Digital Tax Accounts

Of all the interesting stuff to write about why on earth would I want to write something about tax?

Well I wouldn’t but this particular subject got my attention at a recent CPD update. I feel obligated to go on these things on a fairly regular basis to keep reasonably tuned-in to developments in the tax and accounting world. The last one, a Finance Act 2016 seminar, contained all the usual things that I would much rather not fill my head with plus something extra. At this point you can switch off if you are non-UK resident, this is a specially delightful set of proposals affecting the 50m or so tax-paying citizens of Her Majesty’s British Isles.

The presenter of the seminar introduced the topic of ‘digital tax accounts’ with a little anecdote. As a tax specialist he had recently attended a conference of….tax specialists…whereupon they covered HMRC’s December 2015 proposals on digital tax accounts. After covering the topic and enjoying an exploratory Q&A, a survey was conducted of the said tax specialists about their plans for tackling the consultation proposals. Apparently, 17 of the 73 attending put their hands up to indicate that they intended to retire before the full effects of this digital nightmare rolled out. Now these are some of the best tax experts in the UK, the ones who not only advise large corporations on their tax computations but who give seminars to the high street accountants and other generalists.

Suffice to say it got my attention.

The ‘Making Tax Digital’ surfaced as a consultation document in 2015 followed by an innocuous looking promotion outlining the benefits of a move to digital tax accounts. In essence it is about moving tax online which in an increasingly digital world makes a lot of sense. However, as ever, the devil is in the detail.

Personal tax accounts are already being rolled out with many people already having received notification from the HMRC that their digital tax account is now live. For those of us used to doing self-assessment it’s probably not a big deal but it could be a challenge for the millions who don’t have a computer or the skills, or who are limited by sub-standard broadband provision. All most individuals will have to do is check their account to ensure that HMRC have populated it with the right numbers. Easy for those who already self-assess but it could be an extra task for many who have never directly engaged with the Revenue. It is not clear at the moment but it could well be that you will be required to ‘digitally approve’ the numbers each year.

So, a little more work for each of us as individuals but generally not a major challenge for the majority of people.

That’s probably the extent of the good news, unless of course you are a fee-earning accountant or accounting software vendor. The rationale for that comment will soon become apparent.

The first and least welcome surprise in the business world is that small businesses will be required to move over to digital tax accounts before big ones, a break from tradition. As proposals presently stand all small non-VAT registered businesses and landlords will be required to start delivering QUARTERLY updates after April 2018.

‘QUARTERLY updates.’ What does that mean?

We have to speculate at this point as the proposals are still fairly opaque. What it seems to be suggesting is that Joe Plumber, Eddy Electrician and Lawrence Landlord will have to transmit some sort of income and expenditure or profit and loss account each quarter, probably using a piece of HMRC approved accounting software. In other words a ‘mini’ year-end every three months. So it’s a major admin burden for the smallest of businesses, and inevitably, extra cost. What the Revenue intend to do with this information is not totally clear but more regular tax payments ‘on account’ is no doubt pretty high on the list of applications. The fun of course will start when attempts are made to try and reconcile these quarterly ‘abbreviated’ accounts with final year end accounts, and taxation adjusted for capital allowances, private use, loss relief etc. etc. The smallest of businesses have a limited interest and expertise and will clearly resort to their accountants for some sort of help. It will no doubt increase accountancy fees once the challenge of whether there is enough accounting help in the system has been faced. I would not overestimate the ability of the high street accounting sector to cope with a broadly unexpected onslaught of extra work. In time it will absorb the work but the transitional years could be pretty difficult. Even accountants have home lives.

HMRC hope that imposing these additional requirements will in some way raise tax revenues. The evidence for this is at best anecdotal and the policy could actually reduce revenues as rules force small businesses to keep better records and ensure those receipts don’t get lost. Time will tell whether the brave new world of digital taxation will also invoke the law of unintended consequences.

The implementation timeline is aggressive. It is the smallest of businesses in 2018 but larger VAT registered businesses, contractors with PSCs etc. will follow very quickly afterwards. Larger entities are further down the road but in many cases they will already have the infrastructure capable of submitting quarterly accounts; in most cases these organisations already produce monthly statements. The only additional task would be formal quarterly HMRC submission. In a world where these companies are being encouraged to think strategically and plan long term we could see a renewed focus on quarterly market updates. I have not seen a lot of discussion on the implications for PLCs but this could be a topic of future interest.

By 2020 most companies will be updating HMRC quarterly for Corporation Tax purposes through approved accounting software. Investing in Sage and other accounting vendors might not be a bad idea as it looks like every business will be compelled to pay for software, most of which is likely to be updated at least annually. It looks like this could become an additional ongoing cost in addition to any supplemental accounting fees.

Digital tax accounts aside we are slowly moving towards a world where everything is becoming government controlled. The emerging discussion about a cashless society would quite easily interface with a ‘digital tax account’ environment. With every piece of expenditure digitised and an all-seeing government holding absolute control over your affairs we are increasingly reliant on the fact that its intentions are benign. While most of us still think we still have some control through the ballot box we ought to recall the words of Mark Twain on this subject: “If voting made any difference they wouldn’t let us do it.” With digitisation happening so quickly we should be very careful that we maintain oversight on who is the servant and who is the served, or we might all wake-up one day and find that we have sacrificed our freedom to the god of convenience.

The significance of the BLOCKCHAIN

I still covet Issue 1 of the first magazine launched in the UK to cover the Internet. It was a free supplement to an edition of ‘What Personal Computer’ which unfortunately I have now lost. Dated October 1994 and appropriately titled ‘INTERNET’, at 34 pages it is rather thin to say least, much of it advertisements. Page 7 describes the following three and half pages as ‘the most extensive ever published in a magazine’ and includes descriptions of sites such as ‘The BBC Networking Club’, CERN and a handful of corporate sites such as Microsoft, ‘Lotus Development’, Novell and Dell. It’s a fascinating snapshot of the genesis of a technology ten years before it really caught the imagination of the wider world.

