Making Tax Digital: The legal hurdles
Tax experts Judith Knott and Rebecca Cave discuss the changes to tax law which will be needed to bring about Making Tax Digital.
We expect to learn more about the law which will underpin Making Tax Digital (MTD) during the Autumn Statement on 23 November 2016. The following Finance Bill, which generally includes all the changes required for direct taxation, is due to be published on 5 December 2016. HM Treasury has announced that consultation on the draft legislation will remain open until 30 January 2017.
As the consultation period sits so neatly over the peak tax return filing and Christmas season, tax practitioners should have ample time to digest and comment on the draft clauses <joke>. So what are the key things to look out for in the draft legislation?
Businesses are already required to keep sufficient records to enable them to calculate their tax liability. The rules setting out those requirements are contained in the Taxes Management Act 1970, and the MTD con docs suggest those rules will remain in place. But the MTD proposals go way beyond this, as they set out how business transactions must be recorded (i.e. using digital tools), on an ongoing basis from day to day.
The new MTD law will need to set out exactly what is meant by digital tools, how often they must be used, and the level of detail that must be submitted to HMRC: for every transaction or for transactional summaries, perhaps daily sales totals. Knott argues: “This crosses a line between running an efficient tax system and seeking to dictate how a business must be run; businesses do not exist in order to pay tax”.
Knott is also concerned that the MTD definitions will have to be future-proofed. The MTD proposals are framed in terms of today’s technology of apps, smartphones, and tablets, but they are clearly intended to represent a long-lasting change in the requirements imposed on businesses. In many instances the business owner will need to make significant long-term investments and changes in the way the business is run to comply with MTD.
How does HMRC know the technology specified in the law will stand the test of time? Think about the number of technological blind alleys which have been explored but abandoned in the past: Betamax video recorders, floppy discs, and Blackberry phones.
The MTD con doc, which deals with tax administration, confirms that HMRC’s powers will need to be adapted to fit with the MTD processes in time for the launch of MTD in April 2018, but it leaves the detail to be explored in future consultation – yet to be published. Perhaps that consultation will appear after the Autumn Statement, who knows? It will be a mistake to rush changes to HMRC’s powers to fit with the MTD timetable.
While the government plans to introduce the legal structure for MTD in the draft Finance Bill released in December 2016, Knott questions whether the changes may go beyond what is appropriate for a Finance Bill. She asks whether the proposed changes to business record-keeping are so far removed from what is necessary for the regulation and administration of tax that they may be outside the definition of a “money bill” (ie: the imposition, repeal, remission, alteration, or regulation of taxation) or a “supply bill” (which can include tax administration). Depending on the answer to that question, the MTD machinery might have to be included in a separate bill.
This is significant because under Parliamentary procedure, money bills and supply bills are subject to less scrutiny by the House of Lords, whereas bills which are not money or supply bills can be altered and delayed by the House of Lords.
Judith Knott is a former civil servant who worked on tax issues for 27 years, including as head of corporate tax in HM Treasury, and HMRC director of corporation tax and director of large business.