I was expecting to spend today at a conference. But I am not doing that. The House of Lords Economic Affairs Committee has instead commissioned me, at very short notice, to present evidence on HMRC's plans to ‘Make Tax Digital'. The hearing is on Monday afternoon and they like written submissions to support that given in person.
I will be spending today (at least) writing that submission and will publish it on Monday. If, however, anyone has anything to say on this issue, especially with regard to estimated costs for taxpayers in terms of time and direct spending, as well as supposed savings for HMRC and in the tax gap I would be pleased to hear from them.
For those interested a cautious response from the tax profession is noted here.
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Nice one, good luck.
I have been a sole trader since 1987 and am highly educated and specialised, working in publishing. I am not a technophobe. When I started I could complete my own tax return. When the system changed it became too complicated for me and I now use an accountant. However I do sort out all my accounting records, etc, manually using an old fashioned accounts book. I can do the sums. I earn a reasonable amount, certainly more than the proposed £10,000 threshold.
I am concerned that this change will cost me considerably more in accountancy fees, and in my own time if I continue to do my accounts in the same way. I am also concerned to be accurate – I believe in paying the right amount of tax. The idea of learning a new software programme and doing it all myself terrifies me, as well as the not inconsiderable time involved – working on my own I have no one to ask about such things ( except my accountant who I’d have to pay) and the costs of any such programme. Unless they make an exception/threshold around the £50,000 mark or higher – the VAT threshold would be good, I am doomed to take part in this, only 2-3 years before I intend ( hope) to semi-retire… even then I suspect my earnings as a landlord (one property)with a pension will take me over the threshold ….
I am writing to you because I am very worried about this change.
Join the club
My trusty spreadsheets work just fine for me and are little more than automated old cash books
Now, I admit I have them linked to a full excel double entry accounting system I wrote many a year ago
Bit all that is now history
And I hate the alternatives for good reason – they’re slower and take an age to correct if an error is made
The very framing of this – Making Tax “Digital” – worries me. It’s putting technology (or at least a blurry buzzword of tech) before outcomes. Making taxation systems more effective. Making tax collection more efficient. All would be potential outcomes. But making it digital?
The four pillars then, in turn, are solutions searching for a purpose.
Underlying all of this there appear to be some fairly cranky old systems that (certainly judging by the letters that HMRC send out and the experience of online services) are pretty much untouched in years for fear of breaking them. Root and branch change of the underlying systems is probably necessary for the sorts of reforms that are being spoken about, but what will happen is the layering around the legacy. This is what the banks have done. The banks systems seem perpetually hovering on the edge of complete collapse.
How much money is going to be projected to be spent to make this happen? How much should that then be multiplied by to give a real indication of the potential costs (NHS patient records systems can provide a benchmark). At the end of it all, what is realistic to be delivered in a reasonable time frame at a manageable cost that doesn’t completely break the system?
Good reference points in here: http://spectrum.ieee.org/static/lessons-from-a-decade-of-it-failures
Your thinking is very similar to mine
We’re destroying tax and accounting concepts of justice and fair measurement to permit this for a £1 billion one off tax gain
MB is right this is just about speeding up a bureaucratic accounting process and reducing costs.
Richard, this Lord’s EAC event could be an opportunity for you to raise some of the deeper issues concerning the meaning of ‘digital’ in the context of the social-ecology of money as a symbol not a material commodity.
I hope you get a chance make the case for green fiscal policy and the obvious uselessness of monetary policy.
In 15 minutes?
I can try….
Richard, there was an excellent Money Box programme on the problems and costs of ‘Tax Simplification’ with this yesterday afternoon on R4.
Separately, a friend who is self employed sole trader was told that he could not file his tax return online because he didn’t have an acceptable form of identity. He has no passport or driving licence. It was the devil’s own job to find someone in HMRC who could put a note on his file to say that he shouldn’t be fined for a late filing this time round, as he now has to do paper submission. Ok, he shouldn’t have left it so late, but who knew you needed a passport to pay tax?
