The government’s report Building a trusted, modern tax system, published on 21 July, sets out a broad and bold set of ambitions for modernising tax administration over the next decade to create ‘a tax system fit for the challenges and opportunities of the 21st century’. Unsurprisingly, ‘making tax digital’ (MTD) is very much at the heart of it, but it is now as part of a wider digital vision, influenced in part by the experience of Covid-19.
The document sets out three pillars to the strategy:
The aim is to deliver the strategy incrementally and consultatively by involving taxpayers, agents, software providers, representative bodies and the Office of Tax Simplification (OTS) in its development. This approach will, the government hopes, recognise public concerns for the need for proper constraints and safeguards over HMRC powers. The tax system should, the government believes, make it ‘easy for people to pay any tax due and for the vast majority of people the calculation and payment of tax should be effortless’. Few would disagree with that goal; equally, few would underestimate the challenges involved in achieving it.
The report sets out the next steps for MTD.
Most VAT registered businesses with turnover above the VAT threshold were mandated to use MTD for VAT from 1 April 2019. By March 2020, more than 1.4m businesses had joined MTD for VAT and more than 4m VAT returns had been filed using MTD-compatible software. From 1 April 2022, all remaining VAT registered businesses will be required to adopt MTD for VAT. While there will again be concerns about the additional compliance burden for the smallest businesses, the logic behind the decision is clear: the system will have been live for three years and the software market will have matured accordingly. HMRC also points out that 30% of the businesses within this group have already adopted MTD for VAT voluntarily.
From April 2023, businesses and landlords liable to income tax with annual business income over £10,000 will have to keep digital records and report quarterly to HMRC through MTD. These two groups were within the original scope of MTD, but taken out of the first phase because of significant concerns over additional cost burdens. The limit of £10,000 will undoubtedly revive those concerns, particularly insofar as they fall on the very smallest businesses.
In the spirit of consultation that the strategy aspires to, this issue should prompt reflection by HMRC and ministers on the cost/benefit for micro businesses as well as prompting the agent community and software providers to reflect on how best to help as many as possible to adopt digital technology where there is genuine benefit from doing so. There is a mutual interest in simplifying tax compliance, reducing administrative burdens and improving productivity.
HMRC acknowledges that bridging software has provided an initial, cost-effective option to link spreadsheets and legacy software to MTD-compliant software, but anticipates that more businesses will change to using only MTD-compliant software as they become more digitally engaged. Since the announcement of MTD in 2015, the use of direct links between software and business bank accounts has become far more common and the functionality and, more importantly, reliability of apps designed to capture and categorise payment and purchase information has continued to improve. Agents and software developers invested massively in informing, training and supporting businesses affected by MTD for VAT through the digital changeover and that practical experience will help in delivering the next phase. We also need to see the realisation of the aspirations HMRC had back in 2015 for software and apps to use prompts and nudges to reduce errors at the point of data capture: that is no longer a ‘nice to have’ feature, it is a ‘must have’ feature.
MTD for business is, however, a more complex proposition. We will need to return, sooner rather than later, to the issues set out in the relevant consultation documents from the summer of 2016 to ensure that the computational, technical and practical issues they explored are resolved long before go-live in 2023. Those conversations need to start now.
Two other digitalisation threads run through the document: real time information and adaptability.
I have never been under any illusion about the ultimate aim of MTD. It is and always has been about progress towards real time reporting. The original announcement on MTD contained the words: ‘The government is changing the tax system so that it operates much more closely to “real time” … By reporting information closer to real time, businesses will find it easier to understand how much tax they owe’. It is arguable that only when apps and software are deployed to achieve real time capture and categorisation will the aspiration to reduce errors and improve the quality of digital business records be fully achieved. Quarterly reporting is a milestone rather than the destination. The report reiterates this point, opening with the words ‘at the core of an effective and modern tax system is real time information’.
Here the document enters territory that I explored in my last piece for this journal (‘Making tax digital: taking stock’, Tax Journal, 22 May 2020), looking at lessons from the Covid-19 pandemic. This has driven a significant shift to digital by businesses and agents in terms of the way we work and a significant shift in transactional data and payments to online channels and to the cloud. Cloud-based software opens up new opportunities for delivering proactive services. The experience of recent months should trigger discussions about the potential for further expanding the use of digital technology in businesses of all sizes.
