I wrote a lengthy note on Friday about the plan that I knew HMRC would be announcing today that it calls Making Tax Digital:
The plan is almost as bad as I feared. In fact, I'd go so far as to say it will become the biggest obstacle to the setting up of new small businesses in the UK that there has ever been so onerous are its obligations.
Some of the design faults I predicted are as I suspected: for example, the plan is to be introduced for the self employed before companies. The delay for the latter is currently scheduled at two years. Assuming everything is delayed, as is likely, that gap will get worse. So, as I predicted, the sector where progress is really needed now will be the last to be addressed and there will, in the meantime, be a strong incentive to incorporate. That's the exact reverse of what is required.
And the plan is as naive on accounting as I expected. This is said:
By 2020, most businesses, self-employed people and landlords will be required to keep track of their tax affairs digitally and update HMRC at least quarterly via their digital tax account. These changes will be introduced for some businesses from April 2018, and will be phased-in by 2020, giving businesses time to adapt.
These businesses will be required to use digital tools, such as software or apps, to keep records of their income and expenditure. HMRC will ensure that free apps and software products are available, but many businesses and their advisers will choose to use commercially-available tax software packages.
Businesses will use software that compiles their tax data as part of their ordinary day-to-day activity, highlighting any possible errors (for instance, arithmetical mistakes or figures which look out of place) and offering prompts for information that might otherwise be overlooked. Once the software has compiled the relevant data, businesses or their agents will feed it directly into HMRC systems via their computers or smartphones. Updating HMRC directly in this way will be secure, light-touch and far less burdensome than the tax returns of today.
This is absurd: it takes about a minute to submit a tax return now. And populating a tax return from a linked accounting package already takes no time at all for an accountant. It's assembling the data to populate the return that takes all the time. HMRC's claims utterly ignore that fact and want to increase this time consuming part of the job fourfold. That they do not seemingly understand this is deeply troubling.
More worrying still is this:
Businesses currently report information on tax returns and pay liabilities long after the end of the tax year. The government is changing the tax system so that it operates much more closely to ‘real time'. Business will be able to see, through their digital accounts, a real-time view of their tax and a calculation of the tax due. By reporting information closer to real time, businesses will find it easier to understand how much tax they owe, giving them far more certainty over their tax position and helping them to budget accordingly.
The implication is obvious: tax bills will at some time in the future be based on these quarterly statements. Most certainly payment dates are to be brought forward since HMRC say:
The government is consulting on options to simplify the payment of taxes, including whether to align payment dates and bring them closer to the point when profits arise
This will impose a massive credit squeeze on many smaller businesses that a great many will simply not be able to afford. A rash of bankruptcies will follow this change.
But let me stand back from this and point out yet again why this cannot work. The ley misunderstanding (or misrepresentation) on the aprt of HMRC is in this phrase:
"Once the software has compiled the relevant data"
The implication from HMRC is clear and is about as gross as any that any government has ever made on IT. Indeed, Tony Blair in all his naive IT faith and utter IT ignorance could easily have made it. What HMRC seem to think is that accounting is just an exercise in totting up the books. It isn't. Let me suggest just some simple things that complicate the issue and which will now need to be done every quarter by small businesses instead of just once a year, with considerable cost involved:
- Stock will have to be counted and valued
- Work in progress will have to be estimated
- Income in advance will have to be appraised
- Tax disallowances will need to be worked out
- Capital allowances will need to be claimed
- Accruals for costs incurred but not yet billed will have to be estimated
- Prepayments will have to be taken into account
- Bad debts will need to be reviewed and provision made
- Estimated costs, such as use of the owner's home, will need to be calculated
- If the accounts are to comply with UK GAAP then depreciation will need to be estimated.
Fail to do these and that book totting up exercise will be meaningless: it will not declare income correctly. And doing these things takes time, cost and effort and will now need to be done four times a year to ensure tax is not over or under paid, with (no doubt) penalties accruing if the latter is the case and now with much shorter time scales to be applied than has been allowed in the past. In this case every claim the government makes about reducing the burdens on business is, to be blunt, a lie. I use the term advisedly.
There will be a boom in small business accounting as a result of this change, little of which will add to the value of understanding.
And there will be a big downturn in the small business economy as a result of this change as people are put off going into it, or simply go bust because of the extra costs they will incur.
Whilst the shadow economy will get a boost from the cost savings it will offer.
And I candidly doubt that very much extra tax will be collected as a result for all the reasons have explained here.
I stress, I want to close the tax gap.
I stress as strongly that this is not the way to do it.
But it will massively alienate the small business community from this government. As PR disasters go this looks set to be a big one.
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Given the governments track record in IT projects I wonder whether we should be worried about this at all? Surely it will take years for them to get a system that even vaguely works?
That is certainly an issue
Someone’s looking for a profit on the software; I trust that they are just as generous as the usual suspects in Government IT cobsultancy and service solutions.
And you are dismally correct in expectations that it will be delivered over budget, long delayed, and worse than useless.
