Jean-Baptiste Colbert (1619–1683), the Comptroller-General of Finances under Louis XIV of France, is widely credited with saying:
“The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing.”
It's one of the most enduring summaries of fiscal pragmatism. It neatly summarises the difficulty in maximising revenue extraction from a particular tax base whilst minimising political resistance.
Usually, I would dismiss this as not being descriptively accurate of modern tax practice, but a report in the Financial Times has made me reconsider that. As they note:
Only a quarter of the landlords and sole traders who need to sign up for the UK's new digital tax system have done so, new figures show, despite the scheme coming into effect this month.
From April 6, anyone who earned more than £50,000 in the 2024-25 tax year from self-employment or property income was required to use authorised software to keep digital records and send HM Revenue & Customs quarterly updates on their income and expenses, as part of the authority's Making Tax Digital for Income Tax scheme.
HMRC's plans for Making Tax Digital have been known for almost a decade now.
In summary, sole traders who are VAT-registered have already been required to report, in addition to their VAT declarations, their underlying accounting data that supports those declarations, and which also provides a real-time indication of their income and expenditure during the course of each quarter, so that HMRC are, supposedly, possessed of real-time data that will let them appraise the likely ongoing taxation liabilities.
This information is supposed to increase the likelihood that HMRC will both be able to recover the sums due to them and to do so on an accurate basis.
HMRC's claimed logic is that, by imposing this obligation on businesses, with serious penalties soon to be attached for failure to comply, businesses will secure a supposed benefit as a result of them knowing their own real-time accounting performance. This claim by HMRC embraces, with an arrogance that borders on the profoundly presumptuous, the claim that these businesses would not otherwise know how they were doing financially, when, as I well know from my own experience of working with them, a simple range of heuristics is normally enough for most small businesses to be able to completely appreciate the performamce of their businesses.
And let's not pretend the requirement isn't extremely onerous. Instead of having to file one tax return a year, the reality is that self-employed people will now have to submit at least five tax returns a year. One of these will be submitted each quarter, with the requirement that a further return still be submitted after each tax year end to advise HMRC of accounting adjustments to the data already submitted, and additional information that will still form part of the self-employed person's tax return. The inevitable consequence is that their accounting costs will rise considerably.
Despite this, HMRC claims that the cost of submitting these returns will be inconsequential because they suggest that the data can all be automatically extracted from a person's books and records, which they now demand must all be maintained electronically.
I discussed this and other aspects of this matter when giving evidence on HMRC's plans for Making Tax Digital to the House of Lords as long ago as 2017, when I submitted 10,000 words of evidence on this subject to their Lordships, which I summarised on this blog at the time by saying:
I can only describe the numbers presented by HMRC as incompetent. HMRC say 5.9 million businesses 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, as it was in 2017. But HMRC say the £170 million also 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 in 2017, 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 to be necessary.
To be candid, HMRC lied at the time and revealed gross incompetence in their workings. Since then, the House of Commons Public Accounts Committee has found that Making Tax Digital has not worked for the larger organisations to which it has been applied, because the tax gap has not been closed as a result, and there is no evidence of greater tax compliance as a consequence, whilst significant additional costs have been imposed on the business community.
And right now, and utterly bizarrely, whilst Making Tax Digital is being extended to all small traders, it does not apply to partnerships. LLPS and to all small limited companies, where the real tax evasion problems in the UK economy are.
It is as if HMRC are deliberately pursuing a policy that they know cannot work by picking on the most vulnerable targets in the world of self-employment, represented by those who are usually struggling to get by in a world that provides them with little other chance of doing so, while deliberately avoiding challenging the real issues in tax collection in the UK.
So let me suggest what is really required to tackle tax abuse in the UK, which Making Tax Digital will not in any way solve, because HMRC do not have the time, people, or skills to appraise the data they are being sent. Instead, they need to:
- Require that all UK financial institutions advise HMRC annually of all the entities to which they know they supply business banking services, delivering information on:
- Total sums banker per annum
- Year-end bank balances
- Who the owners and managers of the entry really are
- Where they are located.
- Reinstate the requirement for an accountant's report on the accounts of all limited liability entities recording income of more than £250,000 a year.
- Require that all limited liability entities file full accounts on public record, which is now being abandoned again.
- Require that all tax returns of any sort that record business activity include a list of the top ten customers by turnover. Nothing could do more to disclose hidden and fake employment. And by proxy, this would require that records be kept
- In the case of cash-based businesses, they should supply a 52-week taking summary as an alternative. That will also be telling.
