Introduction Since1997, most individuals and businesses have managed their tax affairs through HMRC’s annual tax returnsystem. The system was intended to provide a straight forward method fortaxpayers to both calculate and pay their taxes, as well as providing a meansfor HMRC to monitor tax payments.
In reality, the tax return has become overcomplicated, with many taxpayers miscalculating their tax liabilities throughavoidable error and falling subject to penalties and interest. Latest reportsshow an annual tax gap of over £9billion (Gov.uk, 2017).
This essay willoutline the key concerns surrounding the MTD proposal, as well as the potentialbenefits it could bring to UK taxpayers. Proposal MakingTax Digital (MTD) is the governments new initiative to improve the tax system,marking the end of the self-assessment tax return. This will enable individualsand businesses to manage their own tax affairs through their personaliseddigital tax account, “modernising the tax system to make it more effective,more efficient and easier for customers to comply” (Gov.uk, 2017). Akey concept of MTD will be the personal tax account, holding all of ataxpayer’s information in one accessible online place.
Information will bedrawn from a variety of sources, currently held in HMRC within separateinternal systems, and automatically updated to the taxpayers digital account.This use of third party information should reduce errors that are made on taxreturns and consequently certain taxpayers may not need to complete an annualreturn. HMRC’sinitial proposal start date has been delayed several times, reflecting thesubstantial changes that will be put in place. Currently, businesses withturnover overthe VAT threshold (£85,000+), will be required to use MTD but only for VATobligations in the 2019-20 tax year, with smaller businesses opting to use MTDif they wish. A clearer, more streamlined approach to the tax system shouldreduce the cost and concern that many businesses face when it comes to taxobligations (Gov.uk, 2017). Benefits CurrentlyHMRC receives details directly from third parties such as banks and building societieswhich is used to check the accuracy of the figures reported on tax returns.With the new system this information will be automatically updated onto thetaxpayers digital account, meaning a simple confirmation approach fromtaxpayers, reducing avoidable errors (Webarchive.
nationalarchives.gov.uk,2016). Adigital system will completely change the timescale associated with the annualtax return.
Currently taxpayers calculate their tax liability at the end of thetax year; MTD will allow both taxpayers and HMRC to work on a real time basis,ensuring speed and efficiency and improved support from HMRC through digitalinteractions (Gov.uk, 2017). HMRC’sresearch found that many businesses felt the new system will encourage them tobe more accurate and timely with their record keeping, assisting them with keybusinesses decisions and cash flow management (Gov.uk, 2017). Althoughmany professionals are concerned with the proposed changes, this could providean opportunity for firms to capture the additional market MTD will create.
Smallerbusinesses are likely to struggle with the initial transition process and theongoing quarterly returns. Brian Palmer of the Association of AccountingTechnicians (AAT) explained how advisors will need to shift their focus fromcompliance to advisory (Accountancy Age, 2017). BTCSoftware found 37% ofaccountancy firms felt MTD would help to streamline their practises (BTCSoftware,2017). Manybusinesses already choose to operate using digital processes; latest figuresshow over 98% of VAT registered businesses choose to file online (Gov.uk, 2017). Concerns Akey concern associated with MTD is timescale, which has been greatly publicisedin the media (Thomson Reuters Tax & Accounting, n.
d.), although theGovernment has announced it will await the success of the first phase of MTD,before widening the scope for other taxes (BTCSoftware, 2017). Thesuccess of MTD will ultimately be determined by software quality. The softwareissues HMRC faced in 2016-17 surrounding exclusions on self-assessment taxreturns (AccountingWEB, 2017) has left many taxpayers doubtful aboutreliability of a digital platform. Mike Down of RSM debated the effectivenessof computers and software in the workings of MTD and questioned the need forhuman intervention, accentuating the growing concern surrounding HMRC’s digitalcapabilities (RSM UK, 2017).
Alongside these digital concerns, HMRC’s use ofthird party information presents security and confidentiality issues, which wasraised in numerous HMRC consultations (Gov.uk, 2017). HMRCfound the majority of respondents were hesitant with MTD, in particular the possibilityof additional tax obligations (Gov.uk, 2017).
Clear distinctions show manylarger businesses are already operating digitally, whereas for smallerbusinesses the additional administration is a strain on limited resources (BTCSoftware,2017). Consequently HMRC have ensured freesoftware will be provided for the smallest of businesses (Gov.uk, 2017). Manybusinesses are well accustomed to the current annual return cycle and paymentson account system, and do not welcome the time and costs associated with in-yearupdates, as well as the potential for additional interest and penalties (Gov.uk,2017). When the Administrative Burdens Advisory Board analysed the proposed figures,they implied that HMRC were underestimating the administrative costs of MTD(Tax.
org.uk, 2017). It is worth mentioning, that for businesses who would liketo closer monitor their cash flow, MTD will provide a more accurate picture oftheir final tax liability (Gov.uk,2017).
Conclusion Thechanging role of agents depends on the success and usability of MTD. HMRC foundsome businesses believe MTD will reduce their reliance on their advisors,however in the transition phase many will require specialist advice (Gov.uk,2017). Richard Wild of The Chartered Institute of Taxation (CIOT) alludes tothe access restrictions agents may face regarding their clients’ digitalaccounts (Tax.
org.uk, 2017). Manyaccountancy firms are concerned about relaying the additional fee and software coststo their clients (Whitefield Tax Limited, n.d.). Despite the substantialadministrative costs during the transition phase, many hope that MTD willbecome a practical solution for UK businesses (Accountancy Age, 2017).