Making Tax Digital: the “unexpected item in the bagging area”

Laurence Field, the head of tax at national audit, tax and advisory firm Crowe Clark Whitehill outlines the 6 ‘unexpected items’ regarding HMRC’s Making Tax Digital plans

WHEN supermarkets first introduced the self-checkout aisle, many customers felt the change was positive. No longer would customers have to stand in endless queues, at the preferred pace of the cashier. However, soon many came to realise that this new checkout method had its own downside – the ‘unexpected item in the bagging area’, causing confusion and frustration with many returning to the cashier.

The Making Tax Digital (MTD) proposals ‎aim to make the delivery of information to HMRC ‘more efficient’, with an “unachievable” deadline of 2020, yet they could similarly cause confusion and frustration. HMRC itself states: “The government is committed to reducing burdens for taxpayers and building a transparent and accessible tax system fit for the digital age.”

However, while the shape of the proposals may change over time, the reduced burdens are primarily for the benefit of HMRC rather than the taxpayer. It is clear that taxpayers will be expected to provide more information, more regularly to HMRC. They will also be encouraged to comply through a system of fines and penalties. Business schools would call this approach ‘co-production’ – whereby a customer is encouraged to perform a task previously carried out by a company, in the name of efficiency and convenience – but, it is really a way of cutting costs for the business.

As HMRC will be auditing the information, where exceptions are thrown up, it seems likely that taxpayers could soon be experiencing difficulties with MTD, unless correctly managed. With that in mind, it is worth reviewing the areas (or items) that will most likely give rise to taxpayers (or customers) having to deal with issues.

Areas of misunderstanding

There are a variety of areas that could cause potential misunderstandings but here are an initial six:

  1. Significant fluctuations in income year on year, or even quarter to quarter
  2. A profit margin significantly less than that of your peer group
  3. Late returns could be symptomatic of poor internal controls. Filing on time shows the business knows what it is doing
  4. Significant transactions with related parties, especially if they are overseas or with the owners
  5. Failure to disclose tax scheme references, especially if the structure is being used to reduce in year tax payments
  6. Claims for significant repayments, either of tax already paid or cashing in key tax credits, for example those arising from Research & Development.

As tax becomes more automated, so too will the algorithms used by HMRC to determine ‎where to focus their attention. Taxpayers will hope there is the equivalent of a cashier available to ensure they can complete the process quickly. Human intervention is normally key to ensure that co-production runs smoothly when the consumer runs into difficulty.

There is an incentive for the “supermarket” or, in this case, HMRC to deal with problems quickly, however, when there is a monopoly provider incentives are less. Managing taxpayers expectations should at least be as important as making the technology work.

Let’s hope that as the Making Tax Digital project moves forward successfully, as HMRC will come to realise just how much people hate hearing “unexpected item in the bagging area”.

 

Laurence Field, is the head of tax at national audit, tax and advisory firm Crowe Clark Whitehill

 

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