Making Tax Digital
The LITRG has responded to six consultations focusing on specific groups or specific elements of HMRC’s Making Tax Digital (MTD) reforms. We have responded to the following consultations: Bringing business tax into the digital age; Simplifying tax for unincorporated businesses; Simplified cash basis for unincorporated property businesses; Voluntary pay as you go; Tax administration; and Transforming the tax system through the better use of information. All our submissions can be accessed below.
Bringing business tax into the digital age
While the LITRG is generally supportive of the digital strategy being pursued by HMRC we are concerned that the MTD Business programme is over-reliant on software that HMRC have no control over. We believe that the assumption that the free software made available to the public will deliver the full range of purported benefits from MTD is wrong; it must not be the case that those who are reliant on free software have a much worse experience when it comes to complying with their MTD obligations when compared to their counterparts who are using paid-for versions of commercial software. In our view HMRC should develop free software that is ‘fit for purpose’ and should not rely on the commercial market to do this.
HMRC must also provide a comprehensive communications programme to make taxpayers aware of MTD as well as find a way to reassure taxpayers that both HMRC’s systems and the software they are obliged to use are safe and secure to allay one of the major fears prevalent in the digital environment.
The proposed level of turnover of £10,000 or less to qualify for complete exemption from MTD is far too low. We recommend that businesses with a turnover of up to an amount equivalent to the current VAT registration limit, as determined by the figures on the previous year’s tax return, be exempt from complying with MTD.
In addition to the general exemption from MTD we propose a number of specific exemptions for various groups, including those with irregular income, those with good records but not in the prescribed form, those renting out property to help pay for residential care, some carers, and universal credit claimants.
Our submission can be found here: Bringing business tax into the digital age – LITRG response
Simplifying tax for unincorporated businesses
LITRG has very serious concerns about the significant number of changes being proposed within the ‘simplifying tax for unincorporated businesses’ consultation. Small businesses will be expected to know a huge amount of detail to understand how these changes to the tax and accounting systems could affect their tax position. This is totally unrealistic and worrying, especially given the tight time scales for implementation.
We strongly recommend that the balance of flexibility versus complexity be reconsidered. HMRC are proposing to design a system which is flexible to help small businesses with their new reporting requirements, but which introduces significant complexity to achieve this. This will result in businesses having to make a number of key decisions which will affect their tax affairs, such as what accounting basis and what accounting periods to use. We are concerned that small unrepresented businesses will not have the appropriate understanding to make the best decisions and this could result in them being at an unfair tax disadvantage when compared to businesses who are well able to afford professional advice. The complexity could result in taxpayers doing nothing.
We strongly recommend that HMRC work alongside the Department for Work and Pensions (DWP) to reduce the administrative time and costs for universal credit claimants. The system as currently proposed could result in self-employed universal credit claimants having to prepare different monthly reports for both DWP and HMRC; this must be resolved by fully aligning the cash accounting rules and reporting systems for tax and universal credit. Until this is done, and until systems are aligned such that a single report for universal credit and MTD is sufficient, we believe universal credit claimants should be exempt from complying with MTD altogether.
Our submission can be found here: Simplifying tax for unincorporated businesses – LITRG response
Simplified cash basis for unincorporated property businesses
In this consultation our response concentrates only on the potential effects on low-income taxpayers or other vulnerable groups whom we seek to represent, such as retired people on low incomes who rent out property instead of having a pension, or who may have to rent out their home to pay for residential care, or an employee having to relocate because of their job.
The LITRG understands that the option to use a simplified accounting basis may be helpful with the introduction of digital tax reporting, provided it is not too complex to understand, detailed guidance is available to assist unrepresented landlords and it will not result in an overall tax disadvantage. HMRC want to provide unincorporated property businesses with choices which enable flexibility when completing their digital tax reporting. While we welcome this choice, we are concerned that many unrepresented landlords will simply not understand the choice they will have between accounting under the cash basis or the accruals basis. We recommend that software nudges and prompts are used to flag up the different tax treatments – this proactive support might assist taxpayers in determining which basis is most appropriate for them to use and prevent errors being made.
