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MTD: Rationale is to raise more tax

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24th Feb 2017
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Reducing the tax gap is the primary reason for the Making Tax Digital (MTD) programme, as HMRC believes it will reduce errors and mistakes by small businesses.  

Witnesses

On 22 February the House of Lords Economic Affairs Finance Bill sub-committee questioned HMRC representatives Theresa Middleton and Jim Harra on aspects of the MTD programme. Over a session lasting more than two hours, the Lords attempted to understand the true purpose of MTD, and how it would benefit businesses. 

Why?

Harra explained that the prime reason for introducing MTD was to help close the tax gap, which is the difference between the tax HMRC expects to be paid and the tax which is actually paid. The net tax gap due to small business errors and carelessness is estimated to be £8.2bn.

Harra firmly believes that timely and digital recording of transactions will reduce errors made by omissions of income and expenses. Also, the digital transmission of that data will avoid copying and transposition errors. By eliminating those errors the MTD programme will increase the tax paid by small businesses by £870m per year.   

Thresholds

The MTD exemption threshold of £10,000 was mentioned several times in the hearing by Harra as if it was a fixed figure. However, the second turnover threshold, below which businesses will be able to defer complying with quarterly reporting by one year, was said to be subject to ministerial approval. We expect the MTD thresholds to be confirmed before the publication of the 2017 Finance Bill on 20 March.

Purpose of quarterly reporting

Middleton confirmed that the data transmitted in the quarterly updates to HMRC would only be summaries of income and expenses, and not accounts. This data would not be checked for accuracy by HMRC. The only sanctions applicable to quarterly updates would be penalties for late or non-submission. However, the first year of MTD would be a soft landing when no penalties would be applied. 

When asked what was the point of the quarterly updates Harra said it was only the combination of keeping digital accounting records and making regular returns to HMRC which would close the tax gap. He said this reduction of the tax gap had been proven with the introduction of RTI, which required more frequent returns from employers.

Middleton said that the quarterly updates would help businesses plan cash flow, as the reflection back from HMRC would provide the business with an idea of the amount of tax which would be payable. However, she admitted that this would not always provide a reasonable figure of tax due on the income, particularly where there are seasonal fluctuations in income. 

Pilot

Several of the Lords challenged the adequacy of testing for MTD, and why a robust control test had not been undertaken before the decision to roll out MTD had been made. Middleton said a year-long pilot of MTD is due to start in April 2017, which would include a statistically representative sample of businesses, building up to hundreds of thousands of businesses by the end of the trial. They are trying to over-sample from groups who currently only keep their accounting records on paper.

Middleton repeatedly asserted that this pilot would thoroughly test all aspects of MTD, including HMRC’s customer support. Although compulsory quarterly reporting will commence for accounting periods starting on and after 6 April 2018, the end of year MTD reports submitted by businesses in the pilot programme will be tested before other taxpayers make thier own end of year reports under MTD . 

Will software be ready?

On 6 February the Lords heard evidence from software suppliers, who expressed concerns that they didn’t have the necessary specifications from HMRC in order to produce MTD compliant software, and that information flows to developers needed to speed up. In that session, Kevin Dady, chief executive of IRIS, said its bookkeeping product, required to comply with part of the MTD legislation, would be ready in April 2017, but the MTD software for accountants would not be ready until October or November 2017.

Middleton said there are six software suppliers who will be ready to take part in the MTD pilot from April 2017, and more would join in later months. The latest date that suppliers have said their software would be ready is October 2017.

Timing

When asked why HMRC was not prepared to give businesses more time to prepare for MTD, Harra said he wanted to know what businesses would do with that extra time.

 

If you can answer Harra’s question, please post your comments below, and we will forward your comments on.

Replies (18)

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blue sheep
By NH
24th Feb 2017 17:22

As many will know, I am (probably the only one) very much pro MTD, however even I can see that the insistence on MTD being the solution to the "tax gap" is clearly ludicrous.
In addition to that, the assumption that quarterly figures will give an accurate idea of the annual tax bill is equally flawed.
The comparison with RTI is like comparing apples and pears.
I also agree with Baroness Kingsmill who expressed dissatisfaction that HMRC was using private software suppliers to facilitate the project.

I still believe that making businesses do more regular book-keeping digitally is a step forward for all concerned, but Mr Harra is doing the cause no good by clinging to arguments that clearly do not hold water.

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Replying to NH:
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By Vaughan Blake1
27th Feb 2017 11:47

NH - I think most on this forum are pro MTD, but not pro quarterly filing or introducing it so quickly.

What of the pre-populated returns with stuff from HMRC and banks etc. This bit has gone very quiet and this is where error reduction could be achieved.

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By SteveHa
24th Feb 2017 19:09

I have to wonder what planet Middleton and Harra are living on. With yet another admission that the quarterly reporting is pointless and will serve no useful purpose at all, they fail to recognise that errors work both ways.

The only possible "justification" for MTD is the opportunity to charge more penalties.

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By GW
24th Feb 2017 23:01

Did anyone else notice, when interviewed as part of the Moneybox programme on Radio 4, Jim Harra said MTD was being introduced to benefit businesses, while he told the sub-committee MTD was being introduced to introduce the tax gap and it would take years for the benefits to business to cover the costs involved.

The more appropriate comparison with RTI is that after years of development and subsequent operation it still doesn't work properly, so lets rush through MTD and make it compulsory before the pilot has finished.
Interestingly, we still don't have a definition of what constitutes digital record keeping, has this been given to the software suppliers or are they also guessing?

If computerised bookkeeping is so good why do so many choose not to use it?

