The government’s response to the Making Tax Digital consultation leaves much detail to be thought through, and questions unanswered. Rebecca Cave sets out to explore some of them.
Worth waiting for?
The government promised to provide its response to the MTD consultations in January 2017, so at lunch time on 31 January it issued summaries of the responses to all six MTD consultation documents, together with draft legislation and explanatory notes in the following areas:
- Digital reporting and record-keeping (new TMA 1970 Sch 12C)
- Cash basis for property businesses (inserted into ITTOIA 2005, part 3)
- Cash basis: treatment of capital (new ITTIOA 2005 s 33A)
Comments on the draft legislation can be submitted until 28 February 2017, and should be sent by email to [email protected] or [email protected]. The House of Lords economic committee is also collecting views on the MTD draft legislation, but they need responses by 15 February 2017.
Much of the detail of how MTD will work in practice will be contained in regulations (ie statutory instruments or “secondary legislation”) to be written by HMRC. You can see this from the points in the draft legislation where it says “the Commissioners may by regulations require…” or “regulations under this paragraph may…”.
Traditionally statutory instruments are not debated at great length in Parliament, and are generally passed with little more than a rubber stamp. Regulations can be changed far more easily than an Act of Parliament, and thus give the government more flexibility to amend details such as tax rates and thresholds. Much of the PAYE and VAT law is contained in regulations, but the core of direct taxes: income tax, corporation tax and capital gain tax are contained in Acts.
The danger of putting detail in regulations is that the vital points of how taxpayers must comply with MTD won’t be scrutinised. None of the regulations required for MTD have been published alongside the draft law, so we will have to wait to see the full picture. It is possible that the draft regulations won’t be issued until shortly before they are due to take effect, and thus deny us all the opportunity to comment and change them.
HMRC issues a vast amount of guidance on the tax law, which is contained in; HMRC manuals, statements on gov.uk, helpsheets, notices and leaflets. Very little of this guidance has any legal effect. Some sections of VAT notices do have legal backing, but those parts must be clearly marked.
All other HMRC guidance is just opinion, not law. The courts do not form judgements based on what the HMRC guidance says, but they will consider how the guidance has influenced the taxpayer’s behaviour. In some cases HMRC issues guidance to give taxpayers comfort that the law does not apply to their situation, so the taxpayer is taxed by law and untaxed by guidance. This is regrettable.
In the case of MTD it appears that HMRC will be given considerable scope to alter or amend regulations by way of “directions”, which to my mind means guidance.
Accounting software is the linchpin of MTD. Spreadsheets will be permitted as a recording tool, but some interaction between the spreadsheet and accounting software will be required to make the quarterly updates to HMRC.
The accounting software (in combination with spreadsheets or not) must produce complete and accurate accounting records. This is set out in the draft legislation, which says: “records kept must meet standards of accuracy and completeness set by specific or general directions given by the Commissioners.” So HMRC is going to have the power to set standards of accuracy within accounting software. I find this very alarming.
The use of the cash basis will make MTD compliance easier for many businesses, as they won’t have to calculate: prepayments, accruals, debtors and creditors. We already have a form of cash basis which businesses can start to use if their turnover is under the VAT threshold of £83,000, and they can carry on using until their turnover reaches double that figure.
Those turnover thresholds are to be increased to £150,000 (entry) and £300,000 (exit) with effect from April 2017, so a year before MTD becomes compulsory. Landlords with turnover of up to £150,000 will also be able to use a form of the cash basis from April 2017. However, the rules concerning capital assets purchased under the cash basis will change from the same date. I will write in detail about both these changes in a later article.
The MTD story is not complete. We still don’t know how it will apply to companies and complex businesses. HMRC has promised that another consultation document to deal with these issues will be released in “the Spring”.
We do know that partnerships with turnover of £10m or more won’t be dragged into MTD until at least 2020, which is the date when companies are due to join the system. However, smaller partnerships, where at least one partner pays income tax, will be required to comply with MTD from April 2018. I predict significant problems with partnerships and MTD, and I suspect we may see further movement in this area.
There will also be another consultation paper dealing with penalties under MTD, to be released “later in 2017”.
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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.