A recent National Audit Office (NAO) report compares measures adopted by other countries to reduce instances of VAT and sales fraud with the UK's approach. It reveals that the UK is seriously lagging in terms of its adoption of technological solutions.
In considering why the UK came to be so perverse in its approach to tax technology, we should examine whether HMRC's approach to Making Tax Digital should refocus on sales reporting.
The NAO made a review of control measures used by other countries to ensure tax compliance in terms of reporting and recording sales and VAT, and compared other countries' approaches to the UK.
TheNAO's summary (as reproduced in the table below) indicates that the UK needs to do a lot of work in catching up with its Organisation for Economic Co-operation and Development (OECD) and EU neighbours if it wants to be efficient in the collection of taxes in a digital world.
For example:
- Over half of OECD countries have mandated electronic invoicing: the UK does no such thing and even still allows for paper.
- OECD countries and EU countries are now mandating the use of fiscal tills: the UK has yet to assess the cost and benefits. Note that here, it is worth noting that OECD has said that, "Fiscal tills were introduced by legislation in a number of countries more than twenty-five years ago and there has been a recent increase of interest in their use.
- Many countries automate split payment calculations for VAT in high-risk areas. Despite a 2017 call for evidence, HMRC is only now researching 'proof of concept' for such measures.
- Address verification on company or VAT registrations: Companies House now require director ID, but no proof of company address, HMRC does not check addresses either for VAT registration.
The NAO findings are included in a report on HMRC's strategic response to tackling tax evasion published this week.
What has gone wrong?
It is understandable, perhaps, that a UK government obsessed with the 'Brexit' question for many years would not want to follow any EU initiatives. This is potentially why the UK has nothing similar aligned to the EU's proposals for a digital reporting system.
Also, why also would the UK follow the EU when it has following its own Making Tax Digital (MTD) program for so long?
The original justifications for MTD are now obscured in the sands of time
MTD for VAT took a lot of time and effort but ultimately MTD for VAT has been a success, although it has come at a high cost for many accountants and their clients. Its major success is that it has shifted VAT-registered business into electronic bookkeeping. VAT reporting, unlike direct tax, is pretty easy to report: just nine boxes on a return four times a year and it's non-cumulative reporting.
Making Tax Digital for Income Tax Self Assessment (MTD ITSA) is a very different creature:
- Five submission reports are required, the results are cumulative, tax adjustments are necessary, and tax basis periods have had to transition (taxpayers with non-tax year ends).
- There are complexities for joint ownership, error correction, multiple agents and choosing software with no free solution.
- It creates a need for accurate quarterly calculations, payments, interest and penalties and an error correction mechanism.
HMRC is privately beta testing its MTD ITSA and there is no move yet to mandate partnerships or companies into MTD or provide a start date for those cohorts.
Because participation in the MTD ITSA pilot is also only possible if you have a client with simple tax affairs: e.g. only a sole trade and, that a lot of software (including that used by all the largest firms) is not MTD compliant, there is a serious lack of participants in the pilot.
Participation in such pilots is also unpopular for those who were previously 'burnt' by earlier attempts at MTD (see Blog: Trying to sign up for MTD for VAT), it did not work as it should have. This has led to some firms feeling that they were unpaid guinea pigs then and they do not relish the prospect of losing so many valuable hours of their time with scant in the way of any material reward.
Several software firms have gone bust because of HMRC moving the goalposts in MTD ITSA. There is a lesson there: if you are going to ask suppliers to develop a new product you need to ensure that you have a robust market for them.
HMRC originally promoted MTD as a way of reducing the tax gap. Dreams of doing that swiftly evaporated when HMRC dropped the entry levels for the mandation to businesses to those with a turnover of over £50,000, then to be followed by businesses with a turnover of over £30,000.
As a partner in a large firm recently noted: "All our small businesses are incorporated', so software issues aside, they won't be in MTD anyway.
