MTD: Get Ready to Reveal All

Hillier Hopkins LLP is holding a series of seminars on Making Tax Digital. Our own Ruth Corkin and HMRC’s Heather Elliot will present short explanations and provide technical background, followed by questions and refreshments.  Demand has been high and although most places are now taken, if you would like to attend, please do put your name down on our waiting list.

Making Tax Digital (“MTD”) is the latest euphemism adopted by government for shifting the burden of tax collection onto the taxpayer. We have seen the terms “Customers” replace “Taxpayers”, “Officers” and “Case Workers” replace “Inspectors”, and of course “Self-Assessment” replacing “Assessment“. We have seen friendly “Tax doesn’t have to be taxing” adverts, and “Advice” emails adding to the spin. However, make no mistake, whatever your political allegiances, MTD is among the most intrusive government projects yet devised in modern Britain.

The concept of Making Tax Digital, which has been imposed by government as much on HMRC’s staff as on the general taxpayer, is to link your data to government. Next month, as we see the introduction the General Data Protection Regulations (“GDPR”), we can also witness government forcing us to connect our data to them and legislating to allow government agencies to help themselves to data which belongs to us.

The irony seems to have been missed by many, who have focused on government’s dreadful record of data security breaches. Actually, that is small beer. Government departments may at times be as inept as everyone else, but they do have endless supplies of (your) money with which to put things right. The real issue is that, while legislating to ensure privacy of personal data, they have also been legislating to allow themselves access to it. They really have.

In the beginning, MTD will apply only to VAT registered businesses with turnover over £85,000 pa, in other words, almost all but micro-micro businesses.  (This temporary limited scope was in fact a victory of consultation.) At your own expense, you will need a new internet-based link directly to your accounting software, or via an approved program called an “API” to link to spreadsheets and other sources of data.  At first, software will transfer much the same information as you have to give HMRC already, but they have stated that this will increase and increase. This will help the UK’s GDP, won’t it?

Government consulted with HMRC, the professions and public, and many doubted it was a good idea.  So government pressed ahead anyway, legislated and good or bad, we will all have to comply. So now we must all focus on how we are going to comply. Indeed, that is what our seminars will focus on, because that is what you need to know.  If you get that wrong, there will be penalties.

Tax is an imperative, and unlike other government intrusions, which are generally optional, MTD is ultimately imposed on every citizen.  However valid the need for government spending and however friendly and socially appealing the spin becomes, in the end, tax involves government deciding how much of what starts life as yours will become theirs. Tax is one of the two certainties in our lives, and now MTD is a third.  MTD is billed as the latest way to help businesses and customers to avoid mistakes and get their tax right. Well they would say that wouldn’t they?

But what does MTD truly mean?

For the first time, government will have direct access to our records without having to show good cause. The process will take several years, but this is where we are moving.

The implications are profound, not only because of the invasion of our privacy, but because it interferes with the relationship between taxpayer, adviser and government. A conspiracy theorist might suggest this is deliberate. A direct link to HMRC will call into question any adjustments you make because your accountant has advised you that the way you originally treated a transaction was incorrect. You will be dependent upon the software manufacturers to have written programs that get things right. When it reaches full flow, MTD will bypass the adviser, and government will decide how it wants to treat any transaction. If you disagree, you will have to argue the point. By then you may well have dispensed with your adviser (note the self interest here), and have to rely on a HMRC helpline.

Remembering that tax compliance is a by-product of accounting for transactions and is not its primary purpose, I expect that many businesses will seek to interrupt the flow of data from their records to HMRC by deliberately avoiding the simplified processing software designed to make business life easier and which talks directly to HMRC. This counter-intuitive approach will, for a while, allow businesses to take back control, but at a cost to the businesses as they operate more clumsy software. Indeed, we have seen that some of the high-end suppliers have already stated that they will not develop processes to link with HMRC.

