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AS 2015: HMRC's misplaced faith in digital compliance

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I already had misgivings about the extent to which HMRC is placing its faith in digital (in terms of scope and particularly in terms of timescale) but I had to read paragraph 1.288 of the Blue Book twice to take it in. The idea that the cost to businesses of tax administration can be reduced by £400 million by the end of 2019/20 while requiring businesses and landlords to report their results at least quarterly to HMRC via their digital tax accounts is staggering.

I believe that it shows once again a lack of understanding of how small businesses operate, of what their actual processes are (or are likely to be) and of the actual burden such changes place on them. This move is likely to significantly increase compliance costs for the smallest businesses and I would urge HMRC to undertake some face to face field work with small businesses to understand just how this will impact.

I also find it hard to reconcile such a significant ambition with HMRC’s own research in September which revealed that 19% of the self-employed with no employees were digitally excluded and that 42% of this population (and 29% of micro-businesses with one to four employees) would require assistance to engage digitally.

I certainly believe that digital holds the potential to transform tax administration, but I fear that HMRC is attempting to move too far, too fast and with too little understanding of the way businesses operate.

The ending of the 'on or before' reporting easement for micro employers in April 2016 is also a matter for concern. HMRC will claim a very high level of compliance, but the simple fact is that they have no way of knowing for sure. The on or before reporting requirement could have been entirely avoided had universal credit been designed around the existing tax month structure ab initio. There could not be a better illustration of the need to gain a real understanding of business processes before proceeding any further with what is set out in paragraph 1.288.

I hope that HMRC will reflect on this and reach out to businesses in order to create a digital tax administration that works efficiently and cost effectively for all parties.

On Wednesday the chancellor showed that he was willing to listen on tax credits; I hope that HMRC will be willing to listen on this, as doing so will be crucial if they are to deliver on their digital ambition.