The Making Tax Digital update in the Finance Bill sets out the power for HMRC to make regulations about such important matters as record keeping and quarterly returns, and until those regulations are published we still don’t know exactly how this will all work. But unless there is a complete U-turn – and I suppose given recent events we can’t completely rule this out – Making Tax Digital will start to have an impact on businesses from next year.
No doubt we will return to the detail in a later edition once the regulations have been published. In the meantime I want to reflect on what I think is a very significant change in the way in which MTD is being positioned. You will recall that in the 2015 Budget George Osborne announced with a great flourish that the tax return would be a thing of the past. After the speech, HMRC published a glossy document headed 'Making tax easier: the end of the tax return'. I’ve just re-read it. It is full of optimism about the way in which the experience of the tax system will be enhanced for all taxpayers by new technology; and HMRC will be able to use their new systems to give individuals and businesses enhanced and personalised support.
Fast forward a couple of years and consider the recent House of Lords report on Making Tax Digital. The very first thing that Jim Harra, HMRC’s director general said in his evidence before the Lords’ economic affairs committee was, ‘the prime reason for introducing Making Tax Digital for business is to close part of the tax gap, which is mainly the small business error and carelessness gap’.
The 'prime reason'! That really is quite a change of emphasis. The original document did have a couple of references to MTD helping taxpayers pay the right amount of tax at the right time, but this seemed almost an incidental benefit to the main aim of modernising the tax system. Given HMRC’s shift of emphasis I am beginning to fear that improvements to tax administration for taxpayer and HMRC alike will come a long way down the pecking order as the details of MTD are filled out - missing a real opportunity for positive change.
If we accept that HMRC is intending to use MTD to close the tax gap, how successful will they be? HMRC’s working assumption is that once MTD is fully bedded in for all businesses it will bring in an extra £1bn per year through better record keeping and reduction in errors. That figure has been received sceptically by many commentators: some believe that in reality there are as many errors in HMRC’s favour as there are those which favour taxpayers – for example failure to keep receipts to enable a claim for expenses to be made. There are even those who believe that quarterly reporting will increase the error rate, on the not unreasonable grounds that it gives four times as many chances to get things wrong. My gut feel is that on balance MTD will, after it has bedded down, make a modest contribution towards the overall tax take, but I am sceptical that it will deliver the benefits that HMRC claim. Although, the evidence base has not yet been fully set out by the government.
Weekly Tax Brief supports the principle of MTD: it also strongly supports efforts to close the tax gap. But the two seem to have got completely confused here. MTD ought to be seen as a way of delivering a much more efficient tax administration regime for taxpayers and HMRC alike. It should not be seen primarily as a revenue raising measure. The tax gap needs to be addressed, but it is our view, and George will expand on this in a future edition, that the main focus needs to be on tackling evasion. That is surely where the real tax gap exists.For more information please get in touch with Andrew Hubbard, or your usual RSM contact.