In August 2016 HMRC have publish their response to the six consultations on Making Tax Digital (MTD). We note that they underestimate the real impact costs of making the self-employed and landlords file five tax returns per year.
Nichola Ross Martin says, "Let's be more positive: quarterly reporting can work. You just need to simplify the process."
Here is a two-step new alternative proposal for HMRC:
1. Reporting of sales/income: quarterly in summary (as is currently planned).
2. Reporting of expenses: two options, either:
- Report expenses quarterly in summary (as is currently planned) or
- Allow a NEW option, report expenses annually on the year-end return.
Background and more detail
- Under MTD individual self-employed traders and landlords must file five tax returns per year.
- They must all use software for bookkeeping under the new system.
- You can read about this in our MTD: The survival guide (for the self-employed)
This represents a massive change, a huge cost to business and the UK's economy. HMRC's Tax Assurance Commissioner Jim Harra even admits* that this brings no cost savings to HMRC either. Following consultations, HMRC have toned down their requirements for reporting (slightly). The self-employed may use spreadsheets and need only report three-line accounts.
The extra reporting burden of four more tax returns per year remains.
These measures are heavily criticised by all the leading tax and accounting bodies and professionals. Recently MPs from both the House of Commons Treasury and Public Accounts committees have both suggested that HMRC's proposed compliance requirement is overly ambitious. In short, software and Apps will still require a substantial amount of user time and energy and some 20% of taxpayers are not able to engage with HMRC online partly due to lack of technology and partly due to lack of IT skills.
HMRC’s main argument for additional quarterly reporting is that it will simplify reporting and that it is quicker to do your bookkeeping on the move.
All accountants and bookkeepers know that this is nonsense. Filing five returns a year instead of four is not ‘simpler’ and it is quicker to enter 365 receipts in one batch than to enter one receipt in 365 batches. Most companies do not do their bookkeeping daily and so why expect a self-employed individual to do so?
There is an easier way
The ‘tax gap’ is made up of the difference between what is reported and what is really earned and not reported. The real mischief is not the expenses misclaimed, it is the income undeclared. It follows that we should focus on income and not on expenses.
Scrap three line reporting, have the self-employed report only their income quarterly.
This is not difficult. It requires a summary of invoices raised or cash received, whether kept as a handwritten list or on a spreadsheet. This one act of reporting will focus attention on recordkeeping and it will serve as a nudge, hopefully reducing that tax gap. In terms of reporting, we already have an easy-to-use template. It is called VAT online filing. Taxpayers will need access to a PC or internet-enabled device once a quarter: no special software or smartphone required.
When it comes to expenses, then let the self-employed decide which way suits them to claim their expenses. Give taxpayers the option. Either you can claim your expenses:
- Once a year, when you file your year-end return, or
- quarterly (as is now proposed) when you file your quarterly return.
In both cases, you make adjustments on the year-end return for capital allowances and this gives you the final time to check your submissions.
The Treasury Select Committee suggested that HMRC run a long-term pilot scheme for quarterly reporting and HMRC have agreed. That is unnecessary with a simplified reporting scheme as outlined above. Many of us all file our VAT returns online and we know that system works well.
This is a comment piece. The views expressed in this article are those of Nichola Ross Martin FCA.
HMRC have published their responses to the MTD consultations.
The House of Lords has recently called for evidence ahead of HMRC's publication of draft clauses in FB2017 on MTD. They are focusing on administration, clarification and simplification.
Making Tax Digital: The Grand Design
Links to all the latest updates on MTD, Treasury Select Committee and consultations.
MTD: Survival guide (for the self-employed)
What the self-employed need to know about the current proposals.
* interview Radio 4 Moneybox 1/2/2017