One of previous Chancellor George Osborne's grand claims was that he was abolishing the annual tax return. This sent shivers down the spines of members of my Private Client Team who immediately started making plans for a career change, but their worries were premature. The annual tax return is being replaced by a digital account which still requires an 'annual declaration' (Tax Return anyone?).
Although the digital account will be pre-populated with what HMRC already knows, having received it from third parties, you will still need to check this information is correct and also enter what HMRC doesn’t know. This could be business profits income from let property dividends and capital gains i.e. those things which tend to make a tax return necessary in any event!
This is all part of a project which HMRC has entitled ‘Making Tax Digital (MTD)’. What you have to bear in mind here is that HMRC is currently anything but digital. It must be one of the very few organisations where it is still not possible as a matter of routine to communicate with their officers via email. Therefore it is significantly behind the curve and is trying to catch up very quickly. Security is blamed for the years of procrastination but surely Government Departments such as Defence with all its resources must be one of the most secure organisations in the country, so why couldn’t HMRC piggy back that? Unless, of course there, is something we are not being told!
The danger is that in trying to catch up HMRC moves too quickly and the system just doesn’t work or becomes cumbersome, unwieldly and time consuming for the average taxpayer to comply with it. An example of this will be the need for businesses to submit a copy of their accounting records via their digital account on a quarterly basis. All but the very smallest of businesses will have to comply with this and face heavy penalties for failure to do so. Now you may say many businesses have an obligation for quarterly reporting anyway as they complete VAT returns and monthly reporting of PAYE liabilities. However, the difference is twofold. Firstly, you can still keep manual records if you wish and both returns are required as there is a need to pay tax at the end of the quarter or month. With MTD there is no manual option (everyone must keep digital records) and there is no immediate tax charge; payment dates remain as before.
As these quarterly submissions are not going to be used to assess a tax liability (for now at least) you do wonder what HMRC is going to do with the information. As accountants we take our clients’ information (be it manual or digital) and produce a set of financial statements from it. We sense check it, correcting errors if necessary, and then adjust the accounts to produce a tax computation reflecting the differences between accounting and taxable profit. It is unlikely, therefore, that what HMRC will see on a quarterly basis will be what the client will declare as their taxable profit. This is not through any dishonesty, but simply as a result of an overly complex tax system.
I was talking to a friend recently regarding her Tax Return. She keeps perfectly good manual records but feels under immense pressure at the time of Tax Return filing. Not only does she have to run her very busy and successful business during the day but has to deal with her filing obligations in the evening. When I explained about the proposed new system she saw a positive in being able to account in bite sized chunks but was less happy about being forced to account digitally and with the potential increase in the number of sleepless nights!