Nile, the only people who have applauded this project, as far as I am aware, are the “cloud” accounting giants like Zero who, of course, are well placed to benefit financially from this change. And don’t exclude the possibility that such firms have actively lobbied for this change and/or may well be “in on” the required software development, at which they are, by default, more adept than government, meaning that it may well come online rather more quickly than recent experience would suggest.
Not only small businesses but also small accountancy practices will suffer; the annual nightmare that is every January will now become a quarterly event. When are we expected to be able to recharge our batteries?
And who in HMRC is going to be available to handle the likelihood of four times more errors and queries when staff levels are constantly being cut and local HMRC presence has been consigned to history? What’s being sold as progress is no more than more government propaganda at which the current catastrophe of a government is so adept.
I’m so glad that, come 1 February, my workload will be cut by 60-70% as a result of a positive decision to reduce my workload in response to becoming unable to handle the quagmire that HMRC has become (also, I’m not getting any younger!).
Nick
All those automatic late filing penalties….
That’s what this is all about
Richard
I do not doubt that the government should have blocked this plan right from the start, but like all tax policy it will be something put together by civil servants.
Having drawn a PAYE salary the whole of their lives those civil servants will struggle to see why other people shouldn’t pay their tax at the end of the month as well.
Michael, I can assure you this is the very much driven by the Government, with the Cabinet Office controlling the strategy. Civil servants are just implementing their agenda
Politics: Lord Ashcroft would never have let this through.
How much of this is simple stupidity – the loss of a senior figure who listened to the party base among small businesses – and how much is malignant disinterest by ministers whose only interest in tax is in assisting banks and big four firms facilitate evasion for the billion-dollar clients?
This bears all the hallmarks of a project conceived by politicians, and designed by IT consultants. What is missing in this plan, is the realistic input of users; those inside the HMRC, and those on the receiving end.
Much like the current fiasco that is Universal Credit, anyone with an ounce of insight into the real world, or indeed into complex computer systems, will know that this cannot work. And yet the government will plough on regardless: the project will lurch through changes of specification, delays to delivery dates, politically driven pilot studies, and bare-faced misrepresentation of progress by parliamentarians.
And the waste of money and effort is a scandal waiting to happen, but like most of governments’ blunders, will probably never be given the publicity it needs.
Agreed
The real issue is that we find ourselves saddled with a government which thinks this and similar schemes are in fact practical. Hardly an advert for democracy is it?
They may give that impression Bill but I’m not convinced. I suspect they don’t really care one way or the other whether it’s practical or not. Those making the decisions and those paying (through a variety of means from cash to future lucrative job openings and Directorships) them to make those decisions will not be affected by any of this.
The track record so far demonstrates that there are sufficient numbers of people in the country prepared to put up with any amount of shoddy product, from goods and services through to systems and processes, provided whatever it is has the labels of “choice” and “free market” attached.
We can only hope that this helps the scales to fall from the eyes of small business people about just how malignant this government is.
I rarely hear any comments from business that are anything other than pro Conservatives and anti Labour – if they bothered to think instead of their tribal assumptions they’d notice that they and their family are being shafted.
So, whatever happened to the eternal Tory mantra of “Cutting Red Tape”?
(Or “Cutting Wed Tape”, for those who remember Michael Heseltine.)
Have these proposals been consulted on?
Because a simple lack of cooperation by the Federation of Small Business all submittng Nil returns for the first three quarters of the year could make life rather awkward for HMRC. They clearly won’t have the staff to chase up or enforce or inspect – and if corporations aren’t even in the scheme, public opinion would undoubtedly be on the side of small business.
That will happen next year
So it is a case of marshalling forces.
I’ve just been doing my Wife’s accounts for her first period of trading and although it didn’t take long it occurs that for very small business like hers this is the norm. Go to your accountant with a bag full of receipts and invoices some time after your year end and they pull it together for you.
In our case as we don’t have any accounting package and it’s daft to pay an accountant when I can do it so it’s all done on a spreadsheet, and I imagine we are not alone in taking this route.
If we’re now supposed to do this ongoing and quarterly it’ll be a bit of a pain to say the least. And I am not at all convinced that HMRC are capable of delivering a good IT package that will work properly. So slightly concerned from a personal perspective ïŠ
I still happily use a spreadsheet package I wrote years ago
It will not work quarterly
It’s hard to add anything. The lunatics are in charge of the asylum.
It is not often that HMRC does something to help us entrepreneurs and small business owners (it is usually the opposite) but in the Autumn Statement the Chancellor did just that in the form of digital filing of tax information.
Now don’t get me wrong, there is a lot wrong with the current proposals for digital filing but there is one aspect of the proposals that will significantly help entrepreneurial businesses.
….and that is the requirement for quarterly reporting.
You see one of the biggest problems faced by business owners is that they don’t know their business numbers well enough. Too many still only get reliable figures after their year-end WHEN IT IS FAR TOO LATE TO TAKE ANY ACTION.