This is getting to the point of being absurd
I believe that to set up a personal tax account, that you either need a current UK passport or a current tax credits claim. There are quite a few people who do not meet this criteria.
Non-expert comments
I can see advantages
(a) Ease of use???
(b) Easier to search previous submissions
(c) Greater ability of HMRC to check if submissions from different parties match up.
Disadvantages
(a) Security
(i) Hacking to obtain private information
(ii) Hacking to falsify data
(b) Fat fingers – entering the wrong information at the touch of a key
(c) Where would non-digital evidence to corroborate entries fit in?
Thanks
Tell them they’re complicit in a game that’s destroying all of us except the 1%. Enough is enough now. We want action and action sharpish.
Richard,
Two significant factors seem to be being brushed aside by HMRC with their rose tinted spec firmly in place for smaller businesses.
1) There is no way that doing something 4 times a year instead of once a year is going to save time and cost. And it may be 5 times a year as the annual report will still be required.
2) What about businesses that do not have a steady flow of activity. Presumably the idea is to get business to pay on account but what about when there is a downturn or the dip in trade is longer than expected? This will severely impact cash flow. If your business works on significant projects a delay in a new project starting will already prove difficult in the management of cash. If HMRC are wanting tax on account this will make the picture worse.
With all the well documented failings of HMRC and their consistent proven track record of failure in timely, effective, reliable systems implementation their timescales are sheer fantasy.
All good points
Taking estimated tax by direct debit without obvious early repayment systems looks to be a nightmare in the making
Richard
And (just in case you’ve not had a chance to get to it yet!) reading between the lines of the latest update on AccountingWeb echoes the likelihood of a multifaceted foul up in the making. http://www.accountingweb.co.uk/tax/hmrc-policy/the-mtd-software-race-is-on
Thanks
The nightmare I expected
I am digital (January man), currently I have a small number of transactions 5-30 each year.
It makes my accoutant’s job easier as I scan in all the original receipts, fiddle with file conversions/compression and final collation into one smallish Word docx then pdf, this takes a lots of time generally one full day. The cost to me is much more than the money I am repaid or pay in to HMRC.
Precisely……
But you won’t be allowed to do that anyway: the entries will have to be made in approved software, even if via a spreadsheet
You will have to change your way of working and do more
Four times a year
Oh no.
I would like to add that a quick recovery from an IT problem is essential both for HMRC and the taxpayer – otherwise you are just adding to HMRC’s and taxpayers’ work.
As an example, for reasons nobody seems to understand, I couldn’t access my HMRC account although I’d been happily using the same password and identity for years – since day one. Emailed ‘help’ and it has taken 4 months to issue a new identity and password. Now possibly it was a complex problem — they don’t say. In fact replying to emails can take weeks. But that was two VAT returns that were late and estimated and surcharged.
I’ve only recently paid the proper VAT and ignored the surcharges.
I wrote by snail mail to ask if I could send a paper return after the first overdue VAT return and I still await a reply! I can’t believe I’m the first to have had this problem so it seems to indicate there is no back up plan.
When other taxes are also required quarterly that will potentially double the problem.
None of that would have been necessary had HMRC responded promptly to start with or if that wasn’t possible at least coordinated with their ‘collections’ department to stop the threatening letters telling me of all the myriad of possibilities they have for collecting their money, each one of which I feel obliged to reply to and which, presumably, somebody at HMRC has to scan or file even if they otherwise ignore it.
I find it staggering that so much cannot be done by email on this system
The delays are down to an absence of people
The assumption is the system will always work. It does not
When I was in HMRC communicating with “customers” by email was frowned upon due to worries about data security and was only allowed if the “customer’ signed a declaration that they were willing to take that risk! I also seem to recall that it was only allowed for “customers’ of the Large Business Service and not “ordinary” taxpayers.So just expect more confusion over this new system.
Interesting. Do you have any evidence to present them, or are you going to have to compile something over the course of the next few days?