"To Err is Human; To Really Foul Things Up Requires a Computer", so lets make computers mandatory

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By Trethi Teg
25th Feb 2017 10:06

I am sure that I have read comments by HMRC or one of their political masters that the logical conclusion of MTD is to speed up tax payments i.e. quarterly tax payments "on account". This would obviously impact Ltd Companies most. Can anyone recall seeing that?

As usual the reasoning is that tax payers "like to know that they are up to date with their taxes etc".

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Replying to Trethi Teg:
By itp3asso
27th Feb 2017 13:33

Do they ?? Really??

I think you ll find certain people of the timbre of Messrs Capone, Netti and Malone ( as in Bugsy) wouldn t know an uptodate tax situation if it came at them on a Harley Davidson at 200 mph......

Mr Capone himself was said to be stupefied on arraignment that something calked " tax INVASION" actually existed on the statute book as a prosecutable offence.

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By RobertD
25th Feb 2017 11:39

The major problem as highlighted by Harra is that he believes that the concerns about RTI didn't materialise and therefore those about MTD will not either. He thinks that we are all making a fuss. What he doesn't understand is that RTI was just an add on; a few clicks to submit after the initial work that was already performed before that rule. MTD is a seismic change by Harra doesn't register this. His arrogance in asking what taxpayers would do with an extra year is unbelievable.

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Jennifer Adams
By Jennifer Adams
27th Feb 2017 09:20

I've said it before and I'll say it again... 4 quarterly submissions...no one is going to check their accuracy... so long as submitted on time. Permitted to use spreadsheets...most taxpayers have about the same turnover so why not submit estimates based on last years figures? No... I still dont get it.
Tony M of ICPA should be listened to - he believes that there will be a reduction in tax take.
I am firmly of the opinion that this is the fore runner to quarterly installment payments and to reduce the numbers of staff.

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Replying to Jennifer Adams:
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By Vaughan Blake1
27th Feb 2017 12:05

Quarterly payments make perfect sense. But all that would take is a red pen and two extra lines of legislation.
Second payment on account = 30 April
Third payment on account = 31 July
Fourth payment on account = 31 October
And the job's a good 'un

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By Les Smith
27th Feb 2017 11:32

Twenty years ago a significant number of clients assumed Self-assessment meant they no longer needed an accountant. As the accountants of record we saw the assessments generated by those clients submissions. On average HMRC was getting 50% of the tax & NI that accurate submissions would have generated. Good luck Mr Harra in closing the tax gap. If it is £8.2 billion at the moment it will be £12 billion under MTD

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By Homeworker
27th Feb 2017 11:33

What will we do with the extra time? Prepare our clients, most of whom knew nothing at all about this until I started telling them and are scared to tackle it themselves, so assume we will do it for them. Prepare ourselves, so that we know what we are doing, which we currently do not. I cannot even join in the trial this year to find out, as we are a partnership and are therefore excluded!

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By Vaughan Blake1
27th Feb 2017 11:45

Seems to me that the more we complain the smugger and more patronising HMRC will be when they announce a twelve month deferment, "in view of accountants not being ready......"

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By Peter-S
27th Feb 2017 11:47

The accuracy of any accounting system lies with the person who inputs the data. This applies whether it is Sage, Iris a ledger, a cashbook or invoices stapled in a diary. All can produce perfectly accurate profits or a complete nonsense. No one system will be good if it is forced on a user who would rather use something different. Double entry bookkeeping does not make accounts correct, it only ensures they balance. Using computerised systems is the same. A cloud package guarantees nothing, it will only contain whatever information is put in to it. Until a year end check by someone who understands, lets call them an accountant, then the quarterly report has no real purpose and nothing to guarantee its accuracy. So long as 'a submission' is all that is required then, as many have said, what positive result is MTD going to achieve?

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By ohgoodgodno
27th Feb 2017 12:42

given the weight of evidence of people who are against the introduction of MTD, its mind boggling that its still being pushed along

if MTD does happen as planned, the people causing the 'tax gap' will still cause the tax gap, chances are they will carry on as before, if they don't wont to report income and pay tax, having MTD isn't going to stop that

why is there an insistance on penalising and making life harder for those who already play by the rules??

HMRC's focus should be on clamping down on the people causing the tax gap,HMRC dont state where the tax gap comes from, but I'd bet a good chunk comes from unqualified accountants, those who self assess and those who just do nothing.... some simple idea's spring to mind which would help:

protect the accountancy qualifications and do away with unqualified accountants and get the cowboys out of town

stop self assessment and make it mandatory to use a professional

massively increase fines for those who do nothing at all and don't file their tax returns

all of which would be fairly easy to implement and cause no disruption to the decent tax payers of this country who do things correctly

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Replying to ohgoodgodno:
By DotasScandalDotOrg
27th Feb 2017 17:24

Doing what you suggest would go against the Revenue's (and Government's!) distinct taste for collective punishment.

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By RPTAS
27th Feb 2017 17:29

HMRC's reps are completely delusional. There is no material benefit for businesses. And where are HMRC going to find the time to deal with all this additional information which is subject to change and amendment at the end of the year. Firms can submit complete fiction and change everything at the end of the year. A farce.
RPTAS

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By North East Accountant
28th Feb 2017 09:01

HMRC - tell the truth and stop spouting this nonsense.

Quarterly updates are either a monumental waste of time and effort or there is some other, as yet unannounced, purpose that will be revealed in the passage of time.

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Replying to North East Accountant:
By DotasScandalDotOrg
28th Feb 2017 09:59

Or that the more astute will read between the lines.

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