We look back on the journey so far to tax digitalisation, examining the government’s digital objectives and industry concerns, and explore the key issues for businesses over the next three years
In the March Budget of 2015, the then chancellor George Osborne announced government plans to modernise the tax system, bringing it into the digital age. The announcement signalled the death of the annual tax return, with Osborne hailing the scheme as a “revolutionary simplification of tax collection”.
Two years down the line, and the digital initiative continues to spark controversy. With industry tussles over timelines, disagreements on costs to companies and an alarming number of businesses seemingly unaware of the plans, the government’s road to a fully digital tax system by 2020 has been bumpy at best.
But, perhaps now it’s starting to take shape. With the government’s policy amendments welcomed by the industry following consultations, and with software giants pledging technology support, fulfilment of a digital tax system looks likelier than ever.
So, how did we get here, and what steps can businesses take to prepare for Making Tax Digital? We look back on the journey so far to tax digitalisation, examining the government’s digital objectives and industry concerns, and explore the key issues for businesses over the next three years.
Back in December 2015, David Gauke, as financial secretary to the Treasury, published the government’s vision for transforming HMRC into “one of the most digitally-advanced tax administrations in the world”. He highlighted the following four foundations to the tax system of 2020.
Digital tax accounts will allow taxpayers to view information held by HMRC, with taxpayers able to check the completeness and accuracy of the data at any time. The system will also remove the need for taxpayers to provide HMRC with information already collected by the tax authority, or information accessible from elsewhere, such as banks, employers, and other government departments.
Information will be collected and processed by HMRC in real time so that businesses will no longer have to wait until the end of the tax year to find out how much tax is due. From April 2018, businesses will update the tax authority at least once a quarter on their main source of income, or a secondary source, if applicable.
Taxpayers will be able to view their “complete financial picture” in their digital tax account by 2020, including their liabilities and entitlements. Taxpayers will also have the ability to offset an overpayment of one tax with the underpayment of another.
Digital tax accounts will be accessible by individual taxpayers by April 2016. Individuals will also be able to communicate digitally with HMRC through webchat and secure messaging.
Ahead of the publication of draft legislation on 31 January this year, the Treasury Select Committee released a report expressing concerns over the costs of Making Tax Digital to businesses, including compliance costs for updating and submitting records.
The original government plans required some businesses to report income tax and national insurance from 1 April 2018, with others reporting from 1 April 2019, depending on company size. Reporting of VAT would enter into effect from 1 April 2019. The committee estimated that between 2.5m-5m businesses would be affected by the initiative.
While supporting the digitalisation of the tax system, the committee said that the 1 April 2018 implementation date was “too short a lead time for such a fundamental change”. It pressed for “a comprehensive set of pilots of the end-to-end system” before being made mandatory to all businesses. Furthermore, the committee was “very concerned” about costs to businesses, and said that not enough information had been released about the free software available to businesses.
Finally, the committee urged the government to carefully “consider the legitimate concerns about the costs and benefits to business, and set them against any benefits to the Exchequer from the proposed approach”.
Published at the end of January following consultations with the industry, the government’s policy paper on Making Tax Digital for business set out who would be affected by the scheme and the estimated costs to businesses. It confirmed that businesses, the self-employed and landlords would be subject to the digital system from April 2018 if they had profits chargeable to income tax and paid Class 4 national insurance contributions; from April 2019 if they were registered and paid VAT; and April 2020 if they paid corporation tax.
In addition, individuals in employment and pensioners would be required to use the system if they had a secondary annual income of more than £10,000 from self-employment or property.
The government stressed that the thresholds for Making Tax Digital were still under consideration, and that it was contemplating deferring the start date of the scheme for small businesses with annual incomes of over £10,000 but below a certain threshold yet to be decided.
In his Spring Budget in March, chancellor Philip Hammond announced a delay to Making Tax Digital of one year for businesses with an annual income of above £10,000, up to the VAT threshold of £83,000, with the implementation date deferred to April 2019. The changes were welcomed by the industry, with accountancy bodies to have largely felt that their concerns were heard by the chancellor.
The new timeline requires businesses to use the digital services according to the timeframe below.
Following the Budget, a report from the House of Lords Economic Affairs Committee once again highlighted the costs to businesses as an ongoing concern. The chairman of the committee Lord Hollick said that HMRC’s estimates of an initial cost to businesses of £280 to set a business up for Making Tax Digital were “disbelieved” by most small businesses, with costs thought to the substantially higher.
The committee also advocated a delay to Making Tax Digital to 2020 in order to provide sufficient time for a pilot and allow for the collection of data from a full cycle of tax returns due within the tax year so that advantages, costs and benefits of the scheme could be fully assessed.
Lord Hollick said that businesses with annual income over £10,000 but below the VAT threshold of £83,000 did not “have a great deal of time to do administration” and therefore should be allowed to voluntarily sign up for the digital service.
Yet, accounting expert Sage has criticised the “doom-mongering” surrounding Making Tax Digital. Speaking at the Sage Summit at the beginning of April this year, Sage UK’s managing director Alan Laing said that the claims of significant costs to business to comply were “exaggerated” and that plans for the digital system presented a “huge opportunity” to promote growth and productivity among the UK’s small businesses.
Businesses already using technology in their day-to-day operations could find Making Tax Digital simpler than anticipated. Sage’s Laing said that business technology, internet-accessible mobile devices and software products can be “easily adapted” to ensure compliance with Making Tax Digital.
Preparing to comply with the initiative was “a fantastic opportunity for businesses to embrace new ways of working”, according to director product marketing at Sage Michael Office, as the digital system would significantly reduce “wasted time” spent on bookkeeping and administrative tasks. But Office said that businesses did not have to wait for the new rules to enter into effect, as the technology was currently available and would ensure companies were set up and compliant for Making Tax Digital.
Businesses not yet set up to use technology will be supported, with HMRC committing to making free software products available.
Office said that Sage will provide “free expert advice and support for everyone”.
He commented: “We’ll have technology solutions that meet the needs of individuals right up to large, enterprise size businesses. We’ll provide dedicated training on not only Making Tax Digital but how to embrace new ways of working. Like VAT rate changes, RTI and Automatic Enrolment before it, we’ll be there at every step of the way – for everyone who needs to embrace Making Tax Digital. And our promise is that we’ll make you slicker and more efficient in the process.”
With HMRC kicking off pilots for the digital system this month, further guidance around software availability and compatibility are expected to be released by the government between now and April 2018.
Although further changes to Making Tax Digital are likely to be announced over the next year, the foundations have now been set to introduce a fully digital tax system by 2020. The accountancy and business industries may still have reservations about the implementation timeline, but the government will be set on adhering as closely as possible to the schedule laid out in the Spring Budget earlier this year. However, it remains to be seen whether prime minister Theresa May’s surprise announcement of a general election on 8 June, and recent calls for the government to reduce the current Finance Bill to its core elements, will derail the proposed timeline.
Regardless, with developments in Making Tax Digital software and technology on the rise, businesses can begin their preparations for digitalisation and can expect a level of support from both the government and software providers to meet compliance requirements.
As with any transformation, some level of disruption is inevitable. The availability of support for businesses to overcome this disruption, and the extent to which businesses are prepared to embrace the change, will determine the success of the government’s digital agenda.