I’ve sent over the results of a survey we did concerning client record-keeping, which I hope they’ll find interesting. It is quite difficult to get much in the way of solid evidence, though, given that the proposals are still so unformed.
I’ve promised some comments on the draft legislation too, but that’s going to be a bit tricky given that it doesn’t say anything…
Andrew
I cannot see an email
There is a lot of evidence
Richard
I sent the findings directly to the Lords.
May you share?
I can ask, but I’d have to go through channels and may not get permission in time.
Pardon?
You can’t send me an email you sent?
Why?
Because I have the information in an official capacity, not personally, and so I need to check with the rest of the organization before sending it around to any old Tom, Dick or Harry.
OK
Hello Richard
The basis for the calculation of the tax gap is flaky at best. Please see http://www.accountingweb.co.uk/tax/hmrc-policy/mtd-the-costs-and-the-reality#comment-576052
It has been pointed out numerous times that even if it was this high then errors work both ways. HMRC refuse to address this point.
The overall feedback so far from my clients is one of distress. This legislation will take bookkeeping out of the hands of many small businesses like RTI and auto enrolment before it. I have already been asked by many clients to take over the bookkeeping function and this willl put a strain on my small practice and result in markedly higher accounting costs.
HMRC’s coatings are woefully short. I understand that a reduction in investigation costs as a result of MTD has been factored in to their £280 figure. I have quoted at least double my existing charges to take on a full bookkeeping role. In reality, some may leave but this is the reality of the situation. A small set of sole trader accounts will go from £300 to £600 and company accounts from £800 to £1,600. This are actual quoted fees.HMRC one off costing includes a “small minority” who will need to upgrade hardware. How can this fantasy figure possibly be substantiated?
HMRC’s impact assessment for auto enrolment was £46 and £20 to £50 for RTI. They have a track record for under costing to suit their purpose.
The downtime spent on learning and utilising software must not be underestimated. I have met bookkeepers who make make errors. Imagine what mess novice taxpayers will make especially in a system that HMRC say they will iron out problems whilst it is live in 2018. Any accountant will tell you, and error made on software is doubly hard to locate than one made on books. Many of the software providers only answer queries by email and can take days to reply. Imagine this scenario with multiple taxpayers emailing with a day to a quarterly deadline.
We need those who are able to do something about this. HMRC are forging ahead without restraint and I predict a disastrous mess.
Making Tax Disastrous
Thank you: that is extraordinarily helpful
Appreciated
Warning: those estimates may be quoted!
That’s fine Richard
Just to add, the NAO estimated that HMRC staff reductions as a result of the move to digital cost “customers” £97m in 15/16. HMRC saved a £1 which cost taxpayers £4. We cannot have a situation where cost savings by HMRC cause distress, time and money to SME’s who are the backbone of the economy. I haven’t been able to advise all of my clients of the changes yet as we are still in limbo but 3 of the 30 I have discussed it with are going to cease trading. I wonder what the effect on the economy would be if even half of this percentage is applied nationwide to the 5.3 million small businesses.
Staggering percentage of giving up – and I can see why
Thanks for reminding me of that NAO report
You need to talk to the Estonians. Their experience is like as not what is driving HMG in this direction, and what they have appears to be pretty good. But – and it’s a very big but – the legal framework is radically different, their tax system is only about 25 years old and hasn’t had long enough for the accountancy profession to outright corrupt it, the banks in Estonia behave like partners rather than terrorists and are broadly trusted. Information sharing between government and private sector is designed in, but it’s based on a government issued ID card, and for that reason alone the UK would not be able to make it work.
And the comment about a one-off gain doesn’t stack up: the point that people like Siim Sikkut will make is that the tax is effectively already calculated before you make your return, which in effect is simply agreeing or disagreeing with the figures. If you could do that, HMRC could spend time looking into the abuses rather than shuffling paper, a much better use of their time. But as I said, without fundamental changes the going digital approach will not be a success.
