The Treasury Committee staged the latest witness session in its inquiry into tax enquiries and resolution of tax disputes this afternoon (6 February 2019). The Government's Making Tax Digital project was slated by FSB and ICAEW during the session, with the FSB making some grave predictions about its impact.
A write up of the last session can be found here: HMRC make announcements on Loan Charge during Treasury Committee inquiry.
The Treasury Committee is appointed by the House of Commons to examine the expenditure, administration and policy of HM Treasury, HMRC, and associated public bodies, including the Bank of England and the Financial Conduct Authority. The Committee chooses its own subjects of inquiry. The House has given the Committee the power to send for “persons, papers and records”. Nicky Morgan was elected as Chair of the Treasury Committee in July 2017. The remaining cross party members of the Committee were formally appointed in September 2017.
The Treasury Committee is examining whether HMRC’s approach to conducting tax enquiries, resolving tax disputes and determining the amount of tax to be paid meets those standards. This inquiry sits alongside the Treasury Sub-Committee’s inquiry into the same topic.
Witnesses at today’s hearing:
- Anita Monteith, Technical Lead and Senior Policy Adviser, Tax Faculty, Institute of Chartered Accountants in England and Wales
- Chris Duncan, Managing Director, Times Newspapers Ltd
- Angus McBride, General Counsel, News UK
- Martin McTague, Policy and Advocacy Chairman, Federation of Small Businesses
(This is a 'live blog' so check against transcript which is likely to be up on the Treasury Committee website in the next ten days)
Most of the debate was on Making Tax Digital, with occasional questions about Brexit and a short exchange about the taxation of digital newspapers.
Labour's West Streeting stood in for the Chair Nicky Morgan, who was unavailable.
Anita Monteith is optimistic about the way the public has embraced digitalisation but is concerned about the digitally excluded, such as people who are maybe too old or live or work where broadband is weak.
Martin McTague said digitisation should give HMRC the opportunity to communicate better with taxpayers. At the moment, the largest issues are mainly negatives, especially in regards to the group of people who run small businesses whose digital skills are low and are struggling to deal with digital updates - and MTD is an added complication to their lives.
Angus McBride said News UK has been in discussion with HMRC about how VAT is different for the paper and digital versions of a newspaper (online is not subjected to zero rate of VAT). This shows how tax is not keeping up with the times, he said.
It is hard for HMRC to get any band width on MTD because of Brexit, said McTague. Most small business people only react at the last minute to these kinds of things, he said. There is a big group out there that are not recognising this as an issue for them.
Monteith said there are just 10,000 businesses signed up to the pilots, out of one million due to be mandated into MTD. It is not clear to businesses how you sign up to pilots. HMRC is writing a hard copy letter to businesses and has not finished sending them out yet.
Conservative Simon Clarke asked about the MTD pilots and whether they have found businesses are making less errors.
McTague used the adage about 'rubbish in, rubbish out'. There is no indication that just because you digitise the process, you will reduce the errors. Some software cannot stop taxpayers from making repeatedly the same mistakes.
Monteith said tax errors go both ways - but HMRC seem to think it will lead to fewer expenses and more income reported but that is attributable to the black economy which is a completely different problem. The cost is huge for businesses. Making it compulsory when it is clearly not ready just seems to be unwelcome, she said.
McTague said some businesses are running very old legacy software which is not suited to MTD and therefore they have to spend more on IT that they are not familiar with. HMRC are driving this through very hard, however.
Clarke turned to transposition errors.
Monteith said this simply means switching two numbers around and it may be a small one and a big one, and you can increase or decrease in expense claims.
Monteith said agents need to see and do what a business can see and do. The PTA is not accessible to your agent which may be a surprise. There are problems associated with assuming a businesses will sign up to MTD. You need to be signed up to a BTA or an agent cannot see the information.
Chris Duncan said MTD is about reflecting the changes in the wider economy. News UK has more attention on the way our finances are processed rather than the case for small businesses.
Rushanara Ali, Labour, asks about tax and Brexit. How helpful has the Government been?
McTague said the Government have come out with a helpful statement saying they would treat it on a cash basis, so traders would not be in a position of paying VAT before they collect it. However, there is so much distraction by brexit, the 'white noise in background' means a lot of traders are not hearing what they need to hear from HMRC. HMRC has a lousy reputation for how they deal with phone calls, the digitally excluded suffer from this most of all. If you are going to digitalise the tax system, they could look at improving how they deliver customer service.
Ali then talks about European Commission plans to put a cap on VAT threshold at £75,000. Is this casuing concern among small traders?
McTague said the chances of that influencing our tax laws are slim, so FSB are not panicking. It has only an outside chance of coming into effect.
