MTD For Corporation Tax: Compulsion Disguised As Benefits

 

Should you be forced to go digital or not?

That is one of the many over-arching issues with the government’s continuing expansion of its proposals for everybody to computerise.  

5 March sees the closure of the current consultations on Making Tax Digital for Corporation Tax.  This follows the introduction of MTD for VAT and its extension (which I have argued against here).

HMRC’s proposal is that all businesses, regardless of size, should:

• maintain their records (e.g. records of income and expenditure) digitally
• use MTD compatible software to provide regular (quarterly) summary updates of their income and expenditure to HMRC – there will be some entities
  who won’t need to do this
•  provide an annual CT return using their MTD compatible software.

The benefits are said to be closing the tax gap through minimising errors in accounting, cost saving for HMRC, improving the resilience and flexibility of the tax system and, with the collection of more real time data “allow the government to assess changes to the economy, at small or large scale, as those changes are happening”.

The consultation paper claims “that it will make it easier for businesses to pay their taxes, allowing them to cut costs and devote more time and attention to maximising business opportunities.”

I have no problem with the introduction of IT either in HMRC or business, in fact I am all in favour of it where appropriate, but I have a huge problem with the idea that it has to be mandatory.

Put simply, businesses should be allowed to use what systems are best for them. If computerisation is of benefit, then business will adopt it (as many have done).  If they don’t see a benefit, then they won’t and shouldn’t have to. It is not up to Government, who seem to have a very sketchy idea of what business is all about, let alone HMRC, to tell business that adopting HMRC requirements will allow them  to devote more time to maximising business opportunities.

If those businesses think it will maximise their opportunities, they will surely adopt the system, so why force it down their throats?  What the proposal actually suggests is that Government knows full well that for many businesses it won’t do anything to improve their productivity – which is why they are mandating it.

There are many small businesses out there, including micro and hobby businesses, which do not need the added burden of reporting quarterly to HMRC. I am totally puzzled by how HMRC can think that this will help those businesses.   The claim that it will take less time overall is particularly spurious:  five returns a year cannot take less time than one return, particularly if these have to be done within one month of a period end rather than nine or twelve months after the period end as at present. 

As I have argued on VAT, however it is not so much the time taken as the added angst and worry of having to meet extra four extra deadlines a year with the undoubted threat of penalties if you don’t.   None of this will encourage people to go into business:  the burdens are enough without adding more.

Of course VAT registered businesses will already have much of the information required but it may require changes to their systems too. All businesses will need to report using the cost analyses required by HMRC. Now that is nothing new as far as the year end CT600 is concerned, but the corporation tax categories of expenses are often nothing like the ones which are best for managing one’s business. 

This means either manual analyses at the year end (which many of us have to do and all hate) will now be done quarterly or, hopefully, the IT system will do it for us. Except that none of the readily available low-end accounting packages allow for multiple cost codes. My fear therefore is that, unless the accounting software market radically changes its cheap options, smaller businesses will be “shoe-horned” into using accounting analyses which are good for the taxman but not at all appropriate for their business.  

There will, of course, be benefits to HMRC and, possibly to the Treasury - let us be under no illusions as to the reasons these changes are being proposed. But are we particularly worried about that? After all, as taxpayers, we pay for HMRC and it should be up to us to decide the cost/benefits to us of what they do.

Quarterly reporting and mandatory computerisation is going too far in a time when burdens on small businesses should be reduced. The country needs to encourage small businesses and remove regulation not add it. Time to say no: go digital, but do not mandate.

The full proposals are available here.

Respond to HMRC directly via their online questionnaire here or email makingtaxdigital.consultations@hmrc.gov.uk by 5 March.

(Malcolm Bacchus is an independent member of HMRC’s Administrative Burdens Advisory Board.  The views here are his own and obviously do not represent any official views.)

Public Interest and the audit

 

The International Ethics Standards Board for Accountants (IESBA) has recently issued a consultation on the definition of a Public Interest Entity.

The debate around what should be regarded as a Public Interest Entity (or PIE) may sound esoteric but is hugely important as it defines what standards may be expected of businesses and, in the case of this paper, their auditors.   PIEs need to be held to higher standard of account purely because of that public interest element and the impact they have on all our lives.  Any advance in thought in this thorny area is welcome.

That said, on first read, the proposals in the IESBA paper seem not to have much effect on UK audits as UK standards incorporate a more stringent definition of a PIE than the proposed IESBA code.

The proposals will affect however audit firms who work overseas; could, if adopted in the UK, have some impact on UK legislation; and will probably influence the deliberations we expect from the UK review of audit now under way. 