Our submission can be found here: Simplified cash basis for unincorporated property businesses – LITRG response
Voluntary pay as you go (VPAYG)
The LITRG supports HMRC’s objective to make it easier for people to budget for their tax payments and, where they are able, to allow them to do this through their digital tax accounts. But we are hugely concerned at the proposal to introduce VPAYG before the substantial changes being brought about by the introduction of MTD have had a chance to settle down and operate for some reasonable time; we think a far better and preferred approach would be to continue with the existing voluntary payment services such as the Budget Payment Plan for the time being.
We believe that control, choice, transparency, support and equal access to all are the overriding factors that must be taken into account when considering any voluntary payment service.
If HMRC are committed to their statement that people will have control and choice over their VPAYG payments, it is crucial that people must be able to make these when and how they choose and therefore have the ultimate choice over where payments should be allocated. Although HMRC may have initial responsibility for the allocation of voluntary payments, people should be able to override this or have a right of appeal if they feel that HMRC’s allocation has not given them the most favourable result.
Our submission can be found here: Voluntary pay as you go – LITRG response
The LITRG agrees with a number of the proposals in relation to checking a taxpayer’s tax position, such as replicating the current self assessment enquiry powers in respect of the End of Year (EoY) declaration, and replicating the approach for determinations, corrections and information powers. It is crucially important though that current safeguards are, as a minimum, fully maintained. Additional safeguards will almost certainly be required in relation to data security and privacy.
HMRC should take the opportunity presented by MTD to reinforce the dividing lines between the enquiry and discovery processes, which have become blurred lately. In addition, HMRC need to take very considerable care and act sensitively in how they approach apparent discrepancies, whether between taxpayer and third party information provided to HMRC, or between figures provided by the taxpayer in their quarterly updates and their EoY declaration.
We also strongly recommend that the same three-year period of freedom from penalties be applied to those small and micro-businesses who come within the scope of MTD as was applied at the start of the real time information (RTI) regime. We agree with the five design principles for penalties, but in terms of the design of the specific points system, we think that penalty points should expire after 24 months. In addition, far more should be done to cater for those whose failure to comply is due to vulnerability.
Our comments on late payment penalty proposals include a recommendation that HMRC do more for vulnerable taxpayers who find themselves in debt. Adding to their burden with ever-increasing penalties does little to aid recovery of tax. Instead, efforts should be made to contact taxpayers before penalties mount up and seek to agree time to pay arrangements, with provision for penalties to be suspended provided that the payment schedule is adhered to.
Our submission can be found here: Tax administration – LITRG response
Transforming the tax system through the better use of information
The LITRG welcomes HMRC’s proposals to use both information they already hold, and existing or additional third party information so that taxpayers do not have to provide this themselves. This is a sensible step towards removing administrative burdens which, if implemented carefully, should save both time and effort. However, people must also have the right to challenge the validity of pre-populated information and HMRC should respond to any challenge in a helpful and supportive way. It will be totally unacceptable to suggest that individuals will have to challenge the third party as to the validity of the information provided.
It is though, and continues to be, a major concern that some of the information currently used by HMRC, for example to populate forms P800, is incorrect. Resolving these issues is crucial before the digital tax accounts go live.
Awareness of digital tax accounts is still very low. Even though many people may have already accessed or will access their digital tax account on at least one occasion there is no guarantee they will check it regularly, or even at all, even if they are sent email or text alerts to remind them to do so. We believe that HMRC should deliver a comprehensive and sustained education programme to raise awareness of the benefits and to encourage and support both the initial and ongoing use of these accounts. It goes without saying that any education programme must not be solely digital; it should be available across a range of channels so that those not familiar with digital tools do have the opportunity to be exposed to it. An education programme delivered solely through digital channels may not only discourage those unfamiliar with digital information but may also totally exclude those not able to access services in this way.
Our submission can be found here: Transforming the tax system through the better use of information – LITRG response