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Making Tax Digital: 2/7 Record keeping

October 28, 2016

1. “There is currently no consistent approach to record keeping taken by businesses.” 

Well, why on earth should there be?  Does a coffee shop need to keep the same kind of records as an engineer?  Does a picture framer need the same kind of records as a garage?  HMRC seems to have developed a desire to sheep-dip all businesses and make them all keep the same records in the same way. (The headline is from 2.1 on page 10 of Making Tax Digital: Bringing Business Tax into the Digital Age)

The devil is in the detail: if you keep your records on an excel spreadsheet, then you really should reply to the consultation, because HMRC thinks that’s not good enough and you may have to make major changes.  All businesses (except those with a turnover smaller than £10k, and possibly the next-smallest, depending on the outcome of the consultation) will have to start keeping their records electronically, on an app or a computer programme, and send a summary of the results to HMRC four times a year.

Why?  Why oh why are they doing this, do I hear you ask?  Read on!

2. “HMRC estimated that the Making Tax Digital changes will help to reduce the tax gap and contribute £945 million to the Exchequer by 2020-21”

(Impact Assessment, page 67, ibid)

HMRC thinks small businesses are stiffing the public out of £6.5 billion a year.  Seriously.  This is also from the impact assessment:

Revenue lost to HMRC due to errors and failing to take reasonable care was estimated at £6.5 billion in 2013/14. The methodology behind this estimate is published in Measuring Tax Gaps 2015. To calculate the revenue benefit, assumptions were applied to break down the £6.5 billion figure into revenue lost from small businesses within the scope of MTD, and due to errors and failing to take reasonable care. These were then projected forward to 2020/21 by assuming it will grow in line with the OBR’s forecast tax liabilities.

and so they are kindly going to invest £1.3bn in “transforming” tax administration to make our lives easier, and they want to make sure they make a profit on their investment:

In particular, the return on the £1.3bn investment in transforming tax administration would not have been realised as those most motivated to adopt the new processes would be the ones least likely to be making mistakes currently

(para 2.6, page 11, ibid)

Seriously, the government thinks that small businesses are making mistakes in their tax returns sufficient to pay back a £1.3bn investment if they make us all go digital?  I mean, seriously???

Look at this report on the Business Records Check programme, particularly the table at the top of page 6 which tells us that 80% of the businesses they visited for an in-year records check were keeping sufficient and accurate records and only 11% were “red” – poor.  In other words, we have been here before, and most businesses actually DO keep adequate records.  Is MTD a backdoor attempt to change the definition of “adequate”?

It would be wonderful if HMRC were to become an advanced digital organisation, if they had free apps that were easy for us to use and free to download, and if they pre-populated our tax returns with the information they already have about us.  Hey, it would be nice if they would answer emails, too!  But this… this looks to me like a lot of stick for the fuzzy end of a very small carrot.

There are no fewer than 44 questions in the consultation itself.  I have listed them, below the cut, along with my responses to some of them.  However since not everyone is a sad, sad, tax policy wonk like me, you may be pleased to know that there’s a quicker way to reply: just email your thoughts to

makingtaxdigital.consultations@hmrc.gsi.gov.uk

The more the merrier!

Question 1: What are the challenges for businesses that currently keep their
records on paper or simple spreadsheets in moving to an integrated software
package for record keeping and what further measures or support would help
businesses to meet these challenges?

Produce the apps and let people try them, without mandation, so that people adopt them if they are useful.


Question 2: What information and guidance would you find helpful in choosing

the appropriate software for your business?

Cost, functions, and whether they are approved for use by HMRC.  And then some consumer reviews.

Question 3: What types of business should a free software product cater for?
What functionality would be necessary in a free software product?

It would be iniquitous (as well as a costly imposition of administrative burden) to require ANY business to buy software specifically for MTD.  In other words, any business ought reasonably to be able to use a free software product.

Question 4: What level of financial support might it be reasonable for the
government to provide towards investing in new IT, software or training, to
whom should such support be aimed, and what is the most appropriate form for

delivering such support?

