HRMC created a process for Making tax digital (MTD Programme) which aims to digitalise the UK business tax system, which is planned to be in place by 2020. Aiming to have the “most digitally advanced tax administration in the world” (Beech and Macintosh, 2017). HMRC is fully aware that most businesses want to hand in a correct tax return, however the latest figures published on the HMRC website, show that over £8 billion a year is lost due to tax errors. (Gov.uk, 2017). This is costly to both businesses and the public. HMRC hopes that the digitalisation of tax will help businesses avoid errors and give a clearer view of their tax position. In this essay we will explore the possible benefits and limitations that digitalising the administration of tax could bring to UK businesses.
The Mtd proposition is aimed at both individuals and businesses, however a large part of the initiative is aimed just at businesses. By 2020, businesses, self employed and landlords will be required to keep digital records and make regular updates to HMRC online regarding their tax, VAT and national insurance contributions. (Anon, 2017). Recently HMRC introduced six new MTD consultations.
The first consultation; Bringing business tax into the digital age looks at the functionalism of quarterly updates and compulsory digital self-assessments. In our modern day, people and businesses use online services for most of their everyday needs, such as shopping, communicating and banking. With the increasing reliance on technology, HMRC has also seen an increase in the digital interaction between their customers. Online tax returns have dramatically increased since their introduction in 2010. In 2016, HMRC saw an increase of 86.5% in the digital self-assessment usage (Anon, 2017). HMRC therefore decided to switch to a compulsory digital record keeping in order to ease the tax return process. With spreadsheets continuing to be allowed for recordkeeping, as long as they meet the requirements of the MTD, and that the new requirements, do not impose for invoices and receipts to be stored digitally. However charities will not be required to keep digital records, and digital tax will be deferred until 2020 for companies with a turnover of less than 10 million. (Crunch, 2017). (Litrg.org.uk, 2017) raised concerns that the new requirement to keep digital records up to date (with a window of three months) might prove difficult for seasonal businesses that face time constraints during various times of the year. This new proposed system is impractical for those who update their records in lower activity periods. Furthermore (AccountingWEB, 2017) states that the cost of implementing the new MTD system could be very costly for smaller businesses, with the new systems and training that would have to be offered to the staff, this could offset the benefits that the MTD is supposed to bring. However HMRC have come back with a response, that “free software will be available to businesses with the most straightforward affairs which decreases some costs of implementing MTD (HMRC, 2017). (Murphy, R. (2017) has found that the introduction of MTD might invite small businesses to close, or shrink in since, in order to avoid the compliance of this new system. This could bring a disastrous situation for the UK economy.
The Government’s second MTD Proposition is simplifying tax for unincorporated businesses, changing the way self-employed people, during the tax, year map their accounting periods. This aims to remove the complexity of business start ups and possible change their accounting dates. (Hmrc), 2017). This would make the process of changing accounting dates for self-employed people, to fit in with other reporting obligations and their individual liking easier. The proposal also considers extending cash basis accounting to bigger businesses, whereas at the moment it can only be used by businesses, (or self employed) with a turnover less than the £83,000 VAT threshold. HMRC are considering to increase this (Cohenarnold.com, 2017). The plan is also to ease the requirements of reporting for unincorporated businesses, in order to “reduce the burden involved in calculating profits” (HM Revenue and customs”
Furthermore, the third consultation proposed by the government is the simplified cash basis for unincorporated property businesses, which hopes to expand the cash basis accounting to unincorporated property businesses; those with furnished holiday letting and non-resident landlords, as long as the cash receipts do not exceed 150,000. (HM revenue website) . This is currently being offered to only some unincorporated businesses. Here the accounting process is simplified as the cash basis accounting is a process of calculating profit, by income and expenditure actually received and paid rather than on an accrual basis, meaning that any tax will only be paid once the income is received, making the process more straightforward, and easing the transaction to the digital tax.
Voluntary pay as you go is the fourth consultation proposed, which allows businesses that will have to comply with the digital record keeping, to make voluntary payments towards their tax liabilities, whenever they see fit. (HM revenue and customs). The government is looking at how these pay as you go payments will be distributed along the individuals taxes, and how such payments will be refunded if overpayment occurs.