Do this, and HMRC would have all the data it needs to start investigations in many cases, whilst the goal of requiring records would also be achieved without all the onerous workload that Making Tax Digital totally unnecessarily imposes.
Simultaneously, data on where the real risks lie would be exposed, which is what is really necessary in a risk appraisal system, and the public would be protected as well, and the additional cost would be small.
As it is, HMRC have forgotten Jean-Baptiste Colbert's maxim. Making Tax Digital will be the disaster I always suggested it would be. People will be driven into the shadow economy as a consequence, real risk will remain unappraised, and all that whilst the take of feathers will probably not increase, but the scale of hissing will most probably increase considerably.
If you had set out to destroy trust between a tax system and taxpayers, Making Tax Digital might have been the best way to do it. Asking the impossible and deliberately sanctioning vast numbers of people for failing to comply is not the way to create tax compliance; it is the way to destroy it. Is that what HMRC want? And what is the political agenda in play here? Very few are asking that, and the answers are quite unappealing. If you want to destroy the state, first you destroy its ability to tax.
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I understand points 1 to 3 perfectly
My assumption on point 4 is that if a taxpayer only has one customer or almost all work from a limited number of customers then they are in fact an employee.
I am trying to work out what 5 might tell HMRC. I suppose that in the case of say my local chip shop you can check takings against outgoings but should it tell me something else?
No it is that if people manipulate data they creat patterns that are always falsd e..g they almost never create numbers end in 0. Testing the likelihood of falsehood is statistically quite easy.
It’s my first time commenting as I learn an awful lot from this site and am very grateful for the shared knowledge, but don’t consider myself qualified to add anything.
I must however respectfully disagree with the assumption that a self employed person with one main client is employed.
I am an illustrator and most of my work is licensed to one publishing house ( I receive royalties quarterly) They produce a range of goods and I have a contract that gives them exclusive use of my designs on the items they sell.
I am definitely not employed by them and would not wish to be, as that would also give them the copyright to my work. As a self employed artist that remains with me.
I’m not alone in the creative world with this arrangement.
I agree your situation leaves you with the risk. I strongly suspect you are self employed. But there are many disguised employments and data to identify where the risk is located is required.
Have you got a link to that 10,000 words of commentary you submitted to the HoL in 2017
The link provided comes up with a home page
It is available via the links in the post.
Found it thanks. Here is the new link if you wish to update your records
https://www.citystgeorges.ac.uk/__data/assets/pdf_file/0009/569313/MakingTaxDigitalFull.pdf
There’s no mention of Colbert or his goose. Although you didn’t claim there was, it’s new to see this concept entering the left.
Thanks
There is also the fact that HMRCs computer systems can barely cope with the existing volume of employers electronic employee-pay submissions introduced in 2017. The HMRC systems frequently fail under the load (sometimes also going offline) causing serious angst as such submissions are mandatory for employers over a particular size. When things fail at HMRCs end, guess who is on the hook. It’s not them.
I’m willing to bet that HMRC systems for the new MTD requirements is going to suffer similar problems for a decade.
Wondering if this bit:
but now to partnerships. LLPS
should read:
but not to partnerships, LLPS
? Thanks.
Edited, thanks
“And right now, and utterly bizarrely, Making Tax Digital is being extended to all small traders, but now to partnerships. LLPS and to all small limited companies, where the real tax evasion problems in the UK economy are.”
typo – should be not
Edited, thanks
I’m sorry to repeat an earlier post, but I think HMR&C/Companies House may just be institutionally stupid. I prepare FRS105 accounts for a block of six self-managed flats where I live. In such cases, there is no tax return required to be submitted. Nor, incredibly, do I have to file the accounts that I have, for years, laboriously compiled – just a statements of total assets with no description of what they comprise. I have been bombarded with threats(?) from Companies House that by a certain date (repeatedly deferred) I will have to submit accounts using proprietary software to improve ‘transparency’, eliminate fraud etc. I have asked how the method of filing would make any difference to the content of the accounts, and why transparency can’t be improved just by filing the FRS105 accounts in full. No answer. I think this state of affairs arises from inadequately formulated/misunderstood accounting standards, a mindless obsession with devolving administration from centralised government to personal devices (especially phones) and vague suppositions that all this data can be turned over to AI agents for undefined purposes.
