providers developing working solutions so that they would not incur huge fines for not making it work.
Having to keep accounts regularly updated every three months is nonsense. It would not surprise us if many businesses just guess the returns for Q1, Q2, Q3 and then do a balancing return for their final quarter.
Contractors and other small businesses do not have time for this initiative and could make better use of their company’s cash by investing it in growth and not accountancy bills – that would make more money for the Exchequer.
Making Tax Digital is a wonderful concept, but can’t work until the UK’s tax system has been radically simplified. Right now it can’t be simplified to just ‘clicking send’.