I am aware if their system
It also requires 100% tax return submission
I have to ask what on earth is that commission up to? It’s frankly unbelievable that they should be leaving it so late to commission you to write a report with so little time. Who else have they commissioned? How much notice did THEY get?
I feel like writing a letter of complaint about their procedures. Who was it who commissioned You? What is their address?
The legislation was published in Tuesday
Hence the late request
Time scales have been crashed by HMRC
I used to file online while living in the UK. It’s not possible to do so with an overseas address (or there are some catch 22 issues I can’t recall offhand). At any rate I haven’t been able to file electronically for some years now.
The Irish system seems a LOT more secure, with digital certificate based encryption, not just password based login and it was readily and conveniently usable from other countries (I am somewhat nomadic). In general, online services in Ireland work well. In the UK the service that I have had a good experience of which seems to work reasonably well is the Land Registry.
There’s a lot of literature on ERP implementation failures that are relevant to implementing systems on a large scale, but the lessons are just never learned in advance because people just don’t get how much is involved — they have a Trump-like naivete about what they don’t know and assume they can muddle through.
Pertinent to healthcare, one of the most accessible and interesting analyses published on the failure of the launch of Obamacare (online enrollment systems) was a cover story on Time magazine a few years ago. In two parts: how it happened (no bad news going upward, among other things) and how it was resolved (Silicon Valley SWAT teams and the approach taken). Well worth a look.
Govts are frequently seen by vendors as having inexhaustible resources and they test that idea. Civil servants often have little understanding of systems development and move goalposts without understanding the consequences (costs).
In general, I suspect the complexity of the tax system ends up being self-defeating, with a far higher “cost of sales” (if I can make that analogy) that necessary. I would simplify the system first rather than make it a better digital system — because needless complexity has killer costs and sometimes awful outcomes (incl. even: none).
Recommended reading: The Mythical Man Month by Fred Brooks.
It should be required reading for all who commission systems development. It can be read in an evening.
Many thanks
Appreciated
My thoughts:
1. The present de minimis income level that requires MTD filing is £10,000, HMRC have indicated in their responses to MTD published on 31 January that they may be adjusting this in an upwards direction. I very much hope so as this would require potentially non-tax payers to incur compliance costs – clearly a rather silly outcome.
2. The first tranche of traders (and landlords) who will be required to submit MTD returns from April 2018, are the self-employed, the last, companies from April 2020. In my opinion this is arse about face. Larger companies should be required to register first as they should be better able to cope with the technical changes and the costs of compliance.
3. There is no mention in the HMRC response to the consultation (that I have seen from a hasty reading of the documents) that MTD will be introduced after a trial period of some sort. i.e. ask for voluntary registration running in parallel with the present system to ensure that the MTD actually work in practice, and that will be sustained at higher levels of activity. Jumping straight in could be catastrophic.
4. Advisors, for all their bent to “over-egg” the use of strategies to save tax, do provide a buffer that sits between tax payers and the Treasury assessment and collection systems. If MTD fails, or if (as is likely) there are teething problems, who is going to absorb the economic cost of keeping the system on the rails? Based on previous experience, at a grass roots level it will not be government, in which case advisors and their clients will have to pick up the bill.
5. The consultation suggests that the advent of MTD will give traders the ability to see (on their personal tax accounts) how future liabilities, based on present trading results, are building up. They even, tongue in cheek, suggest that tax payers may like to make forward payments to cover these liabilities. I suspect that this points to a longer term aim to have corporate and business taxes paid on a PAYG basis. I hope the cash flow consequences are considered carefully, as presently, most businesses pay past tax liabilities out of current earnings.
6. I believe that HMRC are currently working with 600 software providers to incorporate links to MTD’s API (application program interface) – the software that will facilitate the movement of data from tax payers software into their personal tax accounts. As far as I am aware there is no formal statement on progress in this area. Before MTD is introduced a sound beta-test of these systems must be reported on to reassure users that Xero and similar accounts software packages are actually fit for purpose.
