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Will MTD reduce the tax gap?

HMRC says MTD will make it easier for taxpayers to get things right and, as a result, will reduce the tax gap. Rebecca Cave interviews CIOT tax policy director John Cullinane on the evidence for this assertion.

30th Oct 2020
Tax Writer Taxwriter Ltd
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MTD: Online tax filing stock photo -top view view of a computer laptop with a tax form on screen, concept of online tax filing (3d render)
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Q. How much of the tax gap is due to taxpayer error and mistake?

The tax gap estimate for 2018/19 attributes £8.6bn to taxpayer error and mistake, which amounts to 28% of a total gap of £31bn. Although, around £3.1bn of the tax lost was due to mistakes made when the taxpayer took all reasonable care.  

Q. Can this figure be broken down between different taxes or different types of taxpayer?

The CIOT understand that as much as 80% of the ‘error’ and ‘failure to take reasonable care’ categories in the tax gap could be down to businesses with less than £85,000 turnover. These businesses are mainly within the target for MTD for income tax and are not required to comply with MTD for VAT at present. 

Q. Why has MTD for VAT not reduced taxpayer errors as HMRC claimed it would? 

The latest tax gap figures are for 2018/19 before MTD for VAT came in, so it’s too early to say. 

However, a CIOT survey found that over 70% of respondents considered MTD for VAT had little impact on the errors made by their clients. The majority of the remaining responses reported an increase in taxpayer errors rather than a reduction.

MTD for VAT doesn’t affect the taxpayer population held mostly responsible for errors, and it wasn’t intended to in the first wave.  

Q. Will the error reduction rate improve for MTD for income tax?

MTD for income tax will apply to the smaller businesses that HMRC believes make most of the mistakes. But there is a great deal of evidence that basic business records are not particularly deficient. HMRC’s decision in October 2015 to abandon business record checks could be taken as a tacit acknowledgement of this.

More errors tend to arise in the judgmental areas for tax, such as private use adjustments and the capital/revenue distinction. But software doesn’t deal with these areas very well.

Q. Is HMRC relying on prompts and directions within MTD compatible software to reduce the taxpayer’s errors?

Generally speaking, the software on offer to businesses to comply with MTD for VAT doesn’t nudge or prompt people in the right direction, beyond applying some very basic rules. Sometimes there is no particular default option on difficult issues and, in other cases, the default option is bound to be wrong. For example, a built-in assumption that cash outgoings have standard rate VAT component. 

The CIOT is fearful that this may happen again with MTD for income tax. This is partly about the reliance on third-party software. Do software providers want the costs of incorporating nudges, or the potential liabilities if people are nudged in the wrong direction? All this could improve over time, but it could be a long while before we get beyond the most basic nudges.

Q. Is this confidence in MTD software well placed?

It is easier in principle to incorporate the right nudges and error-blocks into tax software than it is to write lots of nudge letters. But currently, there seems more of an accent in getting tax software providers to build an MTD software market than in some of these error-reduction benefits.

Q. What examples have you seen of tax software permitting or creating errors in tax records?

Claiming back a supposed VAT component of cash outgoings that didn’t suffer VAT is one theme. Perhaps the market will get wise to this, but other more complex errors may take longer to root out. 

Typically, when the CIOT hear of a problem, it means tax agents (our members) have spotted and corrected it. But members report that it can be harder and more time-consuming to work out what has gone wrong in software than it used to be with spreadsheets or even on paper. Not all the software has a great audit trail, and this will concern HMRC at some stage. 

It would be fair to say that the software has generally ‘permitted’ the error than ‘created’ it. I am not sure how well errant taxpayers will fare in citing the software as an excuse.

Q. Does HMRC check that the MTD software it promotes as approved to taxpayers performs tasks correctly and produces an accurate tax calculation?

We know that HMRC checks the compatibility of software with its own systems before it goes on the ‘approved’ list. There is probably an inherent ‘technical correctness’ component of this type of checking, but we suspect more needs to be done.

However, tax law is so complex, and so full of judgmental, specific-fact-dependent distinctions, that the software can’t guarantee the right answer, although some adverts almost suggest that it can.

Q. If HMRC does not check that the tax software performs calculations according to the tax law, who does? 

HMRC would say that is the taxpayer’s responsibility to check the tax calculations are correct. Generally speaking, that is probably the correct legal position. In time, this could create a rich seam of controversy when errors are discovered by HMRC, and the taxpayer blames the ‘approved’ software.

Q. Should there be a body that audits tax software to check it performs the tasks it claims it does, correctly and in line with tax law? 

When the CIOT responded to HMRC’s call for evidence on raising standards in the tax services market on this point it said: “tax advice that is ‘hidden’, by being embedded in broader advice or in technology platforms, needs to be brought in scope… of Government intervention to address the problems identified.”

