tiintax

This consultation paper is less about the MTD proposals themselves and more about simplifying the underlying tax rules for small businesses.

Four themes emerge:

• extending the cash basis
• doing away with basis period mandation
• easing reporting requirements
• abolishing the capital/revenue divide

These are all good things, I think.*

The cash basis, well, I think the smallest unincorporated businesses pretty much use the cash basis without knowing there’s any other basis until they fall into the hands of accountants.

For accounting periods, the proposals seem sensible enough:

define an accounting period as:  beginning when the company starts to carry on business, or immediately after the end of the previous accounting period; and  ending on the earliest of: 12 months from the beginning of the accounting period; an accounting date of the company; or on the date the company ceases to trade.

The current rules are complicated and – although they can be manipulated to put your profits into a tax year later than they’re made – are definitely something I’d abolish, particularly the overlap and gap rules for the first and last periods of trading. However there is a lot of  hedging in the condoc about whether it’s affordable.  Personally I think if the government thinks it will make buckets out of moving to an on demand system they should just take the  hit of the one year adjustment for overlap profits etc.  Although I’d like to see figures!

Reporting requirements: this again is about moving from GAAP (“generally accepted accounting principles”) to cash basis but specifically the adjustments you’d make at year end and which you presumably won’t make under MTD.  It includes things like:

4.13 … adjustments to the closing stock figure;  adjustments for profits where contracts span the period end;  adjustments in respect of provisions for bad debts; and  adjustments for prepayments and accruals.

although to me it illustrates just how debased the national conversation about tax has become that the document then wanders into rules to prevent people mucking about with contracts that last for years (so they would never have to recognize the income)

Capital and revenue

It seems to me the people who wrote the MTD documents may not actually do a lot of hands-on tax work themselves.  Why else is there no recognition that many of the people affected by MTD in future will at present be the people completing three line accounts, and the reporting requirements of MTD are absurdly onerous in comparison?  Similarly there is no value in introducing rules to redefine capital and revenue expenditure when most of the smallest businesses never have to worry about it because their capital expenditure is covered by the Annual Investment Allowance.  A simpler method of dealing with capital/revenue for tax purposes would be to say the AIA is set at (say) half a million, and will go up with inflation.

Finally, I have serious doubts about the costings in the impact assessment: there’s no quantified benefit to companies and what appears to be a big hit for HMRC:

the extension of cash basis will depend on the threshold chosen. Some options are given in the table in 2.17, for which the estimated Exchequer costs range from £40m to £145m. The basis period proposal is estimated to cost about £50m per year.

£50 million on basis period changes, maybe.  But £50 million *a year*?

I would urge you to consider replying to the consultation if you have concerns about any of this: the email address is businessincometaxsimplification.consultation@hmrc.gsi.gov.uk and the consultation closes at quarter to midnight on 7 November – move quickly!

(I have included the full consultation question list below the cut in case they’re of interest, but this time I haven’t answered the detail and the paragraphs above represent my answer.)

*Although there’s a big question mark for me in how they would deal with authors’ averaging (I am working on a novel and on a non-fiction book.  When they both sell for millions of pounds ha ha ha I would quite like to be able to “average” the profits over the, currently quite lean, years when I’m actually working on them, rather than pay supertax on the amounts all in one go.  I wonder, also, what other quirks and technicalities of the current rules will need to be worked through for MTD, and just who is going to do that?)

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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

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This is the first of seven posts I plan to make over the next couple of weeks on the subject of “Making Tax Digital”.  There are detailed proposals out for consultation till the beginning of November and which you can find from this landing page on gov.uk.  There is also an introductory video and an invitation to sign up for a “webinar”, a seminar conducted over the internet with some clever software.  You might also have seen my preliminary thoughts in this blog entry.

Why am I adding to all this verbiage with blog entries?  Because I don’t think anyone with an actual business to run will have time to read all this stuff, and I think it’s important.  So I’m going to try and summarise what the issues are, and how businesses can best respond.

My first thought is this: NO MANDATION WITHOUT REPRESENTATION

Mandation?  HMRC wants to “mandate” the proposals, make them compulsory, in other words you are going to have to start keeping digital records under pain of penalties.  But HMRC is using this technocratic, stick-seven-consultation-documents-on-a-website-and-expect-that-means-people-know-about-it, method of letting people know.  Surely small businesses are too busy running a business to read this stuff and are unlikely to know it’s there to be looked at in the first place.  The small business community is represented in HMRC circles by a Digital Advisory Group and by ABAB, the Administrative Burdens Advisory Board, and – no disrespect to the volunteers on those groups who do a lot of unpaid work on behalf of small businesses everywhere – have most small business owners even heard of their existence?

Watch this space!