More importantly, to my way of thinking, they seek to set a benchmark for other countries around the world.  We deal with those countries, their businesses are intimately tied up with our lives  – the establishment of a higher trust regime across the world is important to all of us.

Comments are due to IESBA by 3 May 2021 but please also feel free to send your comments to me in my role as chair of the ICAEW Ethics Standards Committee, even if you are not an ICAEW member.

The main proposals of the IESBA paper are to:

• introduce an overarching objective for additional independence requirements for entities that are PIEs;
• provide guidance on factors for consideration when determining the level of public interest in an entity;
• expand the extant definition of PIE to a list of categories of entities that should be treated as PIEs, subject to refinement by the relevant local bodies responsible for standard setting as part of the adoption and implementation process;
• replace the term “listed entity” with one of the new PIE categories, “publicly traded entity”;
• elevate the extant application material that encourages firms to determine whether to treat additional entities as PIEs to a requirement and include enhanced guidance on factors for consideration by firms; and to
• require firms to disclose if an audit client has been treated as a PIE.

The main categories proposed for PIEs are:

• a publicly traded entity;
• an entity one of whose main functions is to take deposits from the public;
• an entity one of whose main functions is to provide insurance to the public;
• an entity whose function is to provide post-employment benefits;
• an entity whose function is to act as a collective investment vehicle and which issues redeemable financial instruments to the public; and
• an entity specified as such by law or regulation as such where the purpose of the legislation is to enhance confidence in the audit of their financial statements.

The last category is intentionally broad and allows governments to decide whether, for example, large charities, should be scoped in.   The detailed rules also allow governments to scope out certain entities in the list “for reasons relating to, for example, size or particular or organisational structure”: which could mean anything from small banks to large partnerships or maybe the whole defence industry.

Finally, audit firms are required to consider, for the purpose of their auditing and ethical standards, whether other clients should be scoped in as PIEs on the basis that a “reasonable and informed third party would be likely to conclude such entities should be treated as public interest entities”.

I can’t help thinking that all the options for scoping in and out means that users will still remain confused over whether a particular entity in a particular country is treated, in that country as a PIE or not.  At the worse, a country could adopt IESBA standards, scope out almost everything, and still comply with this proposal.  And to that extent, the proposal will have some, but limited, use in increasing public confidence.  To make this work, I would see a requirement for every audit report,  whether of a PIE or not,  should state whether the entity has been treated as a PIE or not and whether or not this is through the standard, additional local legislative additions or, most importantly whether an entity which would have been in scope of the standard has been scope out of being a PIE by local laws.

But what do you think?

Malcolm Bacchus is chair of the Institute of Chartered Accountants in England and Wales (ICAEW) Ethics Standards Committee.  The views expressed here are his own and do not necessarily reflect the views of ICAEW. 

 

UK Border Strategy: moving goods and people

 

The Government’s 2025 UK Border Strategy sets out how it plans to improve the way people and goods can move across international borders given Brexit and the longer structural changes in world trade.

As a welcome foretaste of what one hopes will continue, this is a pan-department strategy involving the Home Office, DEFRA and the Treasury/HMRC.

The strategy sets out the type of border which they would wish to create, the operating model for that border, the approach to working with the border industry and users to design and deliver this and the changes that will need to be made in government and industry to implement it.

It is a big ask and set out under six “transformations”:

1. Develop a co-ordinated user-centric government approach to border design and delivery which works in partnership with industry and enables border innovation
   
2. Bring together government’s collection, assurance and use of border data to provide a comprehensive and holistic view of data at the border
   
3. Establish resilient ‘ports of the future’ at border crossing points to make the experience smoother and more secure for passengers and traders, while better protecting the public and environment
   
4. Use upstream compliance to move processes away from the actual frontier where appropriate, both for passengers and traders
   
5. Build the capability of staff and the border industry responsible for delivering border processes, particularly in an environment of greater automation; and simplify communications with border users to improve their experience
   
6. Shape the future development of borders worldwide, to promote the UK’s interests and facilitate end-to-end trade and travel.

Written broadly like that, much seems just aspirational or even obvious “apple pie” but the strategy goes into further detail (otherwise it would be a boring 84 pages) and initial work on understanding what needs to be done is already under way.

It is not a small ask: 21 million people travelled through our ports and 255 million through our airports in 2019.  383 million tonnes of international freight were handled at ports with a smaller, but not insignificant, amount at airports and via the Channel Tunnel.

Reductions in red-tape can’t be done one sided: every export from the UK is an import somewhere else and vice versa.  But systems can be made easier and much of the strategy relies on better IT.  Key is simplifying systems where they can be simplified, ensuring that information does not need to be entered multiple times, better use of technology to track goods with information flow-through, “upstreaming” of information so that it doesn’t need to be entered at the ports and better guidance to the end-users.  None of this is impossible, much of the technology already exists and other countries such as Singapore and New Zealand are already leaders in this field.

