Making Tax Digital: The legal hurdles

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Tax experts Judith Knott and Rebecca Cave discuss the changes to tax law which will be needed to bring about Making Tax Digital.

Process

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?

Digital records

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”.

Future proof

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.   

HMRC powers

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.

Separate bills

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.

About Rebecca Cave

Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.

Replies

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04th Oct 2016 17:58

If, as you suggest, it becomes mandatory for all businesses to maintain digital records, then that of course means that all businesses must buy the equipment, and services (internet access) to enable them to comply. An initial outlay of several hundred pounds and an ongoing outlay for internet access.

Is there not, therefore, a good argument to say that if government is insisting upon this then government has a duty to provide the necessary equipment free of charge to each business?

After all, government is free to charge taxes, we are not (yet) a communist state that dictates how citizens must spend their money.

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By TDRtax
04th Oct 2016 19:54

As I've posted elsewhere (using my work account), Joe builder and his mates from down't pub will simply give up on the tax system and vanish into the hidden economy.

I predict a massive own goal by UK Gvt. If they think this will net them more, they need to wake up and smell the coffee. Government has proved itself incapable of effectively embracing the digital universe. No hope in hell that the ordinary man in the street will.

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By DMGbus
to TDRtax
05th Oct 2016 16:35

HMRC will benefit greatly from non-compliance and any inability to comply - presumably there will be £ millions levied in penalties for non-compliance. (" It's not really 'state confiscation of funds' is it! ").

Then some who are currently self-employed might just decide to cease to be self-employed and become employees - again HMRC wins in terms of no tax relief for exopenses incurred on a s/e basis plus increased NIC yield.

So, it's very much going to be a win-win thing for HMRC unless some form of mass civil disobedience campaign is organised and a large proportion of those affected simply refuse to participate in MTD!

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to DMGbus
05th Oct 2016 13:25

I'm sure that's why HMRC actually even contemplated this ludicrous step.
Do you honestly think, DMGbus, that the self-employed will go back to being employed? No, of course not. So some will go onto the black economy, some will just submit silly figures, some will divide last years figures by 4 and submit those and some will actually do it how HMRC want it to be done.
Hopefully Mr Farage will take on the mantle of leading the fight against this useless and time wasting piece of nonsense.

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By Tornado
04th Oct 2016 20:35

Willow Warbler said -

"Is there not, therefore, a good argument to say that if government is insisting upon this then government has a duty to provide the necessary equipment free of charge to each business? "

Including software.

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By RedFive
06th Oct 2016 17:04

HMGov can provide as much hardware and software it likes (though it won't), the real problem for the micro SME, the real backbone of our economy, is that they just don't have time.

'Self Assessment' has been around for many years, but there are many, many taxpayers choosing not to do so, not always because they can't but because it is more cost effective to outsource it so they can get on with plying their trade and earning money.

Micro SME's (my definition, sub VAT threshold) will drown under the red tape of scanning and uploading if legislation is changed that cuts out the agent and forces them to keep records themselves.

How many Accountants & Bookkeepers are there servicing this industry? We are taxpaying 'customers' (!) too, why does HMRC seem to want to close us all down? Is that factored into the tax gap clawback?

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05th Oct 2016 11:13

Judith Knott is by a long way putting forward the most compelling arguments I've heard so far so I just want to lend my full support to her. A lot of my older clients are scared stiff by MTD so I'm up for a fight as I think this is going too far as is a human rights issue.

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05th Oct 2016 11:22

Time to blockade the tunnel in order to concentrate the mind.

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05th Oct 2016 11:36

"Bookkeepers are the new accountants"

What is that strapline supposed to mean and does it refer to any particular article on today's AWeb?

Accountants have always finalised "bookkeeping" for clients whether it was simply creating a trial balance and accounts for a corner shop or producing consolidated accounts for a multi-national.

I'm beginning to think that (despite the worthy, experienced and intelligent contributors who I highly respect) AWeb is becoming a bit of a waste of space in my inbox.

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to ronlfoot
05th Oct 2016 12:16

Sorry about that email strapline mix-up, Ronlfoot.

We decided at the eleventh hour to run this article in the top slot and save the original headline article for another news bulletin.

The strapline refers to this article: https://www.accountingweb.co.uk/practice/general-practice/bookkeepers-su...

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05th Oct 2016 12:17

Just the other week my wife insisted I throw out my cassette tapes (all TDK tape recordings of albums, or even off the charts!) which I still have 30 years on. Even today they are still playable, not that you may want to. The point is this old technology still works. I know its analogue in a digital world but it still works.

