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.