Cross-border Trade and Accounting was the topic of an adjournment debate on 30 October. Conservative Luke Graham, who was an accountant for Tesco and Marks and Spencer before becoming an MP, secured the debate and spoke about the development of accounting systems, Making Tax Digital and HMRC’s support for small and medium-sized businesses. He said he believed accountants can help with big social and environmental challenges and that it ‘may well be accountants who have the key to global Britain’.
Graham said he was greatly upset that the Government had had to defer some of their plans to make tax digital because of the advent of Brexit. He believes that Making Tax Digital makes business people more efficient and more productive, and that it can lead to better decision making for companies. Digital tax reporting is more environmentally friendly than using paper, he argued. Not only will companies grow by dealing with tax digitally, but it will contribute to our productivity and thus our GDP, he claimed.
The MP went on to say development of accounting systems is important because we need to be able not only to capture the value of physical assets but to look at new methods of valuing intangibles, such as IP. He praised the accuracy of modern accounting systems, adding ‘it is always a good thing that not only should taxes be low, but companies and individuals pay the taxes that they do indeed owe’.
On the topic of VAT, DUP’s Jim Shannon said that accounting systems which create a digital border in Northern Ireland and, indeed, in the Republic of Ireland, have been in place since the peace walls came down. Bob Stewart, Conservative, took on Shannon’s point by saying digital accounting systems should not just be routed into HMRC for tax purposes, but could quite easily be pushed sideways to the Border Force. The priority was minimising the paperwork for crossing a border, he said.
Luke Graham continued, saying the VAT information exchange system will be still open to Northern Ireland under the current withdrawal agreement proposals, and he thinks it ought to be open to other parts of the UK. He complained that there is confusion and a need for greater transparency because in the withdrawal agreement it talks about Northern Ireland being outside EU law in relation to VAT, but also about EU VAT law being applicable in Northern Ireland.
Graham spoke of his time working in China in 2008, a time when a record, fapiao or receipt needed a traditional ink chop to be recognised for accounting purposes. And, citing America and its slightly onerous city, state and federal tax returns, he hopes no matter how far we go with devolution in the UK, we do not turn to the more federal system whereby we erect more transactional barriers. “We need to ensure that we use accounting systems to make the flow of trade easier, rather than erecting more walls and bureaucracy,” he said.
Better accounting systems would be great for UK consumer rights, because they provide a greater level of transparency, detail and trust, said Graham. People complain to him about multinationals such as Amazon not paying the right amount of tax, but ‘accounting systems can provide that level of transparency to give customers faith that where sales are made, the right level of taxes are paid as well’.
Craig Mackinlay, Conservative, had concerns about the push towards making tax digital, particularly for smaller traders, ‘for which I can see very little use for it’. Mackinlay went on to say we are in a new world, but for people to say that intra-EU trade is somehow seamless and completely frictionless is simply not true.
In contrast to Graham, Stephen Kerr, Conservative, said he was gravely concerned about the complexity in accounting systems, which makes any kind of audit trail really difficult. The Big Four audit companies have such a poor record in auditing these accounting systems, he said. Mackinlay, a qualified auditor as well as a chartered tax adviser, disagreed, saying the digital trail is more likely to be there than the old paper trail.
Mackinlay said: “If I sell, as a VAT-registered entity in the UK, to another VAT-registered entity, it is not frictionless. That transaction has to be recorded on both sides, and it will find its way through Making Tax Digital on to a VAT return, so the trail is there. If I sell to an EU company, a level of complication comes into play, because I have to obtain an EU registration number, and I can then zero-rate that transaction. On the other side, they have to do a reverse charge to recreate that VAT for themselves and claim it back. It is a burdensome system, whichever way we look at it.” Records and proof of a good being transferred have to be maintained for six years, he added – not a frictionless system. On the Republic-Northern Ireland border, he went on to say: “There is no physical border infrastructure, yet there are hundreds of thousands of pounds of potential differences in the excisable duties. These lorries are never stopped, however, because there is trust, and that is the route to solving this problem.”
Mackinlay observed that the level of bureaucracy in running a business in the US is ‘infinitely higher’ than in running one in the UK. “I was quite intrigued to learn that if an individual in California decides to buy goods on eBay or whatever site they please from a low-tax state such as Dakota, they have to do a personal return for a transaction above a certain size monthly or quarterly, and actually return the equivalent of the sales tax—VAT, in other words—that the Californian authorities have lost because they have taken their trade outside California.”
Graham intervened to say some of the best tax regimes are in places such as Hong Kong where there are flat taxes, which are ‘simple and elegant’. The UK tax code is 22,000 pages whereas Hong Kong’s is 350 pages, Mackinlay told the House.
Jesse Norman, Financial Secretary to the Treasury, responded to the debate on behalf of the Government. He said Graham was “right to highlight Making Tax Digital for VAT, not merely as a success for HMRC—although it has had some delay, it is clearly proving to be that in relation to VAT—but because of its wider effects. More than 1.25 million businesses are signed up to Making Tax Digital for business, and very nearly 1.75 million VAT returns have been successfully submitted through the service. Some 81 per cent of all businesses mandated from April are now signed up to it. That is a tremendous achievement. When the British people are presented with a challenge, particularly on taxation, they rise to it and overcome it. That is an important and valuable characteristic, and it is one we rely on.”
Norman said HMRC is measuring ‘potentially quite significant productivity benefits’ of Making Tax Digital for VAT. The benefits are starting to become sufficiently well known within the smaller business community to result in many signing up for Making Tax Digital VAT voluntarily, he enthused.
The minister went on to say the digital services tax is designed to level the playing field, with platforms using their power for good rather than yielding to the temptation to exploit insider information and one-to-many power to create an ‘unlevel’ playing field.
On whether VAT systems can be used to facilitate cross-border trade, Norman said there are specific challenges with this. “The first has to do with the monitoring of goods, and the UK is under an obligation to demonstrate its control over goods imported and exported from this country. The Government need to be able to monitor the movement of goods in real time, but the trouble is the current VAT system, which is of course typically run on a quarterly returns basis and does not meet the ‘real-time’ requirement, as VAT is accountable after the movement of goods.”
Secondly, said Norman, it is an underlying principle of the WTO and the World Customs Organisation that tariffs should exist as a trade policy tool and must be applied in a fair and reasonable way. Real-time controls are a way of satisfying authorities that the correct tariff has been applied and collected on goods and it is important not to lose the credibility that border controls confer when they are deployed on the UK as a trading partner. That would potentially be put at risk by this suggestion, he said.
The final challenge is that the UK is under an obligation to show that it has applied trade policy in a fair and uniform manner, and customs controls allow us to differentiate countries that have free trade agreements from those that are subject to most favoured nation status. Both the UK and the EU envisage putting in place ambitious customs arrangements to make use of all the available facilitative arrangements and technologies that we can, he said.
The full debate can be linked here.