The report notes that the availability of more up to date information would have helped government to deliver a different response to Covid-19: ‘real time data would have provided government with a more accurate picture of the trading and profit levels of the self-employed enabling support to have been better targeted ... quarterly reports ... would have provided almost a further full year’s data after the cut-off date of 5 April 2019.’ Furthermore, ‘it would have enabled government to provide support to many more self-employed individuals who had recently set up in business without further exposing the scheme to fraud and criminal attack’. The report goes on to say that the self-employment income support scheme could have been delivered more quickly without the need for eight weeks’ intensive work extracting, cleansing and reconfiguring the relevant data. It is hard to believe that Covid-19 is a one-off crisis, so it will be vital to build into MTD – and systems generally – flexibility and the ability to react quickly for all (HMRC, agents and businesses).
The report briefly mentions the different approaches to digitalisation taken by tax authorities around the world. The ICAEW recently updated its own report on this topic, Digitalisation of tax: international perspectives, which looks at lessons learned by 12 overseas tax authorities, including ideas not currently within the scope of MTD such as e-invoicing. In 2018, I spent an afternoon with the team responsible for data analytics and digital compliance at the Australia Tax Office in Canberra. What I saw there reinforced my view that tax authorities and professional bodies should constantly be looking at the international experience of digital technology in tax compliance (and indeed generally).
The ICAEW report also highlights another area that is mentioned by the government’s report and that is pre-population. Pre-population holds considerable potential for modernising the taxpayer’s experience of the tax system, and it is hard to see how George Osborne’s 2015 vision of the death of the tax return can be realised unless and until it is embraced wholeheartedly. The report acknowledges that smarter use should be made of data (including pre-population of tax returns with data from third parties), reducing the need for taxpayers and agents to submit information that HMRC either already holds or could verify itself. The potential to bring together information held by different government departments and third parties for individual citizens should, in my view, also be explored. The OTS too sees the potential to go further and repeated its views on the benefit of expanding the role of the personal digital tax account in its evaluation and stocktake published on 20 July.
HMRC was a very early adopter of technology and, as a result, has numerous legacy systems, which complicate the modernisation and integration of the overall system. It has continued to develop increasingly effective and reliable systems over recent years. The coronavirus job retention scheme (CJRS) was an object lesson in the rapid design and delivery of an effective and robust system, the need for which no-one could have reasonably foreseen six months ago.
I would also urge the need to take on board the lessons learned from previous digitalisation projects. One recurring lesson is that HMRC’s headcount should only be cut once the new systems have been bedded in and been proved to deliver the intended benefits; too often in the past resource has been cut or reallocated in anticipation. Also, the needs of agents should be designed into digital systems ab initio, so that agents can better serve their clients and reduce avoidable interactions with HMRC, taking pressure off HMRC helplines and contact centres.
Everyone benefits from more efficient compliance, but the primary driver of software design should be the needs of business: tax information should emerge as a (timely and reliable) by-product.
While its main emphasis is on technology as a facilitator of better administration and compliance, the report also notes that the UK’s tax administration framework consists of a patchwork of rules and obligations, parts of which are over 50 years old. The Taxes Management Act 1970 is clearly in line for reform. The aspiration is to create ‘a simpler, more transparent framework that helps build greater trust and provides greater certainty for taxpayers’. The government recognises that any changes will have a very wide impact, and reform will therefore need to be careful, open and undertaken collaboratively with users including taxpayers, intermediaries, agents and the judiciary. I would argue that this element of the strategy should also have a degree of independence from HMRC, so that all stakeholders see that the new regime is being designed in a way that balances the powers HMRC needs with the safeguards for citizens to ensure that those powers are used (in the report’s words) fairly, carefully and consistently. When re-casting the legislation, there is a case for drawing on the technical expertise and practical experience of stakeholders: the direct recovery of debt provisions were far more proportionate and balanced after consultation, and HMRC’s figures show that they still achieved their intended aim.
The work will build on the evaluation of HMRC’s powers introduced since 2012 against the powers and safeguards principles. In the words of Financial Secretary to the Treasury Jesse Norman MP, HMRC needs to ‘maintain the trust and consent both of taxpayers and the wider public’. He is right: without that trust and consent the UK tax system could not function as effectively as it does.
The report also touches briefly on the role of third parties in tax administration, including agents and software providers and the need to ensure high standards.
The vision is broad and bold, rooted in harnessing digital technology. I believe that it is achievable with the collaborative, careful, incremental approach that the government proposes.
The views expressed here are the author’s own.