7. Inevitably, there will be individuals who will not use MTD. These will include tax payers who are technically challenged, have religious or other objections to using computers, are physically disabled or live in areas where there is still no connectivity with the internet. Have HMRC considered how the resulting dual system will work in practice. Will these traders have to take their bag of receipts to the nearest terminal to upload data?
8. No online system is free from data penetration risk. I suspect that no amount of reassurance or investment in ring-fencing data, will reduce these risks to zero. In which case what happens if there is a breach, or catastrophic loss of data? Does austerity mean that the benchmark risk levels are being raised to save on costs?
9. HMRC indicate that MTD compliant accounts software will need to include “nudges and prompts” to deal with adjustments to accounts data normally undertaken by professional advisors at the end of the year. For example, disallowed expenses, claims for capital allowances and other reliefs. I think it unlikely that non-tax specialists will respond to these “nudges and prompts” in an effective manner. See next point…
10. MTD requires potentially 5 not 4 data uploads a year, the fifth to sort out the year end adjustments that would normally be accommodated in a tax and capital allowance computation. This activity, if managed by advisors, will be a significant increase in most traders support costs. Great for the profession, but likely to create resentment at the coal face.
In summary, personally, I think MTD is an inevitable consequence of the digital age, and it will happen. I speak to practitioners on a daily basis and many smaller (less technically competent firms) are running around like headless chickens fretting about the potential loss of self-assessment earnings and the reluctance of their client to pay for ongoing MTD support.
We may be drifting to a situation where tax compliance is automated, and taxpayers are encouraged and advised by “nudges and prompts” in place of professional help. This would be fine by me if I were convinced that HMRC would seek to ensure that tax payers paid what they were required to by law, and no more. In other words they were granted full access by MTD to all the allowances and reliefs they were entitled. The evidence so far, from 35 years submitting clients returns, is that this is very definitely not the case.
Richard, I assume you have access to the consultation documents, the Treasury committe responses and the recent HMRC responses and draft legislation. If no, I can send you links.
Bob
Bob
Yes, I have access to it all – and have read a great deal of them
Thanks for your comments, which I appreciate. I am working on this all day, I suspect
HMRC’s assumptions are quite shocking: no wonder there are, as you put it ‘many headless chickens’
And the nudge idea is dire
Best
Richard
Why is it that the first people required to sign up are the self-employed and sole traders and the big companies come later? Am I too cynical in thinking that when the first run uncovers all sorts of problems it is calculated that small people will be able to make less fuss than well-resourced companies?
Excellent question
Dear Richard
Thank you for the opportunity to comment on this issue ahead of your appearance before the Select Committee.
Out tax system is broken at nearly every level from strategy to customer service. As an accountant dealing with HMRC on a daily basis I waste more of my clients’ money dealing with HMRC than MTD will do. Often I cannot recover these costs and so it is my time that is wasted. Multiply that by the number of accountants, tax agents and small businesses.
An efficient tax collecting service should be a priority for a modern economy. The current thinking is a bit like straightening the deck chairs on the Titanic. The first point I’d like you to make is that digitisation is not the issue here, or at least not yet, however topical HMRC tries to make it. The system is broken, fix the system, don’t go for a route that they may think make they look modern. A dinosaur is still a dinosaur whatever label you give it.
And this isn’t, or even, about the tax gap. Most taxpayers and small business owners want to pay a fair amount of tax to pay for the services tax provides. Fact. I deal with them every day. They do not want to be treated as though they have done something wrong which is HMRC’s default position. So my second request would be to challenge the Select Committee on HMRC’s assertion that MTD will ‘collect’ a large amount of tax (£800m?) currently being underpaid. Where is the evidence? If the impact assessment for MTD is based on this it is flawed thinking, unless HMRC are trying to stop small businesses from using an accountant which won’t happen. Most of my clients use me for far more useful things than tax compliance which these days – for most small businesses – is a relatively low cost or free add on.
