MPS debate Tax Reporting by Small Businesses
On Monday MPs debated the Government’s proposals for ‘Making Tax Digital’, in particular concerns that this will increase the burden on small businesses and the self-employed by making them provide quarterly tax updates.
On Monday MPs debated the Government’s proposals for ‘Making Tax Digital’, in particular concerns that this will increase the burden on small businesses and the self-employed by making them provide quarterly tax updates. The debate was held under the fairly new rule which says that if a suitably worded petition gets 100,000 signatures, it will be considered for debate in Parliament.
The debate was relatively non-partisan. MPs from all parties offered support for the principle of digitalisation, and the cost savings it might eventually bring, while warning the Government about travelling too fast or leaving anyone lacking in digital capacity behind. The importance of thorough consultation, even if it means current timeframes are not achieved, was stressed. What quarterly reporting will actually mean was probed extensively, though with only limited success. There was significant scepticism that the changes would reduce errors or the compliance burden on business.
CIOT were quoted by two speakers (Rob Marris and Hannah Bardell), and LITRG by one (Hannah Bardell) (see below). The CIOT's briefing (with LITRG input) circulated to MPs ahead of the debate can be read here. Financial Secretary David Gauke’s response to the debate appears below the reports on other contributions. These reports have been reordered to make them easier to follow.
The debate was opened by Conservative MP Oliver Dowden on behalf of the Petitions Committee. He was supportive of digital accounts generally, arguing it should reduce costs and administrative burdens, and took the view it was “pretty clear” the proposals did not amount to quarterly tax returns. He asked for clarification on the question of the speed of broadband connection, and also on the broader point about ensuring that small businesspeople who fill out tax returns have sufficient skills to do so. He also asked for greater clarity on the scale, cost and nature of the information to be provided.
Seema Kennedy urged the minister not to rush the changes: “It is better that the switch takes places slightly later, but with fewer glitches. That would increase buy-in from the business community and reduce the frustration for constituents who are involved in making these quarterly reports”. Kennedy welcomed HMRC’s commitment to make more use of digital help, such as webinars, webchat and YouTube videos, and hoped it will increase the use of those. She also raised concerns about when tax would be payable and when penalties would be incurred, and said it was essential that test runs were done “over an extensive period, with different sizes of business, so that glitches are eliminated and the system runs really well when it is in place”.
David Morris is the Government’s self-employment ambassador. He said the self-employed sector was concerned that the proposal could be used as a predictor of turnover, which might not take account of seasonal businesses. “We do not want online registration to become a yardstick with which to beat the self-employed. I know from my experience of being self-employed that turnover can fluctuate.” He worried that, “if quarters are compared to relative years and HMRC thinks that something is amiss, it could enforce an investigation. Would the powers of investigation for HMRC be doubled overnight because it would have more of a dashboard—for want of a better word—on the computer to look between years and sectors and also types of businesses?” Morris also expressed concern about digital exclusion, especially in rural areas.
Maria Miller hoped that the Government would make the guiding principle of any change in the reporting of tax that it should reduce administration and red tape for business. Andrew Bingham said a “quarterly update is fine, if that is where it stays, but I worry about regulation creep… If we are not careful, the process will become one of quarterly tax returns.” Alan Mak felt that 99% of VAT returns being filed online “should give the Government great confidence when they roll out the reforms” though Oliver Dowden pointed out that the very smallest businesses do not fill out VAT returns.
Shadow Financial Secretary Rob Marris opened his speech by thanking CIOT and the Federation of Small Businesses for their help with briefing for the debate. He said Labour welcomed greater digitalisation, and HMRC externalising its costs was understandable, but this process did not always go smoothly.
“I will quote from paragraph 1.5 of the Chartered Institute of Taxation's very helpful briefing: “Making Tax Digital is a huge project that is going to bring in fundamental changes to the tax system and how both taxpayers and their agents interact with it. It has the potential to create a simpler, more workable tax system if it is developed and implemented in the right way but it must be managed carefully and in consultation with taxpayers, tax professionals and software developers alike.” That sets the scene quite well in terms of what one ought to aim for in government, whatever one’s party: to have an inclusive process that runs smoothly and not too quickly. It is not clear that the other online initiatives in HMRC have gone so well. The CIOT states: “There is evidence that past changes in reporting obligations have led to an increase in compliance costs for businesses, and that HMRC tend to under-estimate these costs.””
Would software be free? Marris asked. When would it be available? Even if it was free it would still need installation and staff time would need to be spent preparing and checking all the records four times a year, plus a potential increase in the fees of agents. Marris was the one speaker to raise the issue of agent access, what he called the ‘vexed question’ of “whether there will be synchronicity by April 2017. At that point, quarterly updates will have to be filed by businesses and agents will have access to all the information online—not just the information of their clients, but HMRC’s—and will interact with HMRC digitally, because otherwise there is a risk that businesses will file updates four times a year, but their agents will not be fully engaged in that process that has happened before, and that is a concern.”
