U.K. Cautioned on ‘Ambitious'Plans to Digitize Tax Collection

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By Penny Sukhraj

Aug. 15—Tax practitioners are concerned with low thresholds for quarterly mandatory digital reporting recommended by the U.K. government set out in a proposed overhaul of the nation's tax administration and collection system.

The proposed changes, published Aug. 15 in seven consultations, indicate the end of the traditional tax return by 2020 as Her Majesty's Revenue and Customs sets out to digitize tax collection and computation while also reducing the tax gap and yielding some 945 million pounds ($1.2 billion) for Her Majesty's Treasury.

The HMRC proposal outlines plans for quarterly reporting by self-employed individuals and landlords, which is expected to require regular updates — dependent on business records and receipts drawn into tax computation using app technology and other modern software — that will feed directly into the HMRC's systems.

Small unincorporated businesses and landlords with annual turnover below 10,000 pounds ($12,900) will be exempt from the plans, but all others are expected to make the transition to a digital style of tax filing by 2020, with the exception of larger businesses for which this will be deferred until details of impacts for that sector are fleshed out.

The consultations consider the implications for a range of businesses, including limited liability partnerships, unincorporated and property businesses.

The HMRC also is consulting on how the agency aims to use information it gathers, as well as the information sources it will utilize, such as third-party suppliers in the form of banks, building societies and pension providers, along with further details of its own tax administration and a proposed “pay as you go” system to permit voluntary payments at regular intervals.

Practitioners' Concerns

Senior tax advisers say that while the proposals contain some concessions, the 10,000-pound income turnover—which exempts those below this level—is still too low.

Yvette Nunn, co-chair of the Association of Taxation Technicians' (ATT) Technical Steering Group, said the figure of 10,000 pounds is “a very small threshold and we suggest it should at least be aligned with the personal allowance each year—otherwise it is overcomplicating tax for the very smallest businesses.”

“While we are certainly pleased that HMRC has decided to allow a one-year deferment period for the next rung of small businesses and landlords with income over 10,000 pounds but below an as-yet unspecified limit, that will still leave many other unincorporated businesses,” including some partnerships and landlords “who will need to operate within the new digital rules of MTD” beginning in April 2018, Nunn said.

She said it still is important that there is a robust system in place for those businesses, and that they don't suffer from a bad experience “by being used as guinea pigs.”

The Association of Chartered Certified Accountants' head of taxation, Chas Roy-Chowdhury, criticized the tax authority's mandatory approach.

“I don't think it should be mandatory—they are proposing a carve out for the smaller end but everyone else is netted,” said Roy-Chowdhury.

He said the new system might require “multiple filings” and be all “singing and dancing purely for the benefit of HMRC.”

Tracking in Detail

Roy-Chowdhury said HMRC is proposing the plans to track “in greater detail what each taxpayer is doing.”

“The more information they have, the more chance of catching evasion or avoidance,” he said.

The Chartered Institute of Taxation's tax policy director, John Cullinane, said there also is concern about the implications for agents.

HMRC has always promised it will give agents authorized access to the system so that they may help their clients, as per their usual practice.

However, while the latest consultation doesn't remove this promise, it states that “simplified processes and software might give some businesses the confidence to deal with their tax affairs in-house rather than use an agent.”

“Change is challenging,” Cullinane said. “There are still concerns about whether agents will be able to access the systems because most businesses rely on agents to get things right for them. There's a lot of confirmations from HMRC that they intend to provide access, but we'd like to see that working in detail.”

Frequency of Tax Reporting

The consultation suggests that there won't be requirements for “four tax returns a year” as originally suggested, but instead updates from a business's system directly into HMRC's systems, “eliminating the distinct step of transposing data from their accounting records to a separate tax filing product.”

“For many businesses, updating HMRC in this way will be light-touch and more easily integrated into day to day business activity,” HMRC said in its consultation.