If only you hadn’t closed all your face-to-face enquiry centres I’d say use those!  You need to offer people a place to go for a face to face discussion if they want.  Or else arrange an awful lot of webinars, google hangouts and Skype chats!

Question 5: What other forms of support would help to make the transition to
Making Tax Digital easier?

No mandation! (or, if you’re absolutely set on it, at least postpone mandation till you’re sure the system actually works)

Question 6: What facilities would make it easier and more secure for businesses
to enrol for Making Tax Digital and use software regularly?

No, I have nothing useful to say on that one – except that I finally had a look at my own digital dashboard the other day.  It took me the best part of a morning to get through security and get onto the record… only to find that, while I could read my PAYE record and my NICs history back to the ’70s, I couldn’t get into my tax records because, apparently, I had logged into self-assessment from a different account somehow…  How can you *know* I’m me, know you have my records, but not actually be able to link them together?  You can see how people don’t trust you to go digital competently.

Question 7: Do you have any comments about the practicalities of keeping
evidence of transactions and trading when using digital tools?

It will have to be an app, so that there’s at least a chance people will have it with them when they’re out and about.

Question 8: Do you agree with the minimum transaction data fields proposed for
trading businesses, including retailers? What other data fields might the record
keeping software usefully include as a minimum?

No specified minimum.  You’re offending against the first principle of better regulation, that you should only regulate where there’s a market failure.  Where is the failure here?  Your own records check pilots found none.

Question 9: Do you have any comments about reflecting the current VAT
requirements in MTD-compatible software?

Question 10: Do you have any comments on the additional data capture
requirements for property income and capital gains?

Question 11: What should the minimum categorisation in the software be?
Would additional sub-categories be useful?

Question 12: Do you have any comments on how businesses should reflect
transactions and expenditure with non-deductible elements in the software?

Question 13: What prompts and nudges would be most useful to businesses?

Question 14: Do you agree that businesses should have the choice as to when
to record accounting adjustments?

Question 16: What do you consider is the most appropriate approach to
reflecting the effect of the personal allowance on an individual’s taxable
business profit?

Question 17: Is this the right treatment of partnerships? Are there any additional
partnership issues that need to be considered? (where “this” is, the nominated partner completes the MTD and the other partners’ MTD records are prepopulated with the results from the nominated partner as they go)

Actually, THAT one would be a good idea, if you can make it work.

Question 18: Is this the right treatment of individuals who receive income from
property, let jointly? (where “this” is using the same pattern for property partnerships)

As above.

Question 19: Is this the right treatment of subcontractors within the
Construction Industry Scheme? Are there any other CIS issues that need to be
considered? (where “this”, similarly, is that the contractor will complete details of the subcontractor payments made, and the subcontractor’s MTD will automatically be prepopulated with that info so they just need to check it)

As above.
Question 20: Do you have views on how detailed the summary data in the
updates should be, and whether the level of summary data should be different
depending on the size of the business?

Many of the affected businesses will only be required to submit three line accounts under the current system.  Why not stick with that?
Question 21: Do you have any comments on the categorisation of summary data
in the updates?
Question 22: Do you have any views on what VAT data the updates should
contain? Do you have any views on the advantages or disadvantages of
including VAT scheme data in the updates? If so, which schemes and which
data should be included in the updates?

Question 23: What flexibility around update cycles would be useful?

Question 24: Do you agree businesses should be allowed one month to submit
their update? Would any problems be caused for VAT registered businesses by
standardising the time limit for updates for all taxes?

Question 25: What method of deriving a business’s start date for providing
updates under Making Tax Digital would be most straightforward for
businesses? Personally my brain froze at the sight of this bit of the consultation anyway, so I can’ t imagine small business owners will care/want to engage.  So why not make it *voluntary* for the first few years? Then if it’s so good, by the time it’s mandatory everyone will be doing it anyway?

Question 26: Do you wish to make any comments about the operation of ‘inyear’ amendments to updates for the purposes of profits taxes or VAT?

Question 27: Do you agree that the process of finalising the regular updates
should be separate to the regular updates?   Finalizing the regular updates = making a tax return.  Keep the same rules for that.  Making regular updates?  Make it voluntary, and BETTER, and the tax return part can just wither away…

Question 28: Do you agree that businesses should have nine months to
complete any End of Year activity? No, they should have *at least* nine months!

