I have already noted the report I have written in preparation for giving evidence on HMRC's Making Tax Digital (MTD) programme to the House of Lords Economics Affairs Committee this afternoon. That report is here: because it is 10,000 words a summary has gone to the Lords. Three things stood out whilst writing it from Thursday to Saturday.
The first was the sheer arrogance of the HMRC impact assessment on MTD. This is indicated in a number of ways. There is, for example, no cost estimate made of HMRC's expenditure on this programme when such expense will obviously be incurred. How did HMRC think this would not be noticed? Then there is the glib claim that business will benefit from MTD because of the value of the data generated. The way in which this benefit will arise and be valued is not explained. It is just said that it has been prepared using a standard cost model: this is simply not good enough. Equally arrogant is the assumption that software might replace accountants for some taxpayers. HMRC should really understand why people use accountants in that case, because it's not to add up the books.
Second though was what I can only describe as the incompetence of the numbers presented. HMRC say 5.9 million business will submit four extra tax returns a year (let's not beat about the bush: that is the reality of this programme). That's 23.6 million submissions. And they say they will cost a maximum of £170 million. Divide one by the other and that is £7.20 each, or less than an hour of time at national minimum wage. But HMRC says thew £170 million covers all extra accounting and software costs. I took a strictly marginal approach to costs here: I ignored all accountancy costs and simply looked at how many additional businesses might need new software and estimated it might be 925,000 at £72 a year, the cost of a Quickbooks subscription, or £67 million a year. That reduced the amount available to cover the cost of submission to £4.36 a return, or 35 minutes of time to undertake these tasks that are bound the necessary as we can be sure that penalties will be imposed for false declarations:
- Check cut off for all transactions i.e. make sure a strict allocation to quarters has taken place;
- Reconcile bank accounts to ensure completeness and correct period end cut off;
- Check sales ledger completeness and closing debtors to ensure income is appropriately stated and make necessary adjustments e.g. for bad debts if using an accruals accounting method;
- Check the purchase ledger and outstanding creditors and make necessary adjustments;
- Accrue period end expenses;
- Calculate period end prepayments;
- Count or estimate value of stock and work in progress;
- Estimate depreciation;
- Make adjustments for:
- Private use of car and other assets;
- Use of house as office;
- Stock taken as drawings.
- Ensure that the resulting accounts make sense and correct for errors;
- Check that drawings are appropriately recorded in a self-employment;
- Check digital entries prior to submission to HMRC;
- Log on and submit to HMRC;
- Check resulting communications from HMRC;
- Act in accordance with HMRC instructions e.g. re adjusted payments owing.
Even in the case of a simple business these tasks may well take half a day to complete. They may take much longer in a larger business. That is why I call the HMRC impact assessment incompetent.
Third, I wondered how anyone failed to notice that this estimate was so bad before the report was issued? Or did they notice and it went out anyway? Was political expediency the order of the day, and the instruction was to simple have a big enough number in the hope no one would question it? £170 million is enough to daunt most people: their calculators haven't got enough noughts on them to handle it as a friend joked to me last night, and that means most people can't comprehend it. If so, the hope was clearly inappropriate.
But it's also reckless. In addition to an average cost of £305 per small business, as I note in the report, MTD:
- Potentially imposes inappropriate and potentially seriously misleading accounting methods on taxpayers that may be seriously harmful to their business interests to suit the requirements of HMRC. Business failures as a result of the use of inappropriate accounting data are likely to increase as a result;
- Potentially threatens the cash flows and so viability of some small businesses in the UK;
- Threatens the credibility of small business accounting in the UK;
- Potentially harms UK economic performance as a result.
It is hard to think of a policy more antithetical to the culture of enterprise in the UK than MTD as HMRC propose to impose it. Doesn't this matter to them? And if not, why not?
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This sounds so bad that can only be intentional.
A lot of digitisation just puts the work load onto the customer (more passwords to remember, more windows to open, more time in front of a PC).
The worst of it is that a lot of these tasks could provide real jobs for people.
Disgusting.
I believe that I read somewhere that the accounting professional bodies gave MTD a cautious welcome?
Why are they not up in arms about this? If not, why not? Perhaps I should have said “can you guess why …?”
I foresee a great increase in demand for part-qualified accountants.