Gradually, MTD will extract ever more data about your business and eventually will suck it into HMRC’s analytics programs probably in real time. Everything you know, HMRC will know. The scope will widen to cover corporation tax, income tax and every other form of transaction until we have no privacy at all.  It will only be limited by processing power. Before you know it, your bank accounts, credit card accounts, and in the end, as banks link to software and software links to HMRC, every transaction made by you using any account whatsoever will be available to government agencies before, or at the same time as you know it. This is the start of very Orwellian government.

Does it matter? After all, “nothing to hide, nothing to fear”“Maybe it will help avoid and counteract fraud?” Well, maybe it will, but at what cost?  People will be looking over their shoulder, however innocent they may be. You see, people think, “there’s no smoke without fire, is there?” But so often there is. People run lottery syndicates and holiday clubs, and use the power of digital technology to transfer money around. It is all perfectly legal and innocent, but do you feel you should have to justify it to HMRC?

Is it right that an Inspector of Taxes should know what you bought your partner for Christmas and from where? Should they be able to examine such things and challenge your lifestyle in a free democracy? This high level of potential scrutiny will also stifle creativity. Creativity requires doing something that is exceptional, and the artificial intelligence that runs HMRC analytics programs will question the exceptional.

We all like digital, don’t we? It makes for great photos, it allows easy access to making exciting family videos, recording and playing high quality music, transferring data.  It also makes it easy to download music we haven’t paid for, take data, and steal money and identities. Everything happens in an instant, before humans can intervene.  We all laughed when Little Britain coined the phrase “computer says no” but we all know it to be all too true.

In the press only this week we see that a government department has admitted a form of institutional bias in their blinkered following of government policy. Accountants standing between their clients’ raw data and HMRC have always been the check and balance. Without that defence, there is a real risk that HMRC’s requirement to collect tax will over-ride its current fair and balanced approach. And that ought to make us a little worried.

 

 

Press Regulation – Good, bad or dangerous?

The Press is being very careful at present to ensure that we all see very clearly how valuable its investigative and reporting activities are. They have a point, because if current proposals are adopted, it will be impossible for a newspaper to defend itself in court, so all we will ever read in a newspaper is how lovely everything is. Dictators and despots may approve, but no-one in their right mind would make a person who wins a defamation case pay the costs of the loser.

The Press is not a body of angels. They sometimes manipulate, and behave very badly, for sure, and Self-Regulation is important. The Press also needs to understand that they have been the key architects of the destruction of every other profession, having drawn the public into a belief that government regulation is a good thing. Some may say they have it coming, but that would be short sighted. I would not wish to see them hoist with their petard, as their freedom is too important.

Most professions are already regulated directly or indirectly by government. The results have not been glorious. I thought I might illustrate the point by considering how regulation of the accounting profession has achieved its objectives. Perhaps we can learn something. This is a potted history based more on personal recollection than detailed historical study. The events I describe are therefore seen from my perspective and others may well interpret them differently.

Regulation of accountancy came to the fore around 1975 with “The Corporate Report”, a massively important piece of academic research that concluded many things, not least that:

  • accounts of companies were (at the time) inconsistent year on year, and from one company to another;
  • few users of accounts had a proper understanding of their meaning.

Its authors considered who used financial reports and why, and proposed that a more formalised framework was needed. The profession, fearing government intervention and determined to maintain its high standards, started to regulate itself by setting standard accounting practices and principles. Professional committees produced a body of accounting rules called Statements of Standard Accounting Practice (“SSAP”). Understanding improved and there was greater consistency and comparability between company reports.

However, regulation begets regulation, and the lines between professional judgement and government policy can become blurred. Just as doctors and dentists are restricted in deciding what they do for patients but must follow rules determined by government regulators (“NICE”, for example), so government policy moved in on accountancy. It was politically necessary to harmonise our accounting practice with the EU. A series of major corporate failures during the 1980’s (DeLorean, BCCS and Polly Peck come to mind, but there were others) were blamed on accountants. Sensationalist and often ill-informed media reporting created a misconception that an audit report was a total “clean bill of health”.