Q. Is it reasonable to ask tax software producers to develop products that will reduce taxpayer errors to a significant extent without simplifying the tax system?    

Not entirely, no. After nearly 50 years of VAT, software still doesn’t address partial exemption well, although admittedly this can be a very complex issue.  

I think HMRC and Treasury believe that tax software offers a way of living with the complexities of the tax system. This may be true for number-crunching requirements but actually, most of the complexities reflect judgmental issues and fact-specific points that aren’t so easy to address in that way.

Replies (20)

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By memyself-eye
30th Oct 2020 18:20

MTD is what happens when civil servants who have never run a business in their lives come up with a solution to the perceived 'tax gap'. Instead of policing their' customers' they create another layer of complexity that allows HMRC to a) claim that tax is now 'digital' - and therefore up with Amazon, Twitter, Facebook et al - and b) issue penalties for non compliance - so much easier than actually collecting tax.
N'er do wells will simply deregister and move into the black economy or quit all together.
large businesses will pass on the extra cost, if they can , small businesses will shrug and carry on (or not).
HMRC will claim 'MTD victory' but following Coronavirus won't be able to say why, because they will be so busy trying and failing to root out fraudulent BBS, CJRS, etc etc claims that MTD will seem like a puff of wind in comparison.
Today I received a letter from HMRC. Not as (might be) expected a penalty or a reminder, but a request!
Imagine - HMRC wanting my opinion!
T'was about the job retention scheme and it's effectiveness - asking me as an agent...
who'd of thunk it eh?
Like asking my sainted Irish mother what she thought who was to blame for the famine!

4 months and I'm done with this.

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Replying to memyself-eye:
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By memyself-eye
30th Oct 2020 18:21

ps - I binned it.

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By Paul Crowley
30th Oct 2020 21:35

Difficult to believe that giving anyone more work to do will result in less errors.
Accidental errors will increase as wasting time on an unwelcome intrusion reduces time for care and consideration on existing recording methods

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Replying to Paul Crowley:
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By philaccountant
03rd Nov 2020 11:12

Not just more work but significantly reduced time to complete said work in! Many clients can barely cope with a near 10 month deadline once a year, let alone 1 month deadlines four times a year and another final submission.

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Replying to philaccountant:
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By lionofludesch
03rd Nov 2020 11:29

Philip Swansborough wrote:

Not just more work but significantly reduced time to complete said work in! Many clients can barely cope with a near 10 month deadline once a year, let alone 1 month deadlines four times a year and another final submission.

Oh, aye, it's occurred to me more than once that there may be a significant increase in the penalty take and that that may be the point of the legislation.

All the more reason for you fellas to get your clients up to speed before the sliotar's thrown in.

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By ireallyshouldknowthisbut
31st Oct 2020 11:26

This idea of reducing the tax gap was held out to be a gross lie during the original submission to HMRC over MTD and the same lie seems to be changed now when its known to be untrue, by now pretending the initial phase of MTD was not about raising revenue...............when all the statements at the time said it would magically (a) save business time, (b) save business costs and (c) raise more tax revenue. None of this has actually happened, exactly as predicted.

This lie was created by those selling software, and will be peddled until it is robustly challenged by the profession time and time again, at every opportunity. It is a gross lie to claim digitisation will raise tax revenue. Everyone on the ground knows that but it seem to suit some people to pretend otherwise.

Digitisation may be of a huge benefit to some business, but that is nothing to do with taxation.

HMRC were directly asked by the House of Lords select committee to give real life examples of how MTD would reduce the tax gap, and were unable to do so. One the patsies HMRC put up to be grilled said it would "reduce paperwork flying out of a van window". That was their BEST example! Clueless.

if HMRC want to collect taxes they need to get out on the ground and get their hands dirty and investigate people on a routine basis. All the evidence points to this as the best way to collect tax revenue. Every time inspectors are hired their ROI is huge. EVERY new VAT reg business should be checked within the first 2 years. EVERY business should expect a review every 5-10 years. Each review in itself would have a very low yield, but having 'the fear' overall would ensure tax payers and agents are doing a proper job, and rooting out those that do not.

The problem seems to be that this boring old hiring people who know stuff on the ground is not nearly as exciting as putting in some huge multi-billion pound computer system, and even if they do do it, you can see it now. Outsourced to Serco to charge £100's per hour and get people on minimum wage to do the work and be totalling rubbish, rather than build skilled departments of their own,utlising in particular accountants from practice and other areas rather than always hiring school leavers with no real world knowledge.

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By lionofludesch
31st Oct 2020 14:10

Only thick folk think that the tax gap will be reduced by MTD.

Perceptive folk think errors will be increased as small traders are encouraged to do work they do not understand and with which they cannot cope.

Still, HMRC haven't listened to reason for the last 20 years and I don't suppose they will now.

They already know it all.