Question 29: What criteria should be applied in determining whether to exempt
a particular business or business type from the requirements of MTD? Wrong way round: the case FOR MTD hasn’t been made yet.

.
Question 30: Should charities be exempt from the requirements to maintain
digital records and to update HMRC at least quarterly?
Question 31: Should trading subsidiaries of charities be exempt from the
requirement to maintain digital records and to update HMRC at least quarterly?  No: MTD should be a better way.  If it isn’t, it shouldn’t apply to anyone.  If it is, then it should apply across the board.

Question 32: Should CASCs be exempt from the requirement to maintain digital
records and to update HMRC at least quarterly?

Question 33: Should businesses within the insolvency process be included
within the scope of the requirement to maintain digital records and to update
HMRC at least quarterly; and are any special arrangements required for this
group?

Question 34: Which businesses should be included within a consistent
definition of persons ‘unable to engage digitally’? (“persons for whom online filing is not reasonably practicable for reasons of disability, age, remoteness of location, or any other reason.”)

This, I don’t trust you on an inch.  Your example is of someone with multiple difficulties.  You aren’t the judge and jury on whether someone has a difficulty using digital systems.  The system should not be mandatory: it should be better designed so that it becomes attractive, and you should design it with people’s dislike of/inability with digital technology is taken into account.

Question 35: Do you agree that £10,000 annual income is an appropriate
threshold for exempting businesses from Making Tax Digital? Do you have any
other comments on how the exemption should operate?

I would have used the existing three line account and VAT registration limits – don’t make anyone use MTD if they would only have to put in three line accounts, and don’t make it mandatory until they hit the VAT level.

Question 36: Should the smallest unincorporated businesses that are not
exempt have an extra year to prepare for Making Tax Digital? How should
eligibility for this group be defined? NO  MANDATION WIHTOUT REPRESENTATION!!!!

Question 37: Do you agree that the principles set out in Fig. 7.3 are the right
ones to use in determining eligibility for an exemption? Are there any additional
principles which should apply?

Question 38: Which additional groups (if any) should be exempt from the
requirements to maintain digital records and to update HMRC at least quarterly?

Question 39: Do you believe that there is the opportunity for MTD to create
savings for your business? What percentage time reductions would you see
from the following?
a) Targeted software tax guidance (prompts and nudges to get
information right first time).
b) Gathering, collating and inputting data.
c) Reporting obligations through providing regular updates.
d) Any other potential savings not covered above.
Question 40: Do you think there are different business sectors or sizes likely to
benefit more from MTD? If so, what would these be?

Question 41: What costs might you expect your business to incur in moving to
the new regime? Please provide details of the costs for:
a) Time spent in your business familiarising with the new processes
and conversion to these new processes.
b) Software expenditure costs (new or upgrading software).
c) Hardware expenditure costs (purchase of a computer, tablet device,
etc).
d) Any other costs which are not covered above.

Question 42: Do you expect that your business will incur additional on-going
costs as a result of these changes? Please provide the details of the additional
costs or time for:
a) Additional support from your accountant or tax agent.
b) Additional time spent gathering, collating and inputting data.
c) Additional time reporting obligations through providing regular
updates and any end of year activity.
d) Any other costs or time spent not covered above.
Question 43: Will particular businesses (e.g. partnerships) experience more
difficulty in adapting to the changes? If so please provide details, including any
additional one-off costs or ongoing costs.

Question 44: If you are an agent, please provide details of how these changes
will impact on your own business, including details of any one-off and ongoing
costs or savings. How do you perceive that these changes might affect your
clients?

One comment

  1. Excellent stuff Wendy!
    Are you submitted those answers to the con doc as you have posted above?
    Incidentally Anwer to Q35 – the three-line account upper turnover limit is now set at the VAT threshold – was set at thatlevel in 2010/11. I am very concerned at the 3-line account facility disappearing ( see my article on Accountingweb). Sealso Q 8 above
    I disagree with your answer to Q 17 above – pre-population would cause signnificant problems for any partnership bigger than 2 closely related people.



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