Following recent issues with HMRC’s personal tax computation software, Brian Palmer of the AAT questions whether the government’s implementation timeframe for Making Tax Digital is realistic.
There was great news in last month’s Budget regarding Making Tax Digital (MTD). Having previously proposed that only those with profits of less than £10,000 per annum would be exempt from MTD, the chancellor increased this threshold to £85,000 (the current VAT threshold), reducing back to £10,000 in April 2019.
This means that 3.1m of the UK’s smallest businesses will have an extra year to get ready to comply with the MTD quarterly filing regime. This change came about as a direct response to AAT’s lobbying activity, which had pushed for a higher threshold mirroring the VAT threshold following engagement with AAT licensed accountants.
There are many benefits from this deferment – not least for HMRC itself, who will now get twelve months additional time to adapt and learn.
However, there’s still work to be done on MTD. When the threshold does reduce from £85,000 we would like it to reduce to the personal allowance, currently £11,500, not the proposed arbitrary figure of £10,000.
According to a 2016 MTD AAT member survey, less than 5% of AAT members support a £10,000 threshold where as 65% of AAT members support the threshold mirroring the personal allowance.
By linking the threshold to the personal allowance, the need to regularly revisit the limit is avoided and fiscal drag will not be an issue.
Timeframe for implementation remains a challenge
Despite the deferment for many small businesses, the challenging timetable for delivering MTD remains very much in place – albeit with just 400,000 of the larger unincorporated businesses on-boarding during the 2018-19 tax year. AAT is concerned that HMRC has set itself a very challenging target which could have been mitigated further if the department had taken on board the other half of our deferment recommendation, i.e. that after deferring the on-boarding of those with turnover below £85,000, those held over should be phased in over a three-year period, by gradually reducing the threshold until it reaches the personal allowance.
Given the reliance on HMRC technology and capabilities, it was worrying that reports came out this month around HMRC identifying issues with its 2016-17 self-assessment calculation.
Those in receipt of dividend income as well as other forms of taxable income could find themselves facing a higher self-assessment tax liability if they rely on HMRC’s programming. This is because the system fails to consider that there is more than one possible outcome to the calculation of their personal tax liability, in some limited circumstances, for the last tax year.
Where this situation arises, HMRC’s own tax calculation may result in a sub-optimal calculation for the taxpayer, meaning that if the error is not spotted, affected taxpayers could end up paying more tax than they should – possibly by up to £1,000 more.
HMRC has embedded these complex calculations into their own self-assessment software, which in turn has been built into all UK third-party tax software. It has proved too late for HMRC to address the situation other than by workaround.
The workaround is that HMRC is asking those affected to file their personal tax returns on paper. Clearly this is far from ideal when HMRC is seeking to make our tax system the most digitally advanced in the world!
Fortunately, HMRC’s technicians are on the case to try and resolve the issue. In addition, if the situation is not resolved online, commercial software providers have been advised that clients in this situation will have until the online deadline of 31 January 2018 to provide their paper tax return.
Making MTD work for all
There’s no doubt that this glitch in the system is untimely, given that HMRC is working hard to reassure everyone that MTD can work for all.
There are also significant concerns amongst those in rural areas in relation to broadband access and reliability.
AAT has long argued that any business that is unable to access a basic, reliable broadband service with speeds of at least 10 Mbps should be exempt from MTD. 10 Mbps is the speed identified in the current Digital Services as being the minimum acceptable under the new broadband Universal Service Obligation (“USO”).
The CBI and others have subsequently followed our lead and suggested the same.
The Budget may have come up trumps in this area too. While many small business owners were up in arms around the – quickly corrected – rise in national insurance contributions for the self-employed, one lesser heralded announcement concerned access to digital solutions for SMEs. With some areas of the UK still struggling for strong internet connectivity, the government announced that SMEs will be given up to £3,000 in vouchers that can be exchanged for high-speed broadband in their local area. This will make the ability to complete online tax returns greater, along with hopefully improved methods of sales and marketing for many firms.
Making Tax Digital is going to require fundamental changes to the way millions of businesses interact with HMRC, and as such it is within everyone’s interests that individuals and businesses are fully engaged with its implementation. The rationale behind it is sound, and will allow accountants to focus increasing resources on the “value-added” nature of our roles while harnessing the power of the software taking on some of our compliance work.
We might yet see the “death of the tax return” as then chancellor George Osborne first suggested, but in return, the accounting profession could find itself more valuable and in-demand than ever before.
Brian Palmer is tax policy adviser at AAT.