Much to agree with
For flat management companies you file dormant accounts at Companies House and provide trust accounts to tenants as set out in ICAEW guidance. The transactions are not the companys, they are held in trust. Just saying…. better change that.
The Auditors
Wow
How untrue
If the company has any taxable income that is just wrong
Don’t understand
– Dormant accounts will have to be filed using proprietary software, so that problem and associated expense does not go away.
– I said the block of flats is self managed (by a management company owned by the tenants) which is a fairly common situation with small properties, so the accounts cannot possibly be dormant unless I appoint an external agent and incur considerable expense.
– Sure, an agent would collect charges, hold money in trust and provide a statement of any transactions to the members – at a price – but this does not address my substantive point. See also Richard Murphy’s response to your suggestion.
Hell’s teeth. Alarming reading after listening to your talk with John Christensen yesterday.
Typo?
“bizarrely… but NOT to partnerships…”?
you have “but now to partnerships”?
In para 11? beginning “And right now…”
Edited, thanks
Should the ‘now’ after ‘And right now…’ be ‘not’?
Also, maybe the point is to destroy trust? Removing people’s stake in the economy gives one an excuse to exploit them even more ruthlessly.
Edited, thanks
As a former contractor seeing the ‘planning’ for IR35, HMRC seemed to be perfectly comfortable putting the burden on people who were not given job security, and who had no real say in the contract details they were signing, while lifting it off the big businesses who chose to have those arrangements to have a buffer of ‘dispensible’ workers who were, very definitely, NOT treated the same as employees.
Here, if the more frequent reporting causes SMEs to be pushed to the wall because it’s clear they’ll struggle to pay their taxes, then there may be an outcome that the government still doesn’t get most of the tax nominally due but it also reduces employment and increases its benefits bill. Adding additional accounting costs only adds to the pressures of those struggling companies, and wilfully misrepresenting the costs and benefits helps nobody.
It’s good that there were some sane voices outlining issues to the Lords, but it’s a shame that there was clearly a target fixation which missed the bigger problem and the risks of their own proposals.
I wonder how many of the businesses affected will consider becoming ltd companies, as they would not then have this liability, and I wonder if that was the government’s intention?
Way back when I ran a business I tried out some free trial accounting packages. Some couldn’t be used on my computer, and the rest were unsatisfactory for several reasons. So I wrote my own, gradually transferring from paper over a few years.
This system ran until I retired. My accountant was perfectly content with the information he got from me.
Were I still in business I’d be incensed at having to pay to use less convenient software for my needs.
I wrote a package as well
It worked well
Me too. I am still in business, and I am incensed.
When MDT for VAT was introduced the sign up process required a formal statement by the user that all data would be processed electronically, without any human mediated process. My guess is that the motive was to create a pre-admission of wrongdoing in case of any discrepancy by taking advantage of the ‘computer can not be wrong’ assumption in English law, which contributed to so many wrongful convictions in the Post Office scandal. Whether the courts would be so credulous now, in the light of that scandal and the well known hallucinatory possibilities of “AI” systems, I don’t know. But presumably some person or persons in or around HMRC have bet their pride and reputation on MDT and won’t let go of it now.
There are allegedly a number of free, approved software packages available. But it’s hard to imagine that once these vendors have any meaningful number of customers, that they will remain free. After all, they are in business too and aren’t doing it for altruistic reasons are they? There’s an obligation on the tax payers in question to use something, so for many, a free option will be attractive. Once the users are on the hook, of course with a healthy amount of vendor lock in, what’s the betting that they suddendly start to become paid options?
I’m just mightily relieved that I am long retired. A Shitestorm.
I imagine the only winner will be the IT company that convinced HMRC to use their software, transfering the work from the tax offices to the taxpayers. We might get a Horizon type scandal out of it in a decade or so.
I’ve had to sign up for this. My business is very simple but being obliged to conform to using Quickbooks and then doing the extra required admin feels quite stifling. It won’t make any difference to my tax bill but it will increase my spending on the accountant as well as the software.
I am thinking of just learning to live with a bare minimum of money.
Making digital makes me want to give up work. Unfortunately I cant afford to. Nobody knows how it’s going to work. Once you are in you have to keep doing it for 3 years even if your income drops
I know people who are planning to keep their income below the threshold by working less, so not likely to increase tax the government gets!
There is evidence people did this for VAT. It may well happen here.