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Annual tax return to be abolished?

Maybe so – but how about replacing it with 5 (yes, five) annual tax returns – or even ten!

To put it this way is perhaps an exaggeration, but HMRC’s plans for Making Tax Digital for Business will have broadly that effect.

In brief, the idea is that businesses will be required to keep their records in digital form (via software or an app), and to upload these records – in summary form – to HMRC at least quarterly. There would then be an end of year adjustment, to present the final figures for tax purposes, and so calculate the final tax liability. If an individual has both business income, and property rental income, there could be two lots of quarterly updates and end of year adjustments. Indeed, for someone with more than one business…….

Small businesses will be exempt from these requirements – however, this is of little comfort, as the suggestion is that ‘small’ means turnover of no more than £10,000pa. This limit has been heavily criticised, and it is hoped that this will be heeded – perhaps so that the limit will be set at the VAT registration limit, currently £83,000.

HMRC’s expectation is that there will be two significant benefits from the introduction of this system. One is that it will reduce the number of errors in tax returns (thus reducing ‘the tax gap’); the other is that it will help business taxpayers to keep abreast of how their tax liabilities are building up through the year (via accessing their Digital Tax Account).

There is so much wrong with HMRC’s perception, that it is hard to know where to begin! But let’s try.

Their assumption is that all errors favour the taxpayer. Definitely not the case. And that keeping records digitally will automatically improve the standard of that record keeping. “GIGO”

Keeping abreast of tax liabilities is a commendable aim – but for many taxpayers, there is a lot more to their affairs than just their business income, and occasional transactions (for example, gift aid payments, pension contributions, VCT, EIS) can significantly change the picture. And, if you feel you do not want or need help to keep up with your tax liability, you will be charged penalties for not making the quarterly returns.

Many business owners feel that they are perfectly happy keeping their records on paper (or in a shoebox, for their accountant to sort out at the end of the year!). They will have to change. HMRC have estimated the transitional cost at £280 – others have estimated it at ten times that figure!

Whilst I can see that keeping records in the manner proposed is likely to have advantages for many, I do not see that the advantages will be those that HMRC claim for the proposals. I can envisage that, if embraced, many businesses will be able to improve their management information, and that should be sufficient to encourage businesses to adopt the proposed technology. Making it mandatory to do so for tax reasons is simply a bad idea.

And when will all this begin? Broadly speaking, it will be from April 2018. But the software and apps are not yet available (free apps are proposed to be made available to the simplest businesses), and there is still a paucity of detail. There have been many calls, including from the Public Accounts Committee and the Federation for Small Businesses, for the proposals to be delayed – it is to be hoped that these calls will be heeded, not least as it is hard to see how businesses, their advisors, software providers will be able to be ready in time for the proposed implementation date.

Yet another case of HMRC consulting – or perhaps I should say ‘consulting’ – being told it won’t work, and then carrying on anyway.