Legislation Day 2020

Today saw the latest instalment in the never-ending cycle of tax announcements. Most of what has been published is legislation for the draft Finance Bill 2021, to give effect to proposals which have already been made. Our initial reaction is that there is nothing in these drafts which will set pulses running, but we will be publishing detailed analysis of the legislation in our usual commentary sources over the coming days.

Much more interesting is the publication of a document setting out the government’s long-term framework for Making Tax Digital (MTD). The grand plans for the abolition of the tax return, which were set out as long ago as 2015, got rather stuck in the mud, but MTD for VAT is now in operation for many businesses and the government has now announced plans to revive the MTD programme for income tax. The headline is that that MTD will be compulsory for businesses and landlords from April 2023, including a requirement for quarterly reporting and electronic recordkeeping. A consultation on MTD for corporation tax will be published later this year.

It is the coronavirus (Covid-19) crisis more than anything which has re-energised the MTD programme. This is partly because HMRC’s success in implementing large-scale IT projects to deliver support to businesses throughout the crisis has given it more confidence that it can deliver the changes required for MTD. But the main reason is that the crisis showed that HMRC was unable to target support as accurately as possible because it didn’t hold up to date information about businesses’ tax affairs. The normal self-assessment reporting cycle meant that HMRC was relying on data which was at least a year old. There may be some cynicism about HMRC using this as a reason to revisit MTD - after all, we surely will not be faced with a similar crisis again for many years – but with so many business processes now operating more or less in real time it is difficult to argue against the proposition that the same principle should apply for tax.

What is most striking about the consultation document is, however, its breadth. MTD is not presented in a vacuum (as it seemed to be in some of the earlier proposals) but as part of a 10-year plan for modernising the whole of the way that taxes are administered. Many of us have been arguing for years that the legislation underpinning HMRC’s powers and processes is a relic of the days of pencil and paper and is not fit for purpose in the modern world. HMRC’s acceptance of the need for reform is therefore welcome. Few details are given as to what that reform might look like, but it does appear that the government is willing to look at all aspects of the way that the system is administered and will be prepared to consult widely. Payment of tax will certainly be part of this reform agenda, and it looks as if we will eventually move to a system where more and more tax is paid in real time rather than, at the moment, significantly after the income actually arises. The paper accepts that any transition will create cash flow issues and that change cannot happen overnight. Getting this right will be one of the most important aspects of the reform.

We are certainly prepared to give this paper at least a cautious welcome. It seems to us that the government has recognised MTD cannot be looked at in isolation but needs to be part of a wider strategy to modernise the operation of the tax system. We always felt that trying to implement MTD without addressing the underlying issues was at best a sticking plaster solution which produced few, if any, benefits to taxpayers and created a host of problems. There is also no doubt that in the years since the first MTD announcement, technology has come on in leaps and bounds, and more importantly, many more users have become comfortable with using digital tools to help run their businesses. Coronavirus has forced businesses to consider the fundamentals of the way in which they operate, and with remote working becoming the norm, resistance to digital methods has declined. Of course, even by 2023, not everybody will be comfortable in a digital world and HMRC will need to be sensitive to the needs of those for whom digital exclusion is a reality.

The key to getting this right is open and honest discussion between taxpayers, HMRC and all of the other stakeholders who have an interest in making sure that we have an efficient and effective modern tax system. The consultation today certainly suggests that is what is intended. We welcome that – as ever the proof of the pudding will be in the eating.