From a business view point it all looks good in theory although whether it can made simple enough to attract more SMEs into international trade remains to be seen.  Simplification helps but simplification comes with a trade in choices that can be made by business.  “One-size-fits-all” is simple but hurts those where the size doesn’t fit, whereas a range of tailored solutions fits more, but at the expense of complexity.  This is a challenge which the process designers will need to face head on and it is welcome, therefore, that there is an undertaking to work with users (read: passengers and businesses) in realising the strategy.

One potential stumbling block will be the extent to systems can be integrated with other countries’ ports.   There is little in the strategy about this.  New systems will be most attractive if they not only ensure a freer-flow of goods at the UK end but also at the originating or destination ports at the other.  However, any such agreements between countries are slow in realisation and it may be that the only approach here is incremental. 

There is mention too of the Government’s commitment to ten new freeports.  Freeports haven’t really been that successful in the recent past.  The commitment was however made before the Brexit withdrawal negotiations were complete and I wonder is there is a bonded-warehouse type-solution possible here to the “Percy Pig” type issues.  After all, that debacle must strike everybody (apart from those collecting the tariffs) as ludicrous.

I can’t lose sight however of the fact that the strategy also covers passengers as well as goods.  I would be the first to admit that the systems here need to be improved: airports, in particular, are an experience which few people love.  It is quite possible to spend three times as
long in the airport as one does on the actual flight.  Watching old films, I am always amazed how passengers handed over their luggage at the Victoria Air Terminal, boarded their coach, had the passports checked on the coach whilst on the way to Heathrow, and the coach drove right up to the steps of the plane. It’s the sort of seamless journey one can only dream about now.

However, although I am quite in favour of the goods I am exporting being tracked by technology from cradle to grave, I have considerable worries over more technology (e-passports) being rolled out to track people.  This is, I appreciate, a particularly British concern and maybe a generational one.  But any strategy is going to have to cope with the in-built suspicions of the UK to the surveillance society.

The consultation on the strategy is closed, but there is a lot of input that the Government is going to need if the strategy is going to work.  The Government has said this is to a team-exercise:  it is up to you and me, as business and individuals, to frame it in way which suits us.

(Malcolm Bacchus is an independent member of HMRC’s Administrative Burdens Advisory Board.  The views here are his own and do not seek to represent any official views.)

How you can lose money to scammers even if you are not trying

 

It is a few years ago now and some of the people concerned caught and prosecuted, so here is a story about identity theft and fraud which happened to me.  It  is a long story, so bear with me.  I think it will frighten you and has the advantage of being true.

How it all started

For a few weeks a number of odd things had happened.  I received two new bank cards and a new PIN  which I hadn’t asked for.  I’d also some couple of telephone calls which just cut off and one apparently from the bank - they put the phone down when my wife answered.  Then, late on a Friday afternoon, I had a call, again purporting to be from the bank, which made me very suspicious.  They clearly had some details about me and about the new card I’d requested (I hadn’t), so, just to be on the safe side, I called the bank and asked for a stop on all my cards.  Luckily, as it turns out, I got a confirmatory text from the bank almost immediately and I kept a screenshot of that as well.  The bank asked me to call in on Monday (the local branch was closed on Saturday) and arrange for a new card.

Something odd also happened over the weekend which I didn’t think too much about at the time – my mobile phone stopped working.  All it meant was two calls to make on the Monday before work – first to the bank then to the phone company.

Waited half an hour (of course) to see somebody in the bank as I didn’t have an appointment.  But, it was important:  I wanted a new working bank card. Eventually I saw a member of staff, who checked my passport and address ID, then told me that I had already gone into another branch in North London (I live in South London) on Saturday (hello, what’s happening here?) and had the cards re-activated or new cards issued, I never found out exactly which.

Large alarm bells ringing, now.  They checked my main account – lots of large transactions for jewellery from West End stores had been made over the weekend.  But, said the staff member, after a few internal telephone calls, we checked with you over the telephone because they were such large transactions and you confirmed it was all OK.  (Now I think I understand why my mobile stopped working). 

Put a stop on everything again, I said, and I’ll be back.  Off to the phone shop now.  After a lot of checking  they told me that I had gone in to a branch on Saturday and convinced them that my phone was lost and I needed a new phone and SIM on my old number.   That so explained that.  Very worried now, I went back to the bank.  There was clearly some very good social engineering going on here coupled with, I could only assume, fake ID in my name.  “No problem”, said the bank, “call in on Wednesday and we’ll have a member of our fraud team here to work it out”.