Furthermore, recently released statistics on Unincorporated Business in the Rental sector also show that the number of landlords who will meet the turnover thresholds is also low. Your average landlord has a turnover of just £15,900. The same statistics show that partnerships (who have not yet a start date for MTD) report far greater income
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NAO's table: How does the UK compare to other countries' reporting?
| Control | Examples of use in other countries | Current UK government position |
| Transaction-based reporting, where transaction data is transmitted to the tax authority either in real-time or at regular intervals, giving up-to-date information on VAT owed. | Used in many Organisation for Economic Co-operation and Development (OECD) countries. The OECD reported in 2022 that 18 of the 37 OECD countries with a VAT regime require systematic transmission of some or all transaction data, of which 10 require it in close to real-time. Eight OECD require invoices to be ‘cleared’ by the tax authority to be considered a valid accounting document. In 2022, the European Commission proposed an EU-wide digital reporting system based on electronic invoicing. | There is no systematic reporting of transaction data. All VAT-registered businesses must keep records of invoices, which HMRC can request as part of a compliance check. These invoices can be paper or electronic. HMRC has yet to assess the costs and benefits of adopting transaction-based reporting in the UK but told us it is exploring the potential impact. |
| Mandatory use of electronic cash registers that generate and preserve sales data from cash transactions for tax compliance purposes | Used in almost half of OECD countries. The OECD reported in 2022 that 16 of 37 OECD countries with a VAT regime require suppliers to use electronic cash registers ('fiscal tills'). Five of these require systematic transmission of this data to tax authorities. |
HMRC are yet to assess the cost and benefits of implementing electronic cash registers in the UK.
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| Split payment mechanisms where VAT charged to a consumer is paid directly to the tax authority by the payment provider. | Some countries apply split payment mechanisms to certain transactions they consider risky. For example: Italy applies it for supplies made to public bodies, and Poland applies it to business-to-business supplies of specified goods and services it considers sensitive to fraud. | In 2017, HMRC launched a call for evidence on proposals to extract VAT from online purchases at the point of sale. Responses indicated that introducing split payments would be difficult but technically feasible. HMRC developed models for such a mechanism. In 2018, the government launched a further consultation to evaluate the overall feasibility of split payments. In 2023, HMRC contracted two payment technology companies to develop a proof of concept demonstrating whether or not a VAT split payment system is feasible, due to complete by January 2025. |
| Address verification on company or VAT registrations, to ensure that the address provided is legitimate and appropriate. | Some countries have specific checks in place. For example, in Spain authorities check the validity of documents and corporate agreements submitted before companies are added to the business register. In the Netherlands, authorities verify the business address during the company registration process; in some cases, this allows the tax authority to issue VAT numbers without additional address verification. | As part of the reforms introduced by the Economic Crime and Corporate Transparency Act 2023, Companies House will require directors to provide ID when registering new companies, but there will be no verification of company addresses. HMRC currently conducts risk-based checks on some VAT registrations but does not verify addresses for all registrations. |
Editorial note:
Following the NAO's findings, the Chancellor, Rachel Reeves, has announced a new Digital Transformation Roadmap for HMRC with a consultation and review of electronic invoicing (e-invoicing).
Useful guides on this topic
Is a fiscal till solution the way to prevent ESS?
Over 30 countries have created and implemented so-called 'Fiscal Till Systems' to crack down on tax fraud by Electronic Suppression of Sales (ESS), but the UK shows no sign of following suit. Is the slow-burning rollout of Making Tax Digital into a direct tax to blame?
Online Platforms: ready for tax changes?
Online Digital Platform Operators that are Online Marketplaces have to register with HMRC and report details of people who sell goods and services to buyers from their platforms. This creates a new Customer Due Diligence (CDD) requirement. While HMRC is still building its new Digital Platform reporting service, online operators need to start their own CDD systems to ensure they capture and record the right data.
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