Here’s a cry from the heart of a business (not me)on the accountingWEB site –
“Unfortunately as a profession none of the institutes have got the balls to tell HMRC how stupid this is and HMRC simply believe their own propaganda that the self-employed are gagging for this. I’m going to retire before I have to operate it – Why is it that the PM’s concern for the “JAMS” doesn’t extend to those not on PAYE?”
I have sent my comments to the ICAEW
Let’s see….
Perhaps the grand design is to drive small accountancy practices out of business.
Who might benefit from that? To whom do they offer lucrative non-executive directorships?
Actually, I suggest it will boost them by £1.4 billion
Maybe that’s why they’re being too quiet
Perhaps I am to eager to ascribe to malice that which can be explained by stupidity.
On the other hand – or, perhaps, the same hand – it’s entertaining to speculate that HMRC’s owners believe that their minions are delivering the ‘industrialisation’ of the accountancy profession; and that they have underestimated the geological power of incompetence that rumbles within HMRC management.
If you want to see stupid just look at this from a right wing think tank (what a surprise!):
https://www.theguardian.com/technology/2017/feb/06/robots-could-replace-250000-uk-public-sector-workers
And yet no one wants to talk about how one can own a house on a gig economy income or how someone is supposed to eat! Let alone that the gig economy contributes to inequality. And the robot makers – I bet theirs is not a gig economy.
Completely crazy in my view. We should be putting people back into work – not out of it and the same goes for HMRC who ne more staff not less.
‘need’ not ‘ne’. Sorry.
Has anybody compared HMRC’s current claims with claims they will have made in the past about the benefits of cutting red tape for instance by allowing businesses to submit 3 line accounts in tax returns instead of proper accounts?
While this makes it much harder to target enquiries effectively it is not clear how it benefits small businesses as any honest business would still need to keep proper annual accounts in order to submit an accurate three line statement. Did they include an estimate of the value of the damage caused for businesses who were no longer keeping track of their true position?
The changes might provide some employment prospects for HMRC staff currently being made redundant, albeit doing something useless rather than working to combat the tax gap. But it is unlikely that this is intentional, as all the evidence suggests HMRC values its staff at less than it values its stock of carbon paper.
What we know is that there has always been a heavy clustering of businesses with apparent turnover just below the £30,000 three line accounts submission limit
I wonder why that is?
And why it has not been targeted?
If there is a cluster of businesses with a turnover of £30,000 It has nothing to do with the three line account limit as that is and has been for years the VAT threshold. I do hope you haven’t been advising clients about this.
Hope you don’t mind me pointing this out. I know there are those out there who would want to pounce on little slips like that to suggest that your tax knowledge is out of date on a practical level. That would never do.
I never advised using three line accounts
Hence being rather rusty on it
I would have thought Steve Greaves could have looked up the VAT threshold before posting. It is currently £83K and has never been £30K.
3 line accounts may well have caused a clustering of turnovers just below £30K before it was aligned with the VAT limit in 2010.
This of course gives an additional incentive to cluster just below the VAT limit (the point you were making) while making it more difficult for HMRC to risk assess which businesses are manipulating the figure to achieve this result.
Thanks
I suppose I could have looked up the actual VAT limit but that seemed awfully pedantic and this doesn’t seem to be the sort of site that deals in pedantry.
HMRC are not actually stupid. If someone is trying to inflate expenses it clearly is harder to invent £63k of expenses (at 83k of turnover than £10k at £30k). The compliance risk of a cluster of turnovers around £83k is less than a cluster around £30k. Most 3 line accounts are submitted by very small traders. They would I am sure love to have a t/o of £83k.
My point in bringing Richard up to date is that his opponents will use any chance to discredit him. Suppose this lack of knowledge had come to light in a debate on TV?
Keep up the good work Richard.
I am happy to be corrected
But I am also not embarrassed to admit I cannot know everything
Many builders, plumbers and electricians etc. prevent vat breach by offering labour only services and customer goods supply. This is not illegal and is the reason for many £83k clusters. Whatever limit are set you will find clusters below it whether it be hours for claiming benefits, tax credits limits, higher rates bands or vat registration. I wouldn’t specifically suggest that this is worthy of investigation as sailing close to the wind may suggest that the businesses in question would appreciate their “highlighted” status and have their affairs very much in order. Without MTD I would add.
Noted!
If this is in any way a business plan then somwbody wasn’t paying attention in class.
If HMRC’s remit had been to increase the amount of business done for cash, potentially increasing the tax gap, it couldn’t have done a better job. Total incompetence.