Running a business is a bit like flying an aeroplane. Most of the time you are off course. But the pilot of an aeroplane has a dashboard with the relevant numbers to allow him to make subtle corrections and arrive at his intended destination.
Without a business dashboard, entrepreneurs risk only getting their figures after their year-end only to find that they have arrived at the wrong destination!
HMRC’s proposals will at least mean that business owners will have to up their game and get a proper accounting system (probably cloud based) to access their numbers – and that will mean they can access them not just quarterly but monthly, weekly and daily.
Having up to date financial information and knowing how much tax you owe is a must for all businesses.
Two of the objections I have heard relating to digital filing are that it will increase the ‘burden’ on small businesses and that it will be expensive.
These are just plain wrong.
It is now possible for a business owner to spend no more than one hour a week doing their books (and in many cases 30 minutes will do).
And at a fraction of the cost of doing it themselves or employing a bookkeeper. The cost of this powerful software is less than £50 a month for any business other than those with complicated needs.
Entrepreneurs should welcome quarterly reporting. It will make their businesses better.
Sorry: this reads like HMRC PR
Of course businesses need data but that is on KPIs, not full blown tax compliant accounts
I have run many bsinesses and none needed tax compliant fianncial statements for management accounting purposes
Quarterly data is often too late to be useful
Monthly KPIs are needed
And HMRC data will contribute nothing to that
And I note you are trying to sell quarterly accounting. Your objectivity is in doubt here: this feels like a sales pitch to me, and a poor one at that
I think our society is suffering from an addiction to the concept of digital.
There are many reasons to celebrate the rise of digital technology. For instance:
* Ease of accessibility, any time, anywhere;
* No technical expertise required (apart from being able to install an app);
* Ability to collect and analyse statistical data;
* Cost saving (e.g. on staff wages);
* Processing avoids human error.
Digital technology has transformed our way of life in so many ways, which many of us would not have dreamed of even 10-20 years ago. Why not use this incredible resource to transform the way we assess liability and collect taxes?
Getting carried away with the prospects of digital technology, we must beware of what Bernard Lonergan calls an oversight of insight. That is to say, computers are very good at certain tasks, but they are no substitute for human intelligence and understanding. The outsourcing of intellect to a software app is a hubristic move that transfers responsibility from man to machine. That’s because if the app takes care of everything, HMRC risk becoming a mere team of customer service personnel, whose technical knowhow revolves around how to use the software.
One can understand why digital solutions have such an appeal among people with little imagination and a great propensity for oversimplification. It’s a clash of egos. Not a dramatic clash as might be seen during Prime Minister’s Question Time, but there is a subtle undercurrent of feeling that is neither directly expressed, nor repudiated. (Lonergan calls it ressentiment, or ‘re-feeling’, after Max Scheler). A computer wouldn’t tell HMRC to their face they are stark raving looney to run a tax office the way they are doing. That’s why treasury officials who can’t understand the sophistication of Richard’s arguments try to belittle them, drown them, anything, and then implement an automated procedure which seemingly gives them more control over their data. They don’t like being talked down to. What they are overlooking is an oversight of insight, that uniquely human element which adds to a mass of data an understanding of what it means, how it is collected, and what needs to be done with it. It’s like, don’t tell us what to do, we can figure it out and then we’ll get the software to do it for us.
The solution? Honest argument and debate, and a recognition that some people are more expert than others. The people who don’t understand are usually in the majority, and could be swayed by their feelings of inadequacy. So the non-experts must try not to let their feelings interfere with the arguments, while the experts should try to explain matters in a non-technical language, with the aim of edification. Positive and negative comments should be balanced in the ratio of about two to one.
Unfortunately it seems the tax profession has too many people who consider themselves experts, but are not. Either they are captivated by the idea that everything digital is the way to the future, or they are exasperatingly narrow minded.
Thanks for that comment
I like your conclusion
Well, here’s some feedback, I have a small IT contracting and consultancy business that I have operated for 20 odd years. Although I’m not young, I had a few expansion projects for the next few years. But, if this goes ahead, I shall simply close and retire. I wonder how many baby-boomers like me feel the same and will do the same?
And you do IT!
I think it’s also a BECAUSE I do IT. Like most industry veterans, I watch gov.uk IT (admittedly there are signs of improvement, more openness to open source, for example) and hence the succession of messes made with the usual suspects (the big consultancies) and feel that this will be no different.
Then panicky civil servants will fine us when it doesn’t work and there’ll be a lot collateral mess concerning the ‘client side’ software. We don’t use Windows, for example. Besides our current scale of activity makes this a nonsense (as it would be for a window cleaner or jobbing gardener, for example). Unlike Amazon etc. I LIKE paying taxes and clearly understand the reasons for them but this is badly conceived, bureaucratic nonsense.
Agreed entirely High
And getting the final entries in accounts takes time: hours of time for me so it must for others
The book-keeping is far from the only task