Monteith said there are a lot of business just below that threshold and in any case we will see many more businesses having to register for VAT.
Ali then asked about businesses' access to HMRC. What kind of inputs can help?
McTague wants more HMRC resource for his members to deal with because he fears HMRC have understimated how much help taxpayers will need this Spring.
Monteith urged HMRC not to make changes that they do not have to do now.
Stewart Hosie, Scottish National Party, said FSB has its own MTD hub and ICAEW has done an extensive outreach with members; how responsive are HMRC to the information you are picking up from your members and how can they respond better?
McTague said initially FSB was hostile because HMRC seem to want to ram through this MTD project. We lobbied hard to get it restricted to the VAT threshold. Since then, we have been more constructive with HMRC. But FSB get very little support from HMRC. There was a lot of talk about closing the tax gap from HMRC but not enough about helping taxpayers.
Monteith said ICAEW has enjoyed a constructive relationship with HMRC but the problem is that they are slow to get things fixed. You feel that if it all goes wrong, the business may think it is the agent's fault rather than HMRC.
Hosie is shocked that agents camnot see the PTA. Monteith said BTA is different to PTA. Hosie: "Are the Revenue trying to stop businesses growing beyond the VAT threshold?"
McTague gets the sense that HMRC recognise problems but do not have the resource to fix them.
HMRC say that awareness of MTD among small businesses that do not have tax representatives are higher than the general population, and that there is no real problems with digital capability in that sector.. McTague cannot imagine where they got that view from.
Monteith said the processs of a taxpayer taking a carrier bag once a quarter to their accountant is not necessariy coming to an end. We made clear to HMRC that they have to accept spreadsheets and they acted on it. The real prize is when HMRC can provide an unrepresented businesses with prompts and nudges to check the accounts inputted are right - but she cannot see how HMRC can do this in the timeframe, let alone 'auto-populating'. She said the project needs to be delayed until the business case is proven; this January the huge proportion of self-assessment tax returns were done online but this was not compulsory.
Charlie Elphicke, Conservative, said zero-rating digital publications would save universities, libraries and NHS up to £55 million a year - but would savings be passed on to consumers if they were zero-rated?
Chris Duncan said extra money would be invested in businesses, even discounting for younger readers. Angus McBride said the social policy behind zero-rated has always been clear, such as for democratic accountability. He thinks this should apply for digital editions, too. Chris Duncan said it is about incentivising digital innovation and competitveness. This is a clear example of where the newspaper indusry is being penalised for moving to digital. There should be a level playing field with competitors online.
Elphicke said the entire tax system have been shattered by the innovation that is the internet and the rise of digital publications and enterprises and the travails that the newspaper industry is suffering is not a million miles to the high street is suffering. How do we get a level playing field, he wondered. Duncan agreed the debate about hight street v online sellers and business rates is a bit similar to the problems the newspaper industry is facing.
Catherine McKinnell, Labour, asked about MTD and the impact on the relationship between taxpayers and their agents.
Monteith said advisors have to be more hands on with teaching businesses especially smaller ones, how to get in line with MTD. Also tech them how to use new functions from bank accounts so they can download their transactions on to a spreadsheet for the first time. That bit is perhaps where ICAEW members will be able to spend more time to help people grow their business; we will see more changes in that relationship.
Monteith said the bookkeeping end of the market, which is less where ICAEW members do most of their work, will eventually end, but it is changing anyway. There are not many people who want to spend hours on big ledgers. She recounts a story about a 70 year-old member who has retired early because they do not want to go down the digital accounting route.
McTague said the more mechanical processing of data has been replaced by more quality or added value services. There is no evidence of their fees going up, however,
Monteith talked up the amount of free advice and guidance on the ICAEW website.
Taking about productivity, McKinnell asked what more can be done by HMRC to support small businesses and advisers.
McTague said small businesses' digital skills are weak and that impacts on productivity. The process of digitisation is being pushed too fast for them, however, agreeing with the Labourr MP that is will leave a fight of the digital fittest.
Acting Chair Streeting asked about the sustainability of the software products. Monteith said her members are not the best people to give advice to people on what software to choose. McTague said some businesses will not survive this MTD process. With weeks to go to MTD we are close to a 'very serious problem for a lot of companies'.
Streeting asked about the adverse impact on cashflow of changes to VAT accounting treatment post Brexit that changes the point at which import VAT is paid. The Committee raised this with the Treasury and was given assurance from HMRC that they are engaging with stakeholder to mitigate this risk.
Monteith would be surprised if many small businesses have been reading all the notices that have been published. McTague said HMRC have given specifics on how they will deal with it and praised HMRC for acting responsibly on this.