I wonder how many people at HMRC actually run businesses? I suspect that’s a number tending towards zero.
You’re probably right about that: HMRC (and the Inland Revenue which preceded it) are very much the old Civil Service, with the service culture rather than a business culture.
Most of them, at the ‘front line’, are helpful; some are not. And any of them will be downright difficult if they see you as a tax avoider.
Nevertheless: mostly helpful. And very good at *their* job: and it follows that most good accountancy firms have (or had) a reasonable working relationship with ‘their’ tax office.
Their job at the tax office is, of course, completely different to your job: and only the best of them attempt to see it from your perspective.
The best of them get poached.
Worse, their middle managers are mediocre and their senior management embody the very worst aspects of Private Sector ‘partnership’.
I can assure you that the most senior tier of HMRC have an excellent understanding of business – the business in question being international tax consultancy – and that any one of them would be a valuable addition to your board of directors, if that is the business you’re in.
Otherwise, you need to build a relationship with your tax office, looking for effective channels of communication and explanation: and this is becoming increasingly difficult in an environment where HMRC’s ability to work with small and medium-sized companies is being cut, and cut, and cut.
Agreed
Being realistic, MTD will increase the black economy and reduce enthusiasm to risk enterprise.
The present intention to digitalise reporting is ill conceived.
At the very least HMRC should allow any additional compliance costs to be deducted directly from tax liabilities rather than as a deduction from their profits. And there is absolutely no justification for drawing non-taxpayers into the MTD compliance regimem – the £10,000 limit must be increased.
Here’s hoping your presentation will make a difference Richard.
Amazingly little response so far bar a journalist pointing out an apostrophe in the wrong place (which was Apple autocorrect)
They actually wrote to say that
I think the issue is that journalists don’t understand it either. I have lost count of the pieces I have read whereby HMRC’s glossy spiel has been lazily trotted out. This issue is reflected by MP’s who also do not understand and are happy to reply with standard issue “tax administration easier” and “hunger for digital services” responses. Thank for your hard work on behalf of my business and all of my clients.
I suspect you are right
I allow for the pressure on journalists to produce copy but much is too heavily based on press releases which I why I very rarely use them
A further thought. I have just read Rebecca Caves article on The Accounting Web site http://www.accountingweb.co.uk/tax/hmrc-policy/mtd-the-legislative-road-ahead.
She makes a really interesting point.
Rebecca says:
“Much of the detail of how MTD will work in practice will be contained in regulations (ie statutory instruments or “secondary legislation”) to be written by HMRC. You can see this from the points in the draft legislation where it says “the Commissioners may by regulations require…” or “regulations under this paragraph may…”.
Traditionally statutory instruments are not debated at great length in Parliament, and are generally passed with little more than a rubber stamp. Regulations can be changed far more easily than an Act of Parliament, and thus give the government more flexibility to amend details such as tax rates and thresholds. Much of the PAYE and VAT law is contained in regulations, but the core of direct taxes: income tax, corporation tax and capital gain tax are contained in Acts.
The danger of putting detail in regulations is that the vital points of how taxpayers must comply with MTD won’t be scrutinised. None of the regulations required for MTD have been published alongside the draft law, so we will have to wait to see the full picture. It is possible that the draft regulations won’t be issued until shortly before they are due to take effect, and thus deny us all the opportunity to comment and change them.”
——————————————————————————
Sound familiar?
Oh yes
Once upon a time there was a rating system that in the hands of the unwise could hammer small businesses. By the mid 20th Century sadly, notably after Reorganisation in 1974 there were far too many councils in the hands of unwise councillors.
Finally, a damning verdict on HMRC’s plans that only seek to fulfil their internal desires, driven by a right-wing ethos where the public sector shrinks to sizes where departments are not fit for purpose.
The next, mooted, step with MTD to is get taxpayers to pay tax quarterly meaning even more time required to ensure compliance on all items outside of ‘simple bookkeeping’ per quarter rather than just annually.
HMRC’s vision is to claw extra money into the coffers from small businesses rather than aggressively tackling the big hitters committing tax-evasion on a great scale.
Small business are easy targets as we can’t afford powerful legal experts; we’re the new cash cows!
MTD, VAT FRS and Dividends (I can understand the Dividend changes to make the taxes paid fairer vs PAYE) ‘costs’; all three in a few years totals an assault on small business.
The ‘black economy’ incentives implemented in cit in this reduction in service worry me.
