The government's Making Tax Digital plans, where all UK businesses will be legally required to keep digital accounts and submit them every quarter, are drawing criticism from MPs - and rightly so.
Due to be implemented by April 2018, HMRC insists that the changes will reduce bureaucracy and delays, as well as bring in an extra £625m in tax revenues. HMRC's argument is that more regular reporting will help small businesses to get their accounts right, leading to additional income for the government's coffers.
The Commons Treasury committee has cast doubt on this figure, suggesting that many small businesses may well be undercounting their expenses. Any errors in submissions could just as well be in favour of the taxpayer as HMRC, so Chancellor Philip Hammond’s assertion that hundreds of millions of pounds could be reclaimed seems somewhat naive from a man with a business background.
However, while the committee backs the principle behind the scheme, it has serious doubts about how quickly the plans are being introduced, and I share these concerns. Many SMEs across the country, already dealing with a perilous economic situation, could find themselves badly impacted by these ill-conceived plans.
Improper implementation of the proposed system will inevitably cause errors in the submissions process, which may create chaos in our tax system. HMRC's track record with digital systems isn't exactly great - the recent problematic contract with supplier Concentrix being a prime example, not to mention the systems error in 2014 that saw thousands of people incorrectly sent rebate cheques, or the incident in 2007 that saw the data of millions of Child Benefit recipients put at risk.
Therefore a rushed system developed by HMRC has the potential to cause taxpayers, companies and HMRC lots of issues. The last thing HMRC needs is a further loss of confidence in its abilities to create digital systems fit for the 21st Century.
While the Commons Treasury committee's calls for pilot schemes to be rolled out - rather than a wholesale implementation of the Making Tax Digital plans overnight - are sensible, I would also argue that tax digitisation should be introduced for limited companies first, followed by individuals, instead of the other way around, which is currently planned.
It would also be beneficial if another few years were added to the timescale to ensure the scheme is implemented correctly. Additionally, by introducing other measures first, such as the requirement for VAT submissions to be made through accounting software, businesses would have some time to get into the habit of using these systems in preparation for tax digitisation.
At present, only around 25% of businesses use accounting software and for the government changes to see a smooth transition this number really needs to increase. If SMEs moved over to accounting software now, then by the time tax is digitised it would only be a matter of clicking a few buttons every quarter. It’s down to the government to ensure that business are prepared for these changes so that their bottom lines are not affected by small errors made online.
A survey recently found that in the last two years, 19% of those who filled in a self-assessment tax return believe they made an error or not understood the document correctly and lost out financially as a result. Such mistakes can cost 20-100% extra tax due so it’s important the government takes the time to educate individuals and businesses alike to the changes digitisation will bring.
I’ve worked with thousands of small businesses over the years, including many sole traders, and one thing that has been apparent to me is that many still use analogue processes and need encouragement to switch to doing things digitally. Rather than providing free software and insisting all businesses make the switch suddenly, with punitive measures for those that fail to toe the line, HMRC needs to spend more time alerting SMEs to the benefits of going digital. This should include offering training to those who who lack the confidence or digital skills necessary, and carrying out limited tests to ensure that the software systems that have been chosen are fit for purpose.
The danger of pushing a flawed scheme onto small businesses could be devastating - the additional costs involved in hiring in external help with accounting could have a massive impact on some SMEs, perhaps even driving them out of business altogether. Despite the exemption to the scheme offered to the smallest organisations - those turning over less than £10,000 per annum - the measures could also see some SMEs disappearing into the hidden economy.
Ultimately, Philip Hammond’s time at the Treasury will be judged on the success or otherwise of this digitisation push. If he wants history to look on him kindly then he must listen to the concerns of the small business community - and his own backbenchers.
Lee Murphy, owner of Pandle
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