The Chartered Institute of Taxation (CIOT) has welcomed a call by the Public Accounts Committee for HMRC to assess whether the administrative burden that ‘Making Tax Digital’ is imposing on taxpayers is reasonable and affordable before proceeding with further national roll out of the project.
The recommendation, made in the committee’s Tackling the Tax Gap report published today (Friday),1 reflects in part the CIOT’s evidence to the committee casting doubt on whether compulsion is the best way of extending Making Tax Digital (MTD) to the vast majority of VAT and income tax self assessment businesspeople, or whether it will deliver a significant reduction in the tax gap.
John Cullinane, CIOT Tax Policy Director, said:
“We warmly welcome the recommendation that HMRC should assess whether the administrative burden that MTD is imposing on businesspeople is reasonable and affordable before they expand it further.
“The concerns that surfaced in our survey2 cast doubt on whether compulsion is the right approach to extending MTD, or will deliver the significant reduction in the tax gap sought. It is premature to extend it further without reliable evidence to demonstrate it is achieving its purpose.
“The theory behind digitalisation of the tax system is sound – and experience during the coronavirus has shown its merits. But it would be best to allow it to grow organically, with systems created that are attractive enough that businesses choose to migrate to them, as has happened with online filing more widely.
“We expect that the impact of COVID-19 – and the resources which have had to go into HMRC’s swift and helpful responses – might anyway lead them to rethink or reschedule aspects of their roll out of MTD.”
A key concern of the CIOT is that taxpayers, many of whom will not understand the complexities of the tax system, will presume wrongly that the output from the software they are using is correct because it is on a list of software providers on GOV.UK, and that if the software allows a particular treatment then it is correct.
John Cullinane explained:
“We hear disturbing examples, such as VAT being able to be claimed on wages payments and even on payments of tax. We are concerned that lack of technical accuracy within software could lead to an increase rather than a reduction in errors. We appreciate that HMRC undertake a range of checks from various perspectives but think they should consider greater focus on full and consistent tax technical accuracy within that.”
Broader concerns about the tax gap
The CIOT says the UK tax gap is proportionately low, reflecting a high level of compliance by taxpayers, and the result of HMRC’s compliance and other activities; albeit that these have been reduced by prioritisation in the face of COVID-19. While it is desirable to reduce the tax gap further, any efforts to do so need to be properly targeted and minimise burdens on those already seeking to be compliant, says the CIOT.
John Cullinane said:
“We are concerned at the continuing high level of tax lost due to ‘mistakes’. This is a combination of several factors such as a complex tax system and inadequate guidance on GOV.UK. Until there is real, meaningful simplification of the tax system this rate of errors is likely to continue. We do not believe that technology such as MTD represents the answer to complexity in the tax system – rather the tax system needs to be simplified to ensure digitisation delivers benefits.
“We commend HMRC for the in-roads they have made in relation to criminal attacks but the other components of illegal activity - evasion and hidden economy - have remained stubbornly high. In large part we believe this is due to the perceived risk of getting caught, which is too low. HMRC need to change this perception for illegal behaviour to fall.”
Notes for editors
1. The Public Accounts Committee’s report should be published on the committee’s website tomorrow (Fri) – here.
2. More information on the joint CIOT/ATT survey is here: Survey results contradict government claims of realising benefits of digital tax reporting – January 2020
3. Making Tax Digital is a key part of the Government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs.
HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world. Making Tax Digital is making fundamental changes to the way the tax system works – transforming tax administration so that it is:
- more effective
- more efficient
- easier for taxpayers to get their tax right
MTD for VAT
VAT-registered businesses with a taxable turnover above the VAT threshold (£85,000) are now required to follow the Making Tax Digital rules by keeping digital records and using software to submit their VAT returns. If you are below the VAT threshold you can voluntarily join the Making Tax Digital service now. VAT-registered businesses with a taxable turnover below £85,000 will be required to follow Making Tax digital rules for their first return starting on or after April 2022.
MTD for ITSA
Self-employed businesses and landlords with business turnover above £10,000 will need to follow the rules for MTD for Income Tax from their (current or next account period) following April 2023. Some businesses and agents are already keeping digital records and providing updates to HMRC as part of a live pilot to test and develop the Making Tax Digital service for Income Tax. If you are a self-employed business or landlord you can voluntarily use software to keep business records digitally and send Income Tax updates to HMRC instead of filing a Self Assessment tax return.