With MTD we will have software, apps or whatever and as time and technology moves on (very quickly) we will sharp lose access to it. That's fine if you never need to go back, relying on real time tax, and forget the past but are HMRC prepared for that. Even if the law says keep for x years, as now, how many small businesses will still be able to access MTD information in many years time.

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By Tornado
to North East Accountant
05th Oct 2016 15:42

I have some records for current clients that go back 60 years. These are all perfectly legible and do not require any sort of machine to read them because .... they are on paper.

If digital storage is so good, why are our laws written on vellum and stored on shelves?

Yes, there was an attempt to modernise this practice recently when it was suggested that the records be written on archive paper instead.

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By SXGuy
05th Oct 2016 12:29

If the sme hasn't got the time now to file a self assessment within 9 months what makes hmrc think they will comply with monthly records? Our clients are not interested in even communicating via email let alone using a computer. From what I can see this won't push the accountant out, it will give us more work. This will lead to employing more staff to perform the work and increase cost to the client. I shudder to think how I'd cope with the April yearly clients submitting info monthly. April for me is non stop and that's only clients we see perhaps twice a year. Doing this each month? Not unless I pay someone else to split the work load and so my clients will get a bigger bill as a result.

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By DMGbus
to SXGuy
05th Oct 2016 14:20

The deadline for an unincorporated taxpayer is actually being shortened by a month - the 5th (finalisation) tax return (following four quarterly MTD provisional tax returns) is due 31 December rather than 31 January as at present.

PS. We must all be stressing that the new MTD obligation is one of FIVE TAX RETURNS A YEAR instead of the existing one. HMRC's pretence that a MTD submission is not a "tax return" needs to be robustly kicked into touch, I see a "tax return" as a return of data to HMRC as a tax authority that if failed to be returned (or is late) results in a penalty.

MTD submissions factually are tax returns under a different name, now if they were voluntary and had no penalties for non-compliance attached then I would start to consider that they were not "tax returns".

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05th Oct 2016 14:13

after explaining to a client whats likely to be involved with MTD, they renamed it:

Making Tax Difficult

They can see no benefit to them, only extra hassle and cost

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05th Oct 2016 14:55

An extract from comments made at the Tory Party Conference
Chancellor urged to 'overhaul tax policy'

04 Oct 2016

Ahead of his first Autumn Statement speech on 23 November, Chancellor Philip Hammond has been urged to ‘overhaul the way tax policy is made in the UK’.

In an open letter to the Chancellor, the Institute for Fiscal Studies (IFS), Institute for Government (IFG) and the Chartered Institute of Taxation (CIOT) call for significant changes to be made to the UK’s tax system in order to ‘simplify the making of tax policy’.

Such changes proposed within the letter include returning to a single annual fiscal event to prevent Autumn Statements from becoming second Budgets, beginning the consultation process for tax changes at an earlier stage and extending the ‘roadmap’ approach to taxation.

The letter also outlines the need to ‘prepare the ground’ for future policy changes and establish clear guiding principles and priorities for the UK’s tax system.

Paul Johnson, Director of the IFS, stated: ‘The current system for tax policy making is not fit for purpose. Too many changes are sprung on the country in too many fiscal events with too little sense of direction, consultation or evaluation.’

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05th Oct 2016 15:34

Self employment levels are at their highest with about 15% of the British workforce now self employed. I believe that we need to mobilise that huge number of voters, ensuring that they know the extra work it will entail, the extra costs, and of course the inevitable raft of huge penalties and fines they are likely to incur. If MP's up and down the country start receiving hundreds of letters from outraged constituents they will not be keen to commit political suicide by allowing this farce to continue.

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By Ruddles
to Willow Warbler
05th Oct 2016 15:54

Let me guess - you now have sworn statements from 6 people that say I have accused them of being the same person?

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to Willow Warbler
06th Oct 2016 11:41

"If MP's up and down the country start receiving hundreds of letters from outraged constituents they will..."
You really think so? I'll have whatever you're taking.
MPs don't give a FF. When APNs were "consulted on", MPs received THOUSANDS of "letters from outraged constituents". Promptly responeded to by a templated letter provided by the Treasury. Case Closed.
800+ responses to consultation, including all the big law and accountancy firms. All ignored.

MTD will be more of the same.

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By Tornado
05th Oct 2016 15:48

There must be a Human Rights aspect to this as well. Making it mandatory for people to do something that they are not equipped to do and making it difficult for others to help them (e.g Accountants), and punishing them for not doing what is expected cannot be fair.

