HMRC Wrong on Gains Over Going Digital, U.K. Politicians Told

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By Ali Qassim

The U.K.’s tax office has exaggerated the revenues it could raise by going paperless while underestimating the costs for smaller companies required to go digital at a faster rate than larger businesses, commenters told a government panel.

Her Majesty’s Revenue & Customs’ plans for making tax digital—that will mandate quarterly rather than annual tax returns—could also lead to companies making more rather than fewer errors, according to Feb. 6 parliamentary committee evidence from tax justice campaigner Richard Murphy, a U.K.-based political economist and director of Tax Research UK.

“I’m not totally opposed to digitization but I would start at the other end of the scale, with larger companies where there is a significant problem of capture of data by HMRC and then end up with small landlords. We’re going in the complete wrong direction of travel,” he told a parliamentary committee.

Murphy was one of several witnesses speaking at the hearing held by the Economic Affairs Finance Bill Sub-Committee on the government’s proposals to Make Tax Digital (MTD) that will mainly apply to small businesses and residential landlords.

HMRC proposed Jan. 31 to implement the first stages of a paperless system as of April 2018 as part of plans to go fully digital in the next three years.

HMRC’s Revenue Forecast Wrong

Murphy, who is also a political economy professor at City, University of London, told the Committee that the tax authority’s claims that the move towards digitization could garner an extra billion pounds of revenue were overstated.

“I have serious problems with their estimations of revenue because they are only looking at two components of tax gap”, he said—errors made by genuine mistakes that lead to annual losses of 3.4 billion pounds ($4.2 billion) and “mistakes made from having failed to take due care” which amounts to some 5.5 billion pounds ($6.8 billion) a year.

“If people haven’t taken due care, I don’t see how software is going to help them recover while the others have already tried to get it right,” said Murphy.

He had calculated that of the 5.5 billion pounds lost through lack of “due care”, only half of that tax gap was attributable to small-to-medium-size enterprises—the initial target of the paperless system—so in effect, HMRC would only be able to recover 10 percent of 2.7 billion pounds ($3.3 billion).

That makes 270 million pounds ($336 million) which is considerably less than the one billion claimed by HMRC, he argued.

Murphy questioned why HMRC wasn’t focusing instead on the “hidden economy,” citing the billions of pounds lost through criminal or unpaid tax—rather than “penalizing those who are trying to be compliant.”

During the question and answer session, Murphy also highlighted that HMRC had made “wildly inaccurate” estimates of how much going paperless would cost SMEs.

Instead of the 170 million pounds a year the tax office suggested SMEs would spend to comply with the new program, Murphy argued the plans could cost up to 1.8 billion pounds—or half of HMRC’s annual running costs.

Given the tax office’s cost-cutting program, Murphy also questioned whether HMRC would have enough trained staff to look at the information provided digitally. “There is very little credible threat that HMRC is going to follow up on the data,” he said.

Worrying Accounting Implications

Regarding the future requirements for companies to submit quarterly reports of income, Murphy said he was “particularly worried about the accounting implications” such as encouraging companies to submit cash-based accounting.

“Cash-based cash accounting encourages businesses to think they are they are doing well when it doesn’t include payments to its creditors,” he said. “It’s rather like someone walking off a top of a building, thinking at the beginning, it’s fine, until they hit the ground or until the bailiff turns up and asks for payment.

“And in this case, this is the wrong direction of travel, we must have businesses taxed on true earnings” and avoid the danger of companies “inherently overstating their income.”

Make Quarterly Reporting Optional?

Another witness—John Whiting, Tax Director for the Office of Tax Simplification—was more sanguine about the move towards digitization, stating that “making things electronic has the potential for making things easier.”

In particular, he believed that going paperless would suit the younger generation as well as the emerging gig and sharing economies. “There are a growing cadre of situations where digitization will work,” he said.

Whiting’s main concern was over the “speed” with which HMRC is trying to push its digital plans as well as the “mandatory” nature of the project.

He concurred with Murphy that HMRC should try to launch the project in a different way such as “building on exiting digital systems like those used by VAT registered traders, improving and building on these.”

To contact the reporter on this story: Ali Qassim in London at correspondents@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

For More Information

An overview of the responses to HMRC's six-part Making Tax Digital consultation is at https://www.gov.uk/government/publications/making-tax-digital/summary-of-consultation-responses.

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