Roll forward to today and we could be seeing the start of something equally revolutionary, Blockchain technology. The Blockchain is the enabling platform for the better known Bitcoin cryptocurrency. While Bitcoin attracts most of the interest of writers and news columnists it is almost certainly the Blockchain which is more important. Indeed like the Internet it has the potential to fundamentally and structurally change the way economies work and how transactions take place.

So what is it?

Just a matter of months after the collapse of Lehman Brothers in 2008 a rather mysterious character calling himself Satoshi Nakamoto released a White Paper ‘Bitcoin: a Peer to Peer Electronic Cash System’. The first sentence in the document introduces the concept of Bitcoin: ‘A purely peer to peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution’. With that the Blockchain and its first application, Bitcoin, was born. Its launch has effectively removed the need for any middlemen involvement in a transaction, hence the growing interest of governments and financial institutions.

Bitcoin is potentially significant but is still just a Blockchain application; a bit like relationship between email and the Internet. The Blockchain itself is effectively a database but one with a number of features that don’t necessarily appear in more conventional environments.

There are four elements usually associated with the Blockchain. It is ‘Encrypted’, ‘Distributed’, ‘Public’ (nobody owns it) and ‘Synchronised’. It works in a different way to traditional databases and incorporates a number of principles which are reflected in the features referred to earlier.

It is decentralised. In other words data is validated across a virtual network rather than in one particular centralised place. This allows its nodes to continually and sequentially record transactions on what it calls a ‘public block’. The ongoing chain of these transactions on the ‘block’ is where the description ‘Blockchain’ originates. Each block is distinguished from others by a ‘hash’, the encrypted signature which authenticates the transaction, and the combination of the ‘hash’ and the block ensures that it is not replicated.

The robustness of the Blockchain and its associated encryption and authentication processes facilitate another associated concept, that of ‘trusted computing’. If the Blockchain is the ultimate arbiter of the validity of a transaction then you don’t need an intermediary. You don’t need a bank, corporate or government to establish transaction safety. The rules of trust are embedded in the way the Blockchain itself works.

A third concept is that of the semi-public nature of any transaction taking place via the Blockchain. The fact that you have made a transaction is available to the public but the details of that transaction are opaque to anyone but the person making the transaction. The Blockchain’s encryption technology also ensures that the transaction cannot be hacked for any value that it may hold. It may be that your Blockchain holds Bitcoin and yet no one can access that information, not governments, corporates or other financial institutions.

‘Smart contracts’ are basically a set of instructions associated with a store of value, say a Bitcoin. To enable a transaction to take place without an intermediary the rules of the transaction and any associated transfer of value need to be established between the parties transacting. Once agreed and recorded the Blockchain governs the progress of the transaction automatically and in accordance with the conditions established at the outset.

‘Proof of work’ is a fifth and foundation concept of the Blockchain. It has been described as ‘the right to participate’ in the Blockchain system and effectively prevents users from changing records. Once a transaction has taken place it cannot be undone; it is protected by encryption and the ‘hashes’ that validates its authenticity.

Given the Blockchain is basically an encrypted database that facilitates peer to peer transactions without an intermediary the more interesting aspects are what you can actually do with it. Early applications have generally been financially based, notably Bitcoin, but there are other applications starting to emerge outside of the financial world. Listing those that are (slightly) better known is a bit like looking at that early Internet magazine listing of websites. It’s currently a very small list and the apps themselves are clearly at a very early stage in development.

Actual applications of Blockchain technology are few at the moment, less even than the numbers listed in that first internet magazine in 1994. A few that have caught my eye include ‘Lazooz’, ‘UjoMusic’ and ‘OneName’. Believe it or not if ‘Lazooz’ gains any traction it could be the successor to Uber. Billed as ‘social ridesharing’ it basically links people who have space in their vehicles directly with end users without the involvement of an intermediary. In its raw format it looks and sounds like a winner but perhaps there are still security and logistics issues that will need to be addressed. ‘UjoMusic’ positions itself as ‘a home for artists that allows them to own and control their creative content and be paid directly for sharing their musical talents with the world.’ I can see artists liking this site and certainly users, especially if they would like to establish direct contact with artists. ‘Onename’ is something different. It is essentially a means of establishing an identity on the internet, secured and supported by Blockchain technology. In time it could effectively become a digital signature, a method of authorising a transaction: ‘Blockstack is the global database for people, companies, websites and more.
Decentralized, privacy-centric, and blockchain-secured.’

Potential uses of Blockchain technology are extensive and range from applications in the financial services space to public and private and personal records, physical keys and other uses involving unique identifiers. For example voting could be undertaken via the Blockchain, security access facilitated both physical (keys) or as replacements for unlock codes. Land and property transactions could be authorised, medical records secured and loan agreements processed. The list easily runs into dozens and could reach hundreds or even thousands once the technology becomes ubiquitous and trusted.

As with the internet in the early 1990s it’s all about ‘potential’. Blockchain technology could take off or it could hit the wall along with lots of other equally promising technologies. Robotics, AI, IoT, ‘Big Data’ and the Blockchain are all starting to happen now. The internet has been the big news story of the last twenty years but the next twenty are likely to see much more technology driven change, and at an even faster pace.

The organisational change implications of this technology wave are enormous.

I’ll take a look at this archived blog in 2036, maybe via a Blockchain enabled identity…

Blockchain sites:

http://www.lazooz.net/

http://ujomusic.com/

https://onename.com/