There is a problem that will exist with MTD that no-one (not even our profession) has highlighted yet. Most small businesses, even those who are using software keep rudimentary accounts and make errors. The quarterly filings under MTD if not reviewed by an accountant will be incorrect and need amending at the year end. For example very few small business owners understand the difference between balance sheet and P/L codes and regularly confuse the two. HMRC will not be able to cope with this.
There is one good thing about MTD which again the government haven’t even mentioned. This is that most small businesses in the UK are woefully bad at understanding their business numbers and using them strategically to drive improved business performance, even though there is a huge body of evidence that those businesses with up to date financial information perform better and fewer fail than there counterparts. Improvements in management reporting to help small businesses understand their numbers would be the one thing that would make a big difference to business failure rates in the UK. making businesses review their numbers quarterly is a step in the right direction. Then they lose the plot and say all small businesses need to file is a 3 number summary, which is back to the lack of strategic thinking in HMRC.
Government is pushing through what is a good idea in principle – and let’s be honest digital is the way to go – without the level of thinking behind it to make it work and without rectifying a broken system that needs to be overhauled and properly funded and managed.
I look forward to reading your submission.
Many thanks
We have many thoughts in common
I read these comments with utter dismay.
Under existing rules, 5 – 6 people I know want to start tiny businesses, which for all will reduce or remove their reliance on benefits. Within 2 years most would have gross income exceeding £10,000 pa. None are tech savvy or rich enough to afford accountants constantly.
I doubt those start-ups will happen. This proposal could be so counter productive.
Not could be
Will be
I am a sole trader currently trading under the VAT threshold.
When George Osborne announced that he was abolishing annual tax returns, I thought that this might be part of the government’s Red Tape Challenge, and wondered how it might work.
Despite a government video I’ve seen that proposed four submissions a year were not like four tax returns, it looks like it will involve four times the work, or more if this is in addition to a tax return. This is more red tape, not less, and is possibly the most intrusive thing the government could have done in respect of my business. Added to that, the need to change my way of accounting completely – I’m horrified by the thought and the disruption it will cause to my business. I’m in my late 50s and it seriously makes me think of packing it in and retiring early.
Benefits for who?
I take care to pay my tax. I doubt that all this extra work will make noticeable difference to the overall level I pay. What is the point? Does the government assume all small businesses are fiddling their tax, and can’t be trusted to use self-assessment? Will it treat large corporations in the same way, or are we just an easy target?
Four times a year
The winter is a quieter time for my business, it suits me that I can handle the annual accounts in this quiet period. If I need to have everything entirely together four times a year, that is going to affect the busy times when I should be working for my paying customers.
New Software
I do my own accounts using a now ancient (pre subscription-model) Quickbooks package. It competently handles printing customised invoices and holds address details of hundreds of customers and suppliers. I can look back over seventeen years of my accounts, plus invoice records of items supplied under guarantee. It looks like I will have to re-enter many of these details into some new package, and relearn every aspect of recording my day to day business. Or am I to go back and forth between the old and new software? Either way, that will be many days of my main work lost.
Accountant or not
I will almost certainly need to get in an accountant to handle all the extra work. I’m loath to do that as I prefer to have a complete handle over my own accounts, to know what is going on, and to set up categories that suit my business, rather than the template that suits the accountant. That will also cost me money that, as a small business with variable income, I’d rather not spend.
Security
My customer’s details are relatively safe on my computer. If these need to be sent into some cloud based package, how safe are they there and will it affect my requirements under data protection laws.
Consultation
I’ve mentioned the Making Tax Digital proposals to a number of other sole traders I know. Nearly all were completely unaware. The government says it is consulting, but they haven’t asked me. How many small businesses have they actually spoken to? I can foresee a real level of anger if these massive changes are forced through, and mass non-compliance, either deliberate, or because it just isn’t workable.
I hope that you can make them see at least a little sense during your 15mins.
Thanks for your comments. I really appreciate them. I am still working on the evidence this morning: I have found more to say than I expected. But comments have helped