Chris Leslie is a former Shadow Chief Secretary to the Treasury. He said he was concerned that quarterly reporting would take up so much time and soak up so much effort “when a company is taking stock of the income that has been generated gross, of the expenditure that has gone out and of any gains or losses that have been incurred. When the Government say that in four years’ time there will be “at least quarterly” requirements to file “summaries” with HMRC, the Minister should not be too surprised if people hear that and feel that there will be at least a quadrupling of the administrative effort and exertions and the sweat and tears that sometimes go into that process.”
Leslie wondered where the accountancy and audit stage will fit into the process. Businesses “want to ensure that they are submitting information about their business activities in full, so that it is accurate. They will be anxious about what will happen if they make mistakes in those data, because they are going in on a real-time or near-real-time basis… Will not businesses now feel that they ought to incur even more accountancy costs, perhaps four times a year instead of annually, just to be on the safe side?” He also wondered what would happen to the actual payment of tax owed. Would it still be annual, “or are we in effect moving to some sort of pay-as-you-earn for small businesses?”
Peter Kyle spoke about the challenges of self-employment and entrepreneurship generally. He said this policy needed to be tested and communicated better. He warned that the freedom that is associated with self-employment has diminished. Bill Esterson, Labour’s Shadow Minister for Small Business, said his constituents “would be fascinated to learn how increasing the rate of reporting to quarterly—whether that involves a full report or an update—reduces the amount of administration faced by businesses”. Rachael Maskell said analysis should cover not only financial cost and burden on small businesses, but also the cost in time and infrastructure.
Hannah Bardell, SNP Business Spokesperson, said digital transformation must be done in parallel with a simplification of tax policy: “The Government’s lack of consideration about how the changes will work in practice flies in the face of the commitments they have made to simplify tax for small businesses.” She quoted the FSB and a number of its members expressing concern about the proposals, including an accountant who said “nagging those late clients to bring in their records and other information … 4 times a year would be our worst nightmare come true”.
Bardell also drew on press release issued by CIOT and LITRG: “Many bodies have echoed the concern about the additional workload that the new reporting requirements will place on businesses. Chris Jones, the president of the Chartered Institute of Taxation, said of the quarterly reporting requirement that he was “struggling to reconcile this with the announcement by the Chancellor…that the annual cost to business of tax administration will be reduced by £400m”.
“Similarly, Anthony Thomas, chairman of the Low Incomes Tax Reform Group, has said: “We gave a cautious welcome to the new digital tax accounts on the basis they might simplify matters for some low income taxpayers, although we remained very concerned that a significant proportion of the population, often the most vulnerable, remain digitally excluded.” That applies for a number of reasons. People on lower incomes who start businesses, particularly women, may well be excluded and unable to navigate the new system. A number of Members have referred to the roll-out and cost of training and development. I hope the Minister will refer to how that will be done and assessed, because that is important.”
SNP MP and Treasury Committee member George Kerevan said the issue was not the introduction of technology, which all recognised would bring benefits, “but bringing that technology into play and taking small businesses and the electorate with us. The charge against the Minister and the Government, which is not new or made in a cavalier way, is that there is a rush to judgment.” He pressed for a delay in implementing the quarterly updates and said that, rather than setting a band at £10,000, there could be a variation as to when small businesses of various sizes are brought into the system. He also queried HMRC’s expectation that the number of calls to its various call centres would ‘magically’ reduce from 38 million in 2015-16 to a mere 15 million by 2020.
Sammy Wilson, DUP Treasury Spokesperson, had read Financial Secretary David Gauke’s letter to MPs but was still not clear what the Government were trying to achieve. “Will a business know exactly how much tax it is due to pay every quarter? Will it pay that tax every quarter?” he wondered. “There is significant work involved in getting some end-of-year records that businesses submit in their annual tax return. Those records might cover stock taking, work in progress, accruals, bad debts and one-off payments. Will all those things be required for every quarterly return? … If that is the case, there is absolutely no way that the Government can argue that generating the accounts will not involve substantial extra work for businesses.” He went on: “Once the records go in, presumably the data will be looked at. If that is the case, will queries be raised, or will the data simply be ignored? If we are going to ignore the data, why provide them? If we are not going to ignore the data, will there be queries from HMRC not at the end of the year, when one tax return would have gone in, but on a quarterly basis? That would, of course, create additional work for businesses.” Because many businesses fear HMRC they would feel a need to make more use of accountants to verify their submissions.
Green MP Caroline Lucas accused the Government of making the assumption that all small businesses and self-employed people are already keeping track of their affairs digitally. “Many constituents tell me that they are not. Therefore, the change will be a burden.” Lucas also said that the pressures on small businesses “are made even worse by the fact that they often struggle to get hold of HMRC advice right now, whether on the phone or by other means, because tax offices are closing. As well as having a bigger consultation on the issue, the Government should look again at the resources going to HMRC.”