Rather than clarify this expectations gap, the profession self-flagellated, and Government seized the opportunity to gradually introduce its own regulations. In 1981 a benign Companies Act, the first since 1948, introduced an accounting framework with standardised formats for accounts. In 1985, Company Law was consolidated into a single Act, and in 1989 for the first time, Accounting Standards carried the full force of statute – it was now the law that accounts should comply with Accounting Standards.

It seemed that, sitting in sack-cloth and ashes and seeking to rebuild trust, the profession worked with government to create a new regulatory framework: Financial Reporting Standards. These were supposed to be better, somehow, than what had gone before, and more relevant to the new transactions of the late 20th century. They also moved us, sometimes, closer to international standards.

The question that many asked was, would a set of accounts give a true and fair view because they comply with Standards, or as well as complying? Others were less kind. Did this now mean that previous accounts under the old Standards did not give a true and fair view? It did not matter because the Regulators became stronger too and non-compliance was not an option.

The legislative framework marched on. Companies could be small, medium or large, listed or unlisted, and that may determine the accounting rules followed, with a new, cut-down set of standards for small companies (Financial Reporting Standard for Smaller Entities), if they preferred it. Many companies could choose between Financial Reporting Standards and International Financial Reporting Standards (“IFRS”) (which are completely different).

Then, in the last couple of years, the wholly new Standard (“FRS102”) replaced all the old FRS’s and SSAP’s, but not IFRS, with a further choice for some of “IFRS-Light”. Oh.. and then there are accounts for Micro-Entities (FRS105).

Confused? You cannot be confused, surely? Regulation is there to remove confusion.

The main objectives (as above) of Regulation were to ensure there is a framework for accounting that is intelligible, universally understood, and comparable both between companies and over time. The resultant accounting standards may well be academically wonderful, but it is hard to tell because they are written with such a degree of jargon as to render them unintelligible to anyone outside of the profession (and to many in it). Comparison over time or between entities has become nearly impossible.  But Regulation has achieved a different consistency: that between government policy and accounting policies.

Milton said we should beware something “fair seeming good” (Paradise Lost). We must keep government away from regulating the Press.

Mother, should I trust the Government?

Houses of Parliament

 

Not for the first time in my professional career, Her Majesty’s Revenue and Customs appear, in my humble view, to have failed the trust test.  I do not wish to make any false accusations, so I will use words such as “may” and “appear”, and will leave it to the reader to consider the evidence.  The irony though, is that HMRC is an organ of government, yet there seems to be evidence that it is not averse to pulling the odd fast one, however much it may bleat about nasty taxpayers who are happy to use the law to avoid tax.

Today I saw a new notice of coding for a client.  This client, like most entrepreneurs, has a salary from his company and pays out excess profits, if any, by dividend.  He has been doing so for some years – most years he pays a dividend.  Some years he has not made enough profit to do so.  Each year, he files a tax return which takes account of his employment income, other bits and pieces and his dividends.  He has to make payments on account each year in accordance with the rules for self assessment.  I doubt anyone will find this unusual.

Continue reading “Mother, should I trust the Government?”

To acquire or to grow organically?

We see much in the financial press about business sales and acquisitions as being an important barometer of economic activity.  I thought it would be interesting to focus a little on this fascinating subject.

The question of how to grow, organically or through acquisition is one which always gives rise to debate among finance professionals, business advisers and businessmen themselves.  Yet the answer to the question lies in the question itself and comes from a mathematical truth: two plus two always equals four (except, according to physicists, in the case of a nuclear reaction – an event that we can safely conclude would be bad for business).  Growth can only ever be organic.  Acquisition may make a business bigger but it is not growth.  Though we should not make the mistake of thinking that it is there bad, and this article invites you to consider why you might acquire another business.
Continue reading “To acquire or to grow organically?”