The government has promised to kill the tax return. Casting himself as the champion of tax payers, in 2015 the then Chancellor, George Osborne said: the tax return ” is complex, costly and time-consuming. So, today I am announcing this. We will abolish the annual tax return altogether. Millions of individuals will have the information the Revenue needs automatically uploaded into new digital tax accounts.”
I can almost hear the cheers in the pubs, clubs and tea rooms of the nation – but let me add an important caveat before you celebrate with another Earl Grey. The single annual return is being replaced by 4 on-line returns.
The idea is that the scheme starts this year on a voluntary basis and become mandatory for millions of people next year. If you run a company or are a freelancer – this will almost certainly apply to you.
But the plans are not going down well.
The Treasury Select Committee Report on the policy said: “The cost is likely to be significant for a small business…Evidence given to the Committee suggests that under the current timetable, the total cost to business…might exceed the total benefits in improved tax yield.”
In other words, it may cost businesses more but might not save the government much.
Over 100,000 people signed a petition claiming that “The conservatives are not working for small businesses in bringing such legislation but adding burden.”
WHO THIS AFFECTS: This will apply to the vast majority of businesses, landlords and freelancers. If you fill out a tax return – this is something you need to know.
TIMING: They are starting a trial in April this year with volunteers. It becomes mandatory from 2018 for smaller businesses. Gradually more and more companies will be included in the scheme, adding in companies who pay VAT and Corporation Tax so that more and more companies get involved. By 2020 all companies will have to be using the system.
IMPLEMENTATION CONCERNS: The Treasury Select Committee said: “In the view of the Committee, a start date of April 2018 for mandatory MTD (Making Tax Digital) is wholly unrealistic.” In response, HMRC told me they “do not believe the current timeline is unrealistic. We believe it is achievable.”
COSTS: HMRC say they predict it will cost on average £280 per business as a one-off cost to move to the system. But thereafter, they say businesses will make a “modest saving”. Despite concerns that doing returns 4 times a year will be costly and complex – the HMRC say this is not true and it should be easier for people.
BENEFITS: This is all about what is known as the ‘tax gap’ which is the difference between the amount of tax that should, in theory, be collected by HMRC, against what is actually collected. HMRC estimate the gap is £8billion per year. They believe this new system will help eradicate the gap.
WHAT DIFFERENCE WILL IT MAKE TO TAX PAYERS: Presumably if it raises more tax – it means tax payers will end up paying more, but only what they are meant to pay.
In terms of process, in future it means that businesses and freelancers will have to keep their records digitally – in other words on a computer using some accounting software. Taxpayers will need to upload the data 4 times a year to HMRC. HMRC say it will help businesses get their tax right and avoid investigations.
FIRST STARTERS: The smaller businesses will be the ones to get moved onto the system first. HMRC say smaller businesses get their tax wrong most, so they need to use this system. There are fears that smaller businesses don’t have the resources to do it – but HMRC is staying firm. All companies will be using the system by 2020.
PAYING TAX: The HMRC say there are “no plans to change the time when people have to pay their tax. We will be offering voluntary option for people to pay as they go… they will be free to make that payment as they wish but it won’t be mandatory…”
Sceptics might think that because it puts the right tools in the hands of government, that they could in the future force people to pay tax more often. But HMRC said: “The government has no plans to change when businesses pay tax as a result of these measures.”
SOFTWARE: If you are keeping your records on pen and paper – you might well consider moving to computer records so you get used to the system before it’s needed. HMRC say they will tell people “in good time” about the changes they need to make. But it is not clear that all software will be HMRC compliant. They say there will be free software available. However they were unable to tell me which products available now will be compliant. They say “From 1st April there will be software products will do the updates….spread sheets can still be used as long as they link to software.” However that is only just before the trial starts and at most one tax year in advance of many companies being forced to adopt the system. Since it takes some time to get used to new software it might be worth trying to start using compliant software as early as possible.
Despite some difficult history of I.T projects within government, HMRC say this is “not that large” a project and they are sure it will go off without a hitch.
For more information find the Money Box Live on 1.2.17 on BBC Radio iplayer