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By SteveHa
31st Oct 2020 14:38

How much of the tax gap is attributed to HMRC errors? There are an awful lot of them.

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Tornado
By Tornado
31st Oct 2020 14:45

As true as ever is that keeping the tax rules few, simple and well enforced is better than having thousands of pages of tax rules that no one understands or wants to. KISS

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Replying to Tornado:
By Nebs
02nd Nov 2020 09:49

Tornado wrote:

As true as ever is that keeping the tax rules few, simple and well enforced is better than having thousands of pages of tax rules that no one understands or wants to. KISS

I wonder how one gets selected for a position at the Office Of Tax Simplification? It can't be an onerous position, as I haven't seen any tax simplified for donkeys years. Only a week left to complete their survey on CGT, I wonder how they are planning to simplify it.

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By Jo Nokes
31st Oct 2020 15:45

I agree wholeheartedly with the sentiments expressed by the previous respondents. What I find truly depressing is the attitude of ICAEW, which as far as I know, has completely failed to make any attempt to stop this process. It’s perfectly clear that with computerisation forced on unwilling traders, more errors will be made. Then there’s the fatuous idea of quarterly reporting, which will serve no known purpose. It will add to the misery of thousands of practising accountants for no one’s benefit. The House of Lords report was totally ignored. What can we do as a profession to stop this?

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Replying to Jo Nokes:
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By spilly
01st Nov 2020 17:38

Perhaps if we tell our clients exactly what all this extra filing will properly cost them in additional fees, and point them in the direction of their MP when they object?
All the accounting bodies are spineless on this; maybe they are getting lots of advertising revenue from software companies and so don’t want to rock the (gravy) boat.

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By Mr J Andrews
02nd Nov 2020 09:41

A few more interview points might have been :

Q Do you believe the real reason behind MTD was to push the onus on the customer owing to critical HMRC staff shortages and the fact that remaining Revenue staff are just not up to the job ?

Q Do you believe MTD will have no impact on mistakes by taxpayers but will reduce the statistical shortcomings within HMRC

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By DMBAcc
02nd Nov 2020 10:38

I despair and weep. NO ONE in authority is listening. As to engaging your MP forget it. I approached Scott Mann here in Cornwall three times plus emails. Every time he simply passed my concerns onto HM Treasury when I told him specifically not to do that since I had already tried to get a response from them. He toes the party line and sadly George Osborne has never been brought to account for this monumental administrative disaster. I know some of my clients will go bust seeing MTD as the final straw. Others will either use cash only or (don't laugh) barter (it is already happening). I agree with the person who said the senior civil servants (servants that's a laugh) do not have a clue about the self employed and would never dirty their hands to speak to one of us. You only have to look at individuals who take their earnings as dividends and therefore get no covid support from the government to realise this Gov't and HMRC DON'T CARE. And that is what is wrong with the whole government process in this country. Until MPs are made to CARE we will never get anywhere. As for the large Accountancy bodies - yep you guessed THEY DON'T CARE EITHER.

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By Inquisitive
02nd Nov 2020 11:48

I am 70 years old and when I started my career in a large multinational company I was given the task of 'digitizing' written records. A vast sum was spent on this computer database. It was never used and 'forgotten about' 3 years later. looking back the data was being entered by inexperienced staff and therefore fraught with error. Nobody checked.
As a landlord with 6 properties and 2 partners, I struggle to understand what the MTD benefits are over my excel spreadsheets, MS Money files, and paper receipts. I see none.
I still do paper returns. They work fine. I don't trust computers. And my trust of the internet is even less.

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Replying to Inquisitive:
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By lionofludesch
02nd Nov 2020 12:09

Inquisitive wrote:

I still do paper returns. They work fine. I don't trust computers. And my trust of the internet is even less.

Yet here you are on an internet forum.

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Replying to lionofludesch:
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By Inquisitive
03rd Nov 2020 17:22

Perhaps I should have qualified it for the role of transferring confidential data!

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By Neil Daws
02nd Nov 2020 11:56

MTD = Unannounced Compliance Visits.

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By North East Accountant
02nd Nov 2020 12:12

No it won't reduce the tax gap.

If people are not fully declaring takings now they'll not fully declare their takings under MTD.

It will encourage thousands of people to drop out of the tax system and just trade in the black economy.

What it will do is make life simpler for HMRC to attack the easy targets and hit them rather than get off their backsides, out their ivory towers and actually do something about the black economy.

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By Anthony G Thorne
04th Nov 2020 08:21

Dave Hartnett when at the Treasury stated that it was impossible for anyone person to understand the whole of the UK tax code. As a result I believe that it is not possible to digitise tax.

Also as has been stated advertising by software suppliers has been miss-leading such as stating "making VAT simple" being an obvious example but there are numerous other examples.

The tax system if to become digital needs to be totally rewritten to fit in with reality of the needs of the 21st Century.

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