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Making Tax Difficult

Comment by Robert Marsden, director of Myers Clark on the Government’s proposal for Making Tax Difficult (Digital!!) – 19 August 2016

HMRC are pressing ahead with their plan to digitalise and automate our tax and their latest consultation documents (there are six of them) can be viewed here.  

They seem to think every small business will be able to cope with and afford the technology – computer, tablet, smart phone, fast broadband, Wi-Fi around the business etc etc. to record accounting records and store all business receipts. I suggest only the more sophisticated businesses will be able to cope and the result could be those businesses that comply and pay tax and those forced into the black economy. The penalty regime will be fierce and we will see more growth in the cash economy The Guardian 15 September 2015

All is not lost and my Company, Myers Clark can help you comply and put your mind to rest. All work is carried out at our offices in Watford using specialist trained and experienced staff that are easy to communicate with by either email, telephone or in person.

Summary of main suggestions: –

  • The document is aimed at businesses (limited companies), the self-employed and landlords with turnover over £10,000p.a. Yes owners of rental properties where gross rents are more than £10,000 a year will have to keep digital accounts.
  • Rental property can be taxed on a cash basis rather than on accruals at present. See here also where property is owned jointly one owner would be responsible for making the HMRC quarterly declaration. see page 33 4.43
  • The annual tax return will disappear and instead every tax payer will have a digital tax account and information already held by HMRC will be automatically recorded – for example your pay and tax deducted, bank interest received and very shortly your business profits and rental income.
  • Commencing after April 2019 (was April 2018) every three months using digital accounting software taxpayers will report their accounts to HMRC using standard categorised headings e.g. sales, purchases, repairs, entertaining etc.. Letting agents managing your buy to let property will report gross rents and categorised expenses directly into your tax account. I hope they will know the replacement of a built in kitchen fridge is tax deductible as a repair and a free standing fridge tucked under a work top is not!
  • HMRC software will automatically work out the tax on the declaration taking into account categories which are not tax deductible e.g. entertaining.
  • Tax due to date will be displayed on the digital tax account so you, the tax payer can save up or if you are daft enough pay it in advance. Don’t hold your breath I expect quarterly payments on account to be introduced.
  • A result of the change may be all invoices will be delivered to your accounting software electronically and if by chance you do get a paper invoice you will need to photograph it from your digital smartphone app, categorise it into an HMRC approved expense heading as mentioned above and send it to your accounting software. The invoices which arrive ‘automatically’ will require you to log on and categorise, which is the last thing you will feel like doing at the end of a long day.
  • Invoices will be paid electronically using the accounting software which will be linked to your bank account. I suspect from 2017 the invoice details will be recorded by your bank so your software will be able to automatically match it to the invoice which was sent to you electronically – scary.
  • Your sales invoices will need to be raised on your accounting system and delivered electronically to your customer.
  • When you are paid electronically into your account your software may automatically match it to your invoice.
  • You will have to logon and approve the receipt/payment does in fact match the invoice you either sent or received.
  • You will have noticed from the above all invoices are recorded electronically so no need to keep paper invoices, so no shelves bulging with files or cluttering up your attic or garage, or the dash board of your van!
  • If you want to find an invoice – logon to your accounting software and click through your accounts.
  • This next bit is scary – HMRC is suggesting it wants the power to electronically interrogate your software and look at your invoices. See the hints at 2.10 and 2.11. there will be no hiding places.
  • Every year you will carry out a year end procedure and you will have nine months to complete this (shortened from the current 10 months). During this procedure you will claim capital allowances on the acquisition of new equipment and make the various adjustments accountants make now to your profits before you make your final declaration.
  • The good news, as mentioned at the start is you can delegate all this to Myers Clark and ask them to make your quarterly submissions and with your approval the final declaration. Once all the facts are known Myers Clark will offer a comprehensive package to ensure compliance.
  • HMRC is consulting on how businesses should be compensated for additional costs which I see as follows: –
    • Good digital accounting software – anything from £5 – £300 or more a month depending upon complexity. It is likely old accounting software run on your desktop will not cope. If accounts are kept on spreadsheet HMRC is ‘consulting’.
    • Higher compliance costs – every business will require fast broadband and computers, tablets and smart phones which are modern and linked.  Every business will need an IT expert.
    • Additional risk of being late with a quarterly submission and being hit with a penalty
    • An aligned penalty regime for Income Tax, VAT and Corporation Tax see 4.12 B and whatever is agreed you can be rest assured it is likely to cost more than the current system.
    • There are proposals to allow businesses’ to use cash accounting and to double the current limit which is pegged at the VAT registration threshold of £83,000.
    • Partnerships are made more complex and as with jointly owned property one partner would make the submission to HMRC on behalf of all partners. Tip: don’t fall out with your partner or you could end up with all the income on your tax account!! see page 33 4.43
    • Limited Companies will submit their corporation tax returns three months earlier at nine months rather than twelve months and don’t forget there is a consultation document out their already suggesting smaller limited companies should not be taxed at 20% on the profits , instead their profits should be taxed on the shareholders as a partnership see page 3 on the Office of Tax Simplification report March 2016. If this comes in taxes for those operating through a limited Company are likely to rise.
    • Will this lead to the UK legislating for traders to be no longer legally bound to accept cash? Denmark is considering this – http://www.telegraph.co.uk/finance/economics/11586778/Denmark-moves-step-closer-to-being-a-cashless-country.html       

I fear we are going into an area of no return and like the digitalisation of car tax will result in significant tax loss to the Treasury. Perhaps it is the Government’s intention to develop a tax system which can be run by the troglodytes of London Zoo who will supervise the big brother computer system which will monitor remotely our every transaction. Oh joy!!

I can see a day where the HMRC computer will tally up our spend at the supermarket – by reference to our loyalty cards and everywhere else where we spend money including the pub as no doubt the landlord will be required to give us a digital receipt every time we buy a pint and compare our spending to our available income and where the two don’t tally then God help us. Perhaps we should all ditch store loyalty cards now – though hang on I bet with face recognition technology we are recognised as soon as we step foot in the supermarket?

Robert Marsden, Director

19 August 2016