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HMRC’s annual report: Searching for savings

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27th Jul 2018
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I pulled apart HMRC’s report and accounts for 2017-18 to search for the claimed efficiency savings of Making Tax Digital for businesses and individuals. I was sorely disappointed.

Admin burden

There used to be a requirement from HM Treasury to include a chapter in the HMRC accounts on "better regulation" and reduction in admin burden, but this has evidently gone by the board.

The administrative burden figure is important, if only as a way of keeping score. When it was first calculated in 2005, the total admin burden of the tax system stood at £5.3bn. A tough five-year programme of admin burden reduction took this down to £4.7bn which, adjusted for inflation, sadly took it back to more or less where it first started, at £5.39bn.

While there is no up-to-date figure for the global cost to business of the obligations placed on them by the process of tax collection – not the tax itself, but the time cost of filling in the necessary forms etc to calculate and pay it – nevertheless you can get a feel for the trend by looking at the figure for each individual measure from the tax information and impact note (TIIN) which accompanies each new proposed addition to the tax legislation.

Seeking MTD cost savings

Making Tax Digital (MTD) was originally going to be a big contributor to the task of keeping the admin burden down. It would, we were told, save businesses money, but HMRC appears to have abandoned that goal and now considers MTD purely as a way of closing the tax gap.

The National Audit Office (NAO) report on the HMRC annual accounts tells us in a paragraph headed "Cost reductions for business " that the admin burden of MTD has gone up by £137m per year! Far from saving businesses money – originally a £100m annual net benefit - it is actually going to impose an extra £37m of costs each year, (para 2.23 and figure 19 on page 265).

So MTD, as currently planned, will actually cost businesses money to implement rather than deliver any savings.

MTD as tax collector

Will MTD contribute to closing the tax gap?

HMRC argues that MTD will contribute to fewer small businesses failing to take reasonable care with their figures. It estimates that 41% of the tax gap is attributable to small businesses and that 17% is caused by failure to take reasonable care - although irritatingly there is no link made between the two sets of figures for segmentation by "customer group" and by "behaviour" (figure 2 on page 20).

The audited figures of expected tax revenue are found in the NAO report (page 264 – para 2.22). Originally, HMRC thought MTD would raise £920m in additional tax but that figure has now been revised down to £480m. My earlier analysis of the tax gap figures and the methodology of the underlying estimates leads me to doubt even this lower figure for MTD-related tax revenue.

Net cost of MTD for business

The NAO’s figures force me to conclude that MTD for business will no longer reduce the admin burden on business and has a fairly speculative figure for the amount of tax gap it may ameliorate.

What’s more, according to figure 13 of the NAO report (page 259) more than 65 of the staff working on MTD have been reassigned to more pressing, Brexit work.

So is MTD a dead duck? HMRC is still optimistic. The NAO reports: “HMRC expects Making Tax Digital for Business to have generated £1bn of additional tax revenue by 2023”, (page 264, para 22.2).

MTD for individuals

This programme is now expected to bring in far more tax than originally expected. The NAO reports: “HMRC has identified that its Making Tax Digital for individuals programme, that had no estimate of additional revenue, will now give rise to £293m in additional tax revenue over the SR15 period. HMRC had realised £33.5million of this by the end of March 2018,"(page 264, para 22.2).

The footnotes to the NAO report explain that this tax revenue "will primarily come from HMRC using bank and building society savings interest data to automatically pre-populate tax codes."

I find this staggering. Are individual taxpayers so negligent in declaring bank interest? Has HMRC previously been so useless at making use of the information about bank interest that it already had? I predict more "clarification" of this figure as time goes by.

MTD to restore trust

The annual report describes the top ten risks that HMRC has identified and how it monitors and mitigates them.

The fifth risk: “external perception/loss of trust” is expanded as: "We may be seen by our stakeholders as ineffective, inefficient or as not treating everyone impartially, leading to weaker compliance and potentially an increase in the tax gap." One of the actions to manage this risk is: “we will continue to develop our online services to help individuals and small businesses.”

I find this is particularly tone-deaf to the relationship individuals and small businesses have with HMRC's online services. Indeed, you might argue that the main reason individuals and small businesses are losing faith in HMRC's ability to act fairly and impartially is because of the imposition of a costly, unwanted and unproven digital service on them.

Replies (5)

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the sea otter
By memyself-eye
27th Jul 2018 19:17

Bravo!
MTD will be a nightmare. I have just topped up my premium bonds to £30k in the vain hope that by next March I will have won the big one and can retire from all this nonsense.
God help 'ordinary' tax payers.

Thanks (1)
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By the_Poacher
29th Jul 2018 08:10

The tax gap benefits of NTD will only really be felt when the frequency of filings increase. Once business software has to file at least daily it will be a little bit harder for those who fiddle to do so without being spotted.

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Replying to the_Poacher:
Tornado
By Tornado
30th Jul 2018 10:22

"Once business software has to file at least daily it will be a little bit harder for those who fiddle to do so without being spotted."

I doubt this very much. The more that authorities rely on digital information alone, the easier it is to fool them. Just submit the information that the system is looking for and they will not bother you. (That is NOT a recommendation of course, just an observation).

It has always been human experience and skill that actually detects the problems, so by taking the human element out of the compliance procedures, there is bound to be less compliance. Or perhaps I should say more perceived compliance and less actual compliance.

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By GW
30th Jul 2018 09:42

We are told: Making Tax Digital for Individuals, " the additional tax revenue will primarily come from HMRC using bank and building society savings interest data to
automatically pre-populate tax codes"

In April Jon Thompson told the PAC pre-populating tax returns reduced the tax take.

Do HMRC realy believe what they are telling us?

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By itp33asso
30th Jul 2018 13:51

Hooray for Ms Wendy once again she has hit the nail on the head by pointing out the inconsistencies of the UK tax behenmoth Whose tenacious illogicality knows no bounds.

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