Among other consequences, our future relationship with our trading partners in the EU is going to be very difficult indeed; especially for smaller companies operating in a segment of our economy that will be – rightly – seen as on a par with the more ‘relaxed’ economies of Mediterranean Europe. Or Africa.
Well done, Richard. Your arguments are well made. I hope (probably in vain) that your report is given the time and attention it deserves.
You have highlighted the main issues:
Considerable additional costs to businesses and taxpayers for no discernible benefit
MTD makes the tax system more complicated and less accessible
MTD will make people less likely to join the ‘system’ and more likely to become part of the grey economy
Overall MTD (as proposed by HMRC) will damage the UK economy at the time we need it to be boosted!!!
MTD is the antithesis of a clear, fair and cost-effective tax system.
What about Lord Carter’s recommendations regarding the imposition of new systems and software? Do they not apply to HMRC?
I am just writing a report for my co-Directors to summarise the main issues for our business (an accounting firm)! So far it has taken 2 hours and as I write, more and more issues come to mind.
Ho hum
Richard
I just read your report, and it is a brilliant summation of what is wrong with the whole project. The response of the ICAEW is deeply disappointing, but I suspect that the views of small practitioners carry little weight, although they are likely to be the most affected by the sudden pressure to file returns on a quarterly basis. The workload could prove intolerable. But more depressing is the fact that millions of taxpayers are going to be affected by MTD, but so far, they have no idea what is about to hit them. As another commentator has observed, all I have read so far are reprints of HMRC puff pieces. How can these taxpayers be alerted to the impending disaster?
I rather hoped journalists might note the numbers
Let’s see what happens after evidence has been given
Well done, Richard. I have just viewed the committee meeting. You made your points very well, and I would say most of their lordships seem to get the point, that MTD has been ill thought out, and will cost small businesses a lot of money and inconvenience. I liked the lord who quoted the 98% figure, of respondents who could see no benefit to it. It will take a really clued in journalist to get the point though, and get this into the public domain. I don’t suppose you have anyone in mind?
Thanks
I have sent thjs to a lot of press
Brexit rules is the response I am afraid
But a report like this has in my experience a long life. I hope so: I sweated on this one
Why did they not set the threshold at the VAT registration figure ( £83,000) as all VAT returns are quarterly (or monthly if regularly repayments) ?
We agreed that was wise in the hearing just ended
This MTD seems to be a plot by HMRC, under orders from the Treasury, to bring forward tax revenues. In other words to shift them so that payments are made on average 3 – 6 months earlier than under the current system. A clear case of tax being paid at the wrong time.
If the government has a problem which has led to this need to time-shift its tax receipts forward then a suitable alternative is to borrow the money, or not spend so much in the first place.
Imv, of course
An expensive and undesirable waste of time. Spot on.
If Members of the House of Lords, MPs and the select committee can give this the thumbs down and it still continues in it’s current form they is something very wrong with our legislative system.
But, but, there is a legion of young men, and a few women, creating API’s in an Agile fashion and a cohort of middle aged women, and some men, who are managing them in an Agile fashion.
What could possibly go wrong?
There is an operational and development software car crash happening now which represents a waste of a large amount of public money.
Having watched the proceedings – well done in getting the point over so directly and understandably.
What was also fascinating was seeing the representatives of the software industry who followed you trying to at the same time a) answer truthfully and b) avoid undermining the relationship that they have to maintain with HMRC by admitting directly what a looming omnishambles is hurtling towards us.
How on earth can they be expected to deliver something effective if they still have not yet got a final fixed specification. There will clearly be insufficient beta testing to sort out the inevitable bugs. There was also an underscoring of your damning critique of the proposal when the IRIS representative said he foresaw real difficulty in recruiting the vital members of the pilot programme when there was no benefit to them of participating!
I felt sorry for those guys
They gave been given a nigh on impossible task
Answer truthfully, not undermine the HMRC relationship and remember that they stand to make a tidy sum out of this. I don’t feel sorry for them, including Iris to whom I pay £4.4k a year and their CEO wants to press for 05.04.18 still.
Iris were pretty pleased with their market share yesterday….
I never used it
They might well be at the moment Richard. I like other accountants I know are questioning why we need accounts production software for small businesses and tax returns. After all MTD will sort the tax return and the accounts are just a typing exercise. My grandmother used to say “you’ve got what you wanted, lost what you had”.