The government’s report Building a trusted, modern tax system, published on 21 July, sets out a broad and bold set of ambitions for modernising tax administration over the next decade to create ‘a tax system fit for the challenges and opportunities of the 21st century’. Unsurprisingly, ‘making tax digital’ (MTD) is very much at the heart of it, but it is now as part of a wider digital vision, influenced in part by the experience of Covid-19.
The document sets out three pillars to the strategy:
The aim is to deliver the strategy incrementally and consultatively by involving taxpayers, agents, software providers, representative bodies and the Office of Tax Simplification (OTS) in its development. This approach will, the government hopes, recognise public concerns for the need for proper constraints and safeguards over HMRC powers. The tax system should, the government believes, make it ‘easy for people to pay any tax due and for the vast majority of people the calculation and payment of tax should be effortless’. Few would disagree with that goal; equally, few would underestimate the challenges involved in achieving it.
The report sets out the next steps for MTD.
Most VAT registered businesses with turnover above the VAT threshold were mandated to use MTD for VAT from 1 April 2019. By March 2020, more than 1.4m businesses had joined MTD for VAT and more than 4m VAT returns had been filed using MTD-compatible software. From 1 April 2022, all remaining VAT registered businesses will be required to adopt MTD for VAT. While there will again be concerns about the additional compliance burden for the smallest businesses, the logic behind the decision is clear: the system will have been live for three years and the software market will have matured accordingly. HMRC also points out that 30% of the businesses within this group have already adopted MTD for VAT voluntarily.
From April 2023, businesses and landlords liable to income tax with annual business income over £10,000 will have to keep digital records and report quarterly to HMRC through MTD. These two groups were within the original scope of MTD, but taken out of the first phase because of significant concerns over additional cost burdens. The limit of £10,000 will undoubtedly revive those concerns, particularly insofar as they fall on the very smallest businesses.
In the spirit of consultation that the strategy aspires to, this issue should prompt reflection by HMRC and ministers on the cost/benefit for micro businesses as well as prompting the agent community and software providers to reflect on how best to help as many as possible to adopt digital technology where there is genuine benefit from doing so. There is a mutual interest in simplifying tax compliance, reducing administrative burdens and improving productivity.
HMRC acknowledges that bridging software has provided an initial, cost-effective option to link spreadsheets and legacy software to MTD-compliant software, but anticipates that more businesses will change to using only MTD-compliant software as they become more digitally engaged. Since the announcement of MTD in 2015, the use of direct links between software and business bank accounts has become far more common and the functionality and, more importantly, reliability of apps designed to capture and categorise payment and purchase information has continued to improve. Agents and software developers invested massively in informing, training and supporting businesses affected by MTD for VAT through the digital changeover and that practical experience will help in delivering the next phase. We also need to see the realisation of the aspirations HMRC had back in 2015 for software and apps to use prompts and nudges to reduce errors at the point of data capture: that is no longer a ‘nice to have’ feature, it is a ‘must have’ feature.
MTD for business is, however, a more complex proposition. We will need to return, sooner rather than later, to the issues set out in the relevant consultation documents from the summer of 2016 to ensure that the computational, technical and practical issues they explored are resolved long before go-live in 2023. Those conversations need to start now.
Two other digitalisation threads run through the document: real time information and adaptability.
I have never been under any illusion about the ultimate aim of MTD. It is and always has been about progress towards real time reporting. The original announcement on MTD contained the words: ‘The government is changing the tax system so that it operates much more closely to “real time” … By reporting information closer to real time, businesses will find it easier to understand how much tax they owe’. It is arguable that only when apps and software are deployed to achieve real time capture and categorisation will the aspiration to reduce errors and improve the quality of digital business records be fully achieved. Quarterly reporting is a milestone rather than the destination. The report reiterates this point, opening with the words ‘at the core of an effective and modern tax system is real time information’.
Here the document enters territory that I explored in my last piece for this journal (‘Making tax digital: taking stock’, Tax Journal, 22 May 2020), looking at lessons from the Covid-19 pandemic. This has driven a significant shift to digital by businesses and agents in terms of the way we work and a significant shift in transactional data and payments to online channels and to the cloud. Cloud-based software opens up new opportunities for delivering proactive services. The experience of recent months should trigger discussions about the potential for further expanding the use of digital technology in businesses of all sizes.
