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Initial thoughts on HMRC’s ‘making tax digital’ proposals

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HMRC has published its much awaited proposals on ‘making tax digital’ in the form of six consultation documents. There is no doubting the scale of HMRC’s ambition: HMRC has posed dozens of questions in these consultation documents, and the proposals in the longest consultation, on bringing business tax into the digital age, are likely to herald a dramatic period of change to the way digital tools and data are used by businesses, individuals, accountants, tax agents and government. If MTD is to deliver for all stakeholders, it is vital that as many people and organisations as possible respond to those questions raised.

Eight months after the launch event for HMRC’s ‘making tax digital’ (MTD) project we at last have the consultation documents. These explore in depth the questions that will need to be addressed to make a reality of HMRC’s ambition. My thoughts here are very much a first reaction and I have picked some highlights that I think are notable.
Let’s get the negative point out of the way first. I am far from alone in believing that mandating digital record keeping for small businesses is the wrong way to approach this and sceptical of HMRC’s claim that it will contribute to a reduction in business burdens. While I am pleased that some businesses have been taken out of scope, £10,000 turnover is incredibly low: did HMRC really want these cases with income below the personal allowance in the system anyway? I hope that ministers can be persuaded that many more businesses should be spared compulsion and allowed instead to opt in voluntarily.
Now to the positives.
Prepopulating a digital tax account with information government already holds makes total sense. It has been done successfully elsewhere. The consultation on making better use of information highlights a critical lesson learned by the Nordic countries, trailblazers in this area, which is to have a high integrity taxpayer identifier to ensure that information is allocated accurately. There is also a clear recognition of the issues surrounding data security. The section of this consultation that really caught my attention though is the future ambition. Existing information within HMRC’s systems will not be sufficient to achieve the 2020 goal of zero tax returns and the consultation considers a number of additional items and how they might be captured.
The powers document builds on the 2015 consultation and responses and suggests a penalty points system. HMRC envisages a light-touch familiarisation period and then a process that allows taxpayers to see points building before a penalty becomes chargeable (and indeed a process by which points fall out). I see considerable merit in pursuing this approach. Having each head of duty in a silo with its own set of compliance and penalty rules appears to be on the way out.
The longest consultation, bringing business tax into the digital age, is where ambition and technology have to combine. Technology changes rapidly and constantly, which will mean that the exact shape of MTD for business (and indeed for individuals) will change as we progress towards 2020 and beyond. Apps and software will change in response to advances in technology, while technology responds in turn to accommodate more sophisticated software and apps; all respond to changes in market demand. That market demand will be partly driven by the direct needs of businesses and partly by HMRC’s pursuit of a digital tax system through MTD. Perhaps this is where I should reach for the anorak, but this interaction fascinates me. This is less a vehicle that can be built and rolled out to the showroom than one that will have to be called in for frequent pit stops and adapted as the (endless) race progresses.
Over the next three or four years I believe we will see a dramatic period of change to the way digital tools and data are used by businesses, individuals, accountants, tax agents and government. MTD is only one – albeit a major – driver of this change and HMRC will have to respond flexibly and rapidly to the way other drivers impact on the market. The API strategy will be an essential enabler, allowing HMRC and software developers to engage in a far more open way.
The two consultation papers on simplifying tax for unincorporated businesses suggest that HMRC has listened to concerns that quarterly transaction summaries would only yield an accurate picture of a business’s tax liability in the very simplest cases. The problems presented by end of year adjustments have been recognised and the suggestions for extending the cash basis are aimed at addressing at least some of these. Exempting the first £5,000 of dividend income, £1,000 of savings income, £1,000 self-employment income and £1,000 of letting income will all, when added to the latest easements, reduce significantly the number of people who would have needed to complete a tax return or MTD declaration. Some might argue that HMRC is in danger of letting the tail wag the dog (and it is something we must beware of), but personally I believe it is healthy to be challenged on accepted ways of doing things. Technology and digital ambition have become disruptive catalysts of change.
HMRC has posed dozens of questions in these consultation documents. If MTD is to deliver for all stakeholders, it is vital that as many people and organisations as possible – especially the small business and agent communities – respond to those questions. The responses must also be taken on board, notwithstanding the timing of the Autumn Statement. HMRC’s Administrative Burdens Advisory Board will have a role to play in challenging or confirming purported burden reductions and the Digital Advisory Group chaired by Rebecca Bennyworth – and on which I also sit – is there to look at the practical challenges MTD will present, particularly to small and micro businesses.
So will the tax return really be dead by 2020? In name perhaps, but the End of Year Declaration will live on. It’s comforting to have some constants in an ever-changing world. 
The consultation documents are available via Responses are sought by 7 November 2016.