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.

 

 

Post-Budget 2017: A Few Comments

The highlights of today’s budget were neither high nor light, but the budget did effectively do what, politically, it should have done: as little as possible. It was merely sensible. The objectives: attract the youth, make a noise about housing, give money to the NHS. For an embattled government, Mr Hammond’s speech will be generally welcomed.

The Big Issue was in relation to housing and his amendments to Stamp Duty Land Tax (first-time buyer exemption for properties below £300,000 and the first £300,000 on properties priced up to £500,000) will attract younger voters, as will the extension of railcards up to the age of 30. Of course the fiscal impact is to focus ever more burden on those in their mid-years (31 to 65) who are expected to carry the entire weight of the economy on their shoulders. But this mid-range is not what the Chancellor sees as his target for favours.

Continue reading “Post-Budget 2017: A Few Comments”

Pre-Budget 2017: No Direction Home

Another Budget: another opportunity to criticise government. Inevitably some will pay more to, or get less from, government. The Press have predetermined that this is a “make or break” Budget for Mr Hammond who must try to fit a large square peg into an impossibly small, round hole. 

He has to meet the popular expectation of entitlement and an even stronger belief that someone else should pick up the tab. Yet, this same population has also set a course into unchartered waters known as Brexit. Continue reading “Pre-Budget 2017: No Direction Home”

Out of the jaws of victory she snatched defeat

There can be little doubt that we have just witnessed a historically bad performance by the incumbent government, not quite a defeat for Mrs May, but a resounding discord from the people of the UK, for the second time in a year telling politicians that they cannot take for granted the views of the people.

I have heard it said that it was a choice between austerity and less state intervention on the one hand juxtaposed with big state and big spending on the other. I doubt it is that simple.  Mrs May is, as I write, off to the Palace to propose her new government, but we should not think for a second that her policy is one of shrinking government.  That is not an option for any government anymore, and with such a marginal position, we face a period of mediocrity in terms of government policy. That is what we voted for and what we will get. Continue reading “Out of the jaws of victory she snatched defeat”

M’aidez, May Day

Having no political affiliation provides me with the space to criticise everyone, and there is much to criticise in our politicians. It must be very difficult to try to behave in a principled manner, while being dependent on the popular vote. Doubtless that is the reason why principles are so often lacking in democracy (except the principle that someone else is always to blame). The assumption that underpins democracy is that the voters will, overall, behave in a principled and intelligent manner. We can see, perhaps, why life for a politician is complicated.

At the eve of a general election, it is interesting to ponder that the whole idea of democracy is that voters hear all the arguments and vote in their own best interest. The Invisible Hand which Adam Smith identified as underpinning capitalism should then act to give the best solution for the voters as a whole. Continue reading “M’aidez, May Day”

The George Giveth, the Phil Taketh Away

Houses of Parliament

“Anti-Entrepreneur” was the first thought that entered my head, as I wondered why the Chancellor seeks to direct his tax-hoover exclusively on those whose industry underpins the greatest wealth in the UK. Then the light-bulb shone: it is politically expedient, playing to the gallery of those who are jealous, while economically, it is safe to attack entrepreneurs because they don’t complain, and cannot go on strike; they just don’t have the time.

There really wasn’t much in the speech, and the detail will emerge as the economists and tax specialists wade through the government press releases.  Our own Ian Abrey will be releasing his more technical analysis shortly, but for most business people the budget involved two sections:

  • There was the bit by which entrepreneurs and small businesses were abused, and,
  • There was another bit by which the Treasury will work out how they can abuse them more.

Entrepreneurs are the low-hanging fruit – they are just too busy working 24 hours a day to complain.  Perhaps this explains the comment that 1% of the population pays 27% of the income tax, since it is clear where the votes lie. But it does not sound like that 1% are under-contributing to me.

Compared to previous Budgets, the Chancellor was witty, for sure, and did not spend the first half-hour congratulating himself. Maybe he had his reasons. Nor did he mention Brexit, peculiarly. Much of the budget revolved around wider government policy, such as education, and I had to smirk when he indicated that after the Polytechnics were sprinkled with holy water and turned into Universities some years ago now, the trend has now gone full circle, along with rebirth of Grammar Schools and Technical Colleges. When will politicians learn to leave education (and all the professions) alone? Those involved in education may be happy to see £216m being made available for 110 new free schools – though that is less than £2m per school.

The Chancellor wants to tackle tax avoidance. How better than to turn his cannon against VAT on roaming charges and moving fixed assets into stock – matters with which no-one will be familiar. He will continue his attack on those who enable tax avoidance, and we wait to hear exactly how he defines his terms. I recall being lectured by a professional body in 2006 that we could be negligent if we failed to offer tax avoidance schemes.  We never did, but it shows how inconsistent governments can be when faced with public opinion.

Apparently the self-employed get too good a deal. He deftly ignored the down-sides of being self-employed (no holiday pay, sick pay or job security). The previous Chancellor helped them by scrapping Class 2 NIC’s. Although the real blows will be released while we are all on holiday in the summer, the taster for now is that NIC’s for self-employed people are going up 2% over 2 years. In one brilliant blow, the Chancellor will upset millions of self-employed people, for a total tax take of £140m.

All UK companies were looking forward to seeing their corporation tax rates fall, and this will not change, it seems.  What will change is that small businesses (usually entrepreneurs), who saw last year the rate of tax on their dividends go up as the tax credit regime was abolished, will now suffer more tax on their dividends. Once again the tax take will be small and the upset caused will be enormous.

Making Tax Digital (“MTD”) is supposed to be tax neutral. How then did the Chancellor conclude that deferring the entry of businesses below the VAT threshold into the MTD regime by 12 months will cost the Exchequer £180m? Do I detect some flying pork pies?

Business rates are the big headlines at present, and a package of reliefs was offered for small businesses to do very little but make it look like government was addressing the situation, especially for everyone’s favourite local pub. As for larger businesses and how to address the virtual business economy: the government will think about it and take soundings.

Other things the government will think about are simplification of Research and Development claims and the burning issue of North Sea Oil Revenues (don’t they belong to Scotland?).

An Initial Conclusion

The achievements so far and the objectives are laudable: we have a fast growing economy with low unemployment and inflation forecast at around 2%. Yet our borrowing is £1.7 trillion. Because governments do not produce balance sheets, only income and expenditure accounts, it’s hard to see what assets are backing that up. However, the Government says it wants to build productivity and infrastructure, delivering fairness.

Yet the reality is that Government is increasing the burden of small and medium sized businesses, imposing higher effective taxes, massively increased administrative burdens through MTD and auto-enrolment, while effectively subsidising larger employers by supplementing salary costs with in-work benefits and credits, and thus distorting the unemployment figures.

Government’s words are all about developing the economy and encouraging growth, but its actions are more about restriction, control and red-tape, welcoming us back to the 1970’s.  How ironic that the squeeze on taxes and increased red-tape reminds me of the decade when we entered what is now called the EU.

There is a saving grace: at least the Chancellor did not do very much at all.