Response to the debate from the Financial Secretary to the Treasury
David Gauke, Financial Secretary to the Treasury, responded to the debate.
Quarterly updates: “Quarterly updates will not involve the complexity of a full tax return, where the business, or its agent, has to gather together and manually input data on to an electronic or paper form and then perform various calculations. Instead, updates will be generated from digital records and, in most cases, little or no further entry of information will be needed.” “Whereas a full return can be complex, the update will be based on business records that are already being recorded. There will be one process for both business and tax purposes, which will involve a summary of income and expenses.”
Reducing error: “Keeping records digitally will reduce error, partly because that will be done on a more timely basis”, and “the software will help taxpayers identify any errors in the information they provide”. “The alternative would be to stick to a system where taxpayers take out 18-month-old records, stare at them for a while as they try to figure out what they were doing then and tentatively use them to fill in a lengthy HMRC form, or drop on to their accountant’s desk a large carrier bag of records… and bear the expense of having the accountant do the job. The taxpayer then pays their final tax bill on money made up to 21 months previously. It is a system designed for a world of paper and bookkeeping, in the literal sense, and it is not tenable in the 21st century.”
HMRC interventions: Gauke said HMRC did not intend to increase interventions on the basis of quarterly updates. “On the contrary: HMRC is seeking to reduce error at source and so reduce the need for interventions. It is the case that by keeping records in real time instead of processing paperwork at the year end, businesses are less likely to lose receipts or make basic accounting errors.”
Applicability: Gauke stated that the proposal applies to large businesses too.
Software: The minister said that there are already six free software products on the market (with more expected)
Speed of introduction: Gauke disagreed that the measure was being rushed, noting that it is a five-year roll-out. “We are engaging in substantial consultation this year. The piloting and testing of the technology and the various processes will then follow.” “I reassure hon. Members that we will carry out extensive testing. Roll-out to businesses will take place when the process and the design are known to work.” While acknowledging concerns about the pace of the reforms, “Similar concerns were raised about online filing and real-time information. However, HMRC’s impressive track record in implementing those changes speaks for itself. Working with interested parties, we can match that success.”
Penalties: On sanctions, the Government will consult, but “penalties and other sanctions will not be the same as those that apply now to end-of-year returns. We will want the new process to bed in before we turn on any sanctions. There is no plan to penalise those who try to comply.”
Accounting adjustments: Will quarterly updates be required to take account of accounting adjustments for stock and work in progress, which are currently made only once a year? “Detailed issues such as the allocation of capital allowances and the counting of stock levels will be addressed through consultation. I stress that all allowances, deductions and reliefs that are currently annual will remain so. Of course, for the many businesses that use cash accounting, that is much less of an issue, but I recognise that it is an issue for some businesses. Again, for issues such as work in progress, we are not requiring information quarterly.”
Quarterly payments? : “No decision has yet been made about changing payment dates. In December, alongside the “Making tax digital” road map, we published a discussion paper on options to simplify the payment of taxes. An initial consultation will take place shortly, with a further, full consultation to take place later this year.”
Seasonal businesses: “Questions about how the changes will affect seasonal businesses will be addressed through this year’s consultation. Businesses trading seasonally may be due a tax refund in-year. If they update HMRC more frequently than they do now, that will allow HMRC to assess them for such a refund, so there may be a financial benefit for them. Let me also stress that the quarterly update will be based on actual information, not forecasts.”
Future of the annual tax return: “The traditional annual tax return, we can get rid of”. However “direct taxes will remain annual taxes, so some adjustments will need to be made at the end of the year. That should, however, be less of a task than the traditional annual tax return, because much of the information will already have been pulled together.”
Costs / impact assessment: “As with any other tax measure, a detailed assessment of the impact on administrative burdens will be published alongside draft legislation, and that is expected to be in December 2016. That assessment will be informed by prior consultation of affected businesses. HMRC anticipates producing an initial draft impact assessment alongside the formal consultation process, which starts in the spring.”
Digital exclusion: The minister is “focused on ensuring there is support for those who need it. The Government have already said they will ensure that free software products are available to businesses with the most straightforward tax affairs. Some—a very small minority—will be unable to adopt digital tools due to geography, personal disability or other circumstances. In those cases, help will be provided. There is no question of forcing those who genuinely cannot go digital to do so. We will consult with business and representative bodies to understand fully who cannot get online and what support they need, and we will ensure we provide alternatives, such as telephone filing.”
Voluntary V compulsion: “A voluntary approach would cost the same but deliver only a fraction of the benefits for business and the Exchequer. In the current fiscal environment, without the additional revenue generated by closing the tax gap, we could not have provided the £1.3 billion investment required to transform services for all taxpayers.”
At the end of the debate the question was put and agreed (no vote): “That this House has considered e-petition 115895 relating to tax reporting for small businesses and the self-employed.” This has no consequence. Consultation on the proposals is ongoing.