Does anyone have a reasonably informed opinion on this as related to the MTD proposals.

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to Tornado
05th Oct 2016 16:25

I don't have an informed opinion..........but I know a man who does.
I have e-mailed Nigel Farage to find out if he would be interested in leading a national campaign to get rid of this ludicrous, time wasting stunt.

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to johnjenkins
06th Oct 2016 09:47

johnjenkins wrote:

I don't have an informed opinion..........but I know a man who does.
I have e-mailed Nigel Farage to find out if he would be interested in leading a national campaign to get rid of this ludicrous, time wasting stunt.

Nigel Farage has an informed opinion on anything. The kind of lies and rhetoric he spouted during the EU campaign (and let's not forget his distasteful "not a shot fired" comment when an MP had actually been shot dead) is actively harmful to the democratic process.

I think if he becomes involved in an anti-MTD campaign, then it risks losing the support of many people far better placed to argue against it. It would be like handing the Tories a free pass to plough on regardless.

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to stepurhan
06th Oct 2016 10:44

What would you rather have. Someone at the helm that gets results or someone that sidesteps the real issues. Ask yourself why we haven't won the world cup since 1966. They didn't give it to Cloughie and they sacked Terry Venables. Two managers who could have "bought it back".
The lie is that MTD will make life easier for business. So you need someone "on the ball" to show that lie for what it is. Parliament will not listen to us or our MP's. All you get is the standard reply "It'll save business time". Gauke didn't even have the courtesy to answer the petition properly.
By the way - who spouted lies during the brexit campaign????????

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to johnjenkins
06th Oct 2016 15:51

"Gauke" and "courtesy" don't belong in the same sentence.

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05th Oct 2016 16:36

If Digital Taxation is so secure, and wonderful, why are MPs exempt from electronic filing?

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05th Oct 2016 16:36

If Digital Taxation is so secure, and wonderful, why are MPs exempt from electronic filing?

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By tom123
to vinylnobbynobbs
05th Oct 2016 18:37

Because the laws are for the little people.

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05th Oct 2016 21:39

Keeping digital records and filing more regularly to HMRC are two completely different things. Nowhere in any of the HMRC documentation have they adequately explained why they are putting this enormous and unjustifiable burden on small businesses. All we get when we ask the question is nanny-state BS about the 'benefits' for their 'customers' of being forced to do something against their will. They are honestly treating the entire business community like little children. After all, nanny knows best.

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to brianheg
06th Oct 2016 11:45

It's ALL about the penalties.
Exactly same think as penalties on APNs - levied even as a plethora of JRs are in the pipeline, waiting to be heard.
It's a nice little jackpot.
Sorry to be the one to break it to you, but the new motto is: anything to maximize the "tax take". Even if it means looting you senseless.
Check out HMRC's mission statement on their website: it's not "ensuring you pay the correct amount of tax".

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By Tornado
06th Oct 2016 10:17

The Government are promoting MTD as way to reduce the Tax Gap. It has been discussed on AWEB that the largest contributor to under-declared tax is likely to be those that submit their own Tax Returns, encouraged by a liberal Government policy that disregards the obvious. MTD builds on this liberal approach by forcing millions more to Do it Themselves.

I only have to cite the case of Jeremy Corbyn who famously missed income off of his Tax Return and filed it late. If the leader of the Labour Party is unable to comply with current legislation then why should the Government arrogantly expect other people to do better than Mr Corbyn, particularly in connection with the much more complex MTD rules?

I think it is time to scrap the old fashioned ideas of the (former) liberal elite and bring more professionalism back into tax administration. After all, those that use Accountants to assist them with their tax and accounting affairs are not going to be the ones contributing to the Tax Gap.

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16th Nov 2016 13:17

MTD,,, massive transitional disgrace........ massive tax disaster..... moving towards disaster.

The costs, mmmmmm thats a tricky one, it will all depend on the Accountant, some may do it for nothing, others will see it as an opportunity, well at least we have time to think about it.

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16th Nov 2016 13:19

Lets start one of those government petitions, another legal hurdle, lets keep putting hurdles on the way, none compliance etc.

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to AndrewV12
16th Nov 2016 13:35

Gauke dismissed the last petition.
My view is that the only way would be to concentrate the mind. Block the tunnel. We need a "face" to lead us. I e-mailed Nigel, but he too busy with his new best mate. What about Jimmy Carr?

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