HMRC earlier had proposed the filing of “transaction” data, but has now backtracked from this, saying it has “listened to business concerns about updating transaction level data” and confirms that “the update of income and expenditure will be only summary data.”

“HMRC systems (including businesses' digital tax accounts) will only be updated when businesses provide an update,” HMRC's consultation states.

Reporting Details

More detailed value-added taxation returns will be required for the nearly two million businesses above the VAT turnover threshold—83,000 pounds—at which income becomes liable for VAT. HMRC will require one quarterly update for both the VAT return as well as the Self Assessment tax return detailing and categorizing income and expenditure.

In addition, more current stringent requirements for VAT-registered businesses will be maintained, with HMRC suggesting that evidence of expenses be scanned into apps and smartphones if not already in a digital format.

For the retail sector, cash takings are expected to be recorded manually into software, along with entries relating to some allowances, reliefs or tax adjustments.

Retailers with low-value cash transactions, but without the means to record every transaction, will also have the opportunity to provide even more detail to HMRC in relation to trading dates, gross cash takings and income category.

HMRC's digital tax system aims to channel taxpayers into being more accurate and timely with their filing with its “prompts and nudges” approach through software capabilities which reduce arithmetic and transposition errors by highlighting “entries and figures that appear to be incorrect and nudge users who seem to be making common errors or prompt users for information that appears to be missing or incomplete.”

Establishing “Taxable” Profit

According to HMRC, while some businesses will continue to draw up accounts with the use of an agent once a year, others may want “greater certainty in-year of their tax position” if short accounting periods may be better.

HMRC said in its consultation that the requirement to maintain digital business records provides an option for businesses to begin to give an in-year estimate of their Income Tax and National Insurance Contributions position.

The final position for such taxes and NICs will only be established after the end of the period or periods of accounts that end in the relevant tax year after all relevant adjustments have been made.

Unincorporated Businesses

Currently, businesses that are not incorporated usually need to make other adjustments to calculate an accounting profit or loss, including stock adjustments; adjustments for profits where contracts span the period end; sales, purchases and stock cut-off adjustments; adjustments in respect of provisions for bad debts; and adjustments for accruals and prepayments.

HMRC is now consulting separately on whether this burden can be reduced to remove the accounting burden while “still delivering an acceptable calculation of profits for tax purposes for both the business and HMRC.”

For More Information

“Making Tax Digital: Bringing Business Tax Into the Digital Age” is at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/545715/Making_Tax_Digital-Bringing_business_tax_into_the_digital_age-consultation.pdf.

“Making Tax Digital: Tax Administration” is at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/546001/Making_Tax_Digital-Tax_administration-consultation.pdf.

“Making Tax Digital: Transforming the Tax System Through the Better Use of Information” is at: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/545691/Making_Tax_Digital-Transforming_the_tax_system_through_the_better_use_of_information-consultation.pdf.

“Business Income Tax: Simplified Cash Basis for Unincorporated Property Businesses” is at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/545704/Business_Income_Tax-Simplified_cash_basis_for_unincorporated_property_businesses-consultation.pdf.

“Business Income Tax: Simplifying Tax for Unincorporated Businesses” is at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/545708/Business_Income_Tax-Simplifying_tax_for_unincorporated_businesses-consultation.pdf

“Making Tax Digital: Voluntary Pay as You Go” is at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/545700/Making_Tax_Digital-Voluntary_pay_as_you_go-consultation.pdf.

“Making Tax Digital for Business—An Overview for Small Businesses, the Self-Employed and Smaller Landlords” is at https://www.gov.uk/government/consultations/making-tax-digital-for-business-an-overview-for-small-businesses-the-self-employed-and-smaller-landlords/making-tax-digital-for-business-an-overview-of-the-main-design-choices-from-the-consultations.

To contact the reporter on this story: Penny Sukhraj in London at psukhraj@bna.com

To contact the editor responsible for this story: Rita McWilliams at rmcwilliams@bna.com

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