The report notes that the availability of more up to date information would have helped government to deliver a different response to Covid-19: ‘real time data would have provided government with a more accurate picture of the trading and profit levels of the self-employed enabling support to have been better targeted ... quarterly reports ... would have provided almost a further full year’s data after the cut-off date of 5 April 2019.’ Furthermore, ‘it would have enabled government to provide support to many more self-employed individuals who had recently set up in business without further exposing the scheme to fraud and criminal attack’. The report goes on to say that the self-employment income support scheme could have been delivered more quickly without the need for eight weeks’ intensive work extracting, cleansing and reconfiguring the relevant data. It is hard to believe that Covid-19 is a one-off crisis, so it will be vital to build into MTD – and systems generally – flexibility and the ability to react quickly for all (HMRC, agents and businesses).
The report briefly mentions the different approaches to digitalisation taken by tax authorities around the world. The ICAEW recently updated its own report on this topic, Digitalisation of tax: international perspectives, which looks at lessons learned by 12 overseas tax authorities, including ideas not currently within the scope of MTD such as e-invoicing. In 2018, I spent an afternoon with the team responsible for data analytics and digital compliance at the Australia Tax Office in Canberra. What I saw there reinforced my view that tax authorities and professional bodies should constantly be looking at the international experience of digital technology in tax compliance (and indeed generally).
The ICAEW report also highlights another area that is mentioned by the government’s report and that is pre-population. Pre-population holds considerable potential for modernising the taxpayer’s experience of the tax system, and it is hard to see how George Osborne’s 2015 vision of the death of the tax return can be realised unless and until it is embraced wholeheartedly. The report acknowledges that smarter use should be made of data (including pre-population of tax returns with data from third parties), reducing the need for taxpayers and agents to submit information that HMRC either already holds or could verify itself. The potential to bring together information held by different government departments and third parties for individual citizens should, in my view, also be explored. The OTS too sees the potential to go further and repeated its views on the benefit of expanding the role of the personal digital tax account in its evaluation and stocktake published on 20 July.
HMRC was a very early adopter of technology and, as a result, has numerous legacy systems, which complicate the modernisation and integration of the overall system. It has continued to develop increasingly effective and reliable systems over recent years. The coronavirus job retention scheme (CJRS) was an object lesson in the rapid design and delivery of an effective and robust system, the need for which no-one could have reasonably foreseen six months ago.
I would also urge the need to take on board the lessons learned from previous digitalisation projects. One recurring lesson is that HMRC’s headcount should only be cut once the new systems have been bedded in and been proved to deliver the intended benefits; too often in the past resource has been cut or reallocated in anticipation. Also, the needs of agents should be designed into digital systems ab initio, so that agents can better serve their clients and reduce avoidable interactions with HMRC, taking pressure off HMRC helplines and contact centres.
Everyone benefits from more efficient compliance, but the primary driver of software design should be the needs of business: tax information should emerge as a (timely and reliable) by-product.
While its main emphasis is on technology as a facilitator of better administration and compliance, the report also notes that the UK’s tax administration framework consists of a patchwork of rules and obligations, parts of which are over 50 years old. The Taxes Management Act 1970 is clearly in line for reform. The aspiration is to create ‘a simpler, more transparent framework that helps build greater trust and provides greater certainty for taxpayers’. The government recognises that any changes will have a very wide impact, and reform will therefore need to be careful, open and undertaken collaboratively with users including taxpayers, intermediaries, agents and the judiciary. I would argue that this element of the strategy should also have a degree of independence from HMRC, so that all stakeholders see that the new regime is being designed in a way that balances the powers HMRC needs with the safeguards for citizens to ensure that those powers are used (in the report’s words) fairly, carefully and consistently. When re-casting the legislation, there is a case for drawing on the technical expertise and practical experience of stakeholders: the direct recovery of debt provisions were far more proportionate and balanced after consultation, and HMRC’s figures show that they still achieved their intended aim.
The work will build on the evaluation of HMRC’s powers introduced since 2012 against the powers and safeguards principles. In the words of Financial Secretary to the Treasury Jesse Norman MP, HMRC needs to ‘maintain the trust and consent both of taxpayers and the wider public’. He is right: without that trust and consent the UK tax system could not function as effectively as it does.
The report also touches briefly on the role of third parties in tax administration, including agents and software providers and the need to ensure high standards.
The vision is broad and bold, rooted in harnessing digital technology. I believe that it is achievable with the collaborative, careful, incremental approach that the government proposes.
The views expressed here are the author’s own.