“It’s all sorted out”

Two anxious days later, I called into the bank.  No fraud team there.  “It’s all sorted out,” they said, “Your wife called and explained that she had made the transactions on your card.”  What?  We have separate accounts and she is not a signatory to my account.  Plus the fact that you put a stop on the cards and you told me on Monday that I had been shopping.  “Did you give her your PIN?”, they said.  “No I did not.  Nor did she go into the West End on Saturday.”  My wife, when I told her, was outraged.  Not only had I been impersonated in person, she had now been impersonated on the phone!

Whilst in the bank, we looked at my accounts again.  Since the bank had unlocked my account again, my current account had now been entirely cleared out.   Money had also been transferred from my other accounts into my current account and taken out of that.  Worse (if it can get worse) they had got into two other community accounts with which I was associated and withdrawing money from there by transferring that into my current account.  On one of those accounts, I had read only access and was not a signatory; on the other I was a signatory but only jointly with a second party and telephone/online banking had not been implemented.  I still do not know how this was done … but it was. 

Now I had no bank cards and no cash, and some difficult explanatory calls to make.  One of the two community organisations had wages to pay and no money now either; so I borrowed some money to re-imburse them, allowing them to do that, and a bit more for myself.  And then settled down to three months of letters, meetings, and statements to the police.

Why me?

The bank eventually refunded everything – we were talking six figure sums – they really didn’t have much of a defence having clearly been conned into disobeying my stop instructions twice.  However an additional £50 compensation for the weeks of inconvenience caused was just a little bit mean.

Some time after it was all over, the police came back and took another statement as they had (I think from what they implied) tracked the gang down.  I learnt a bit more about the methods involved.  It looks as if, a while before it all started, my card was cloned: I think I can now guess where.  After various attempts to get my PIN (hence the duplicate cards and the telephone calls) they decided on the fake identity route.

“Why me?“ I asked the police.  Apparently professional people, particularly if also company directors, are good targets.  They are likely to be moderately wealthy and therefore worth putting in a bit of effort for and there is likely to be quite a bit of information about them on line.  If your name is “John Smith”, you are probably safe as it is difficult to identify which John Smith you might be simply from the name on the card – but if you have an unusual name (and Malcolm Bacchus is an unusual name) it is much easier for fraudsters to find out sufficient information about you to produce at least some credible faked documentation.

What lessons were there?

So that it’s it.  Clearly it is impossible for an individual to prevent fraud on their bank accounts when the bank’s processes are at fault and I am assured by the bank that their processes are tighter now than when this happened.  Companies House too have stopped putting your full date of birth for all to see. But what can one learn from this?  Obviously there are the all normal things such as not giving out your PIN, not writing passwords down, being alert for suspicious telephone calls and not clicking on any unknown links on your computer, but I was fine on all of these and still got caught.  So here are my additional take-aways from the story:

• Split your funds across accounts with more than one bank
• If possible, don’t allow your bank to associate the various accounts you might have access to on their system in one place – it’s good for them but good for fraudsters too
• Again, if possible, and most of the time it isn’t, be careful about who you give copies of your ID to (everybody asks for them these days and whether they store them safely is anybody’s guess)
• Use invented answers to the security questions on all websites  – not your real first school or first pet (it didn’t happen in my case as far as I am aware, but I was warned that fraudsters are good at extracting that sort of information by social engineering
• For the same reason, don’t use the same answers or the same passwords on multiple sites
• Investigate anything odd on your account as soon as it happens: don’t assume it is a mistake
• Keep documentation on every contact with your bank, even if it was a short telephone call.

And what to do if it happens to you...

Obviously, always contact the bank as soon as you are suspicious.

If you are an ICAEW accountant you can get guidance for you or your clients on the New ICAEW Fraud Advisory Helpline on 01908 248 250; if you are a business speak to your accountant;  and, whether it was you or your business affected, always report the fraud to ActionFraud at actionfraud.police.uk or
0300 123 2040 (England and Wales only – otherwise your local fraud prevention organisation or the police). 

If you are an accountant you might also have to report on a SAT to the National Crime Agency and, as a business or accountant, for cyber crime, to the Information Commissioner’s office.

Smaller businesses: A chance to turn back the tide of regulation

 Do you:

• File a tax self-assessment for business (say as a sole-trader) or
• Have property income (such as rents) greater than £10,000 per annum?

If so, it will pay you to read on.

HMRC’s Making Tax Digital (MTD) regulations currently only apply to businesses registered for VAT with turnover greater than £85,000.  However, under their current plans, from April 2022 all tax payers who file income tax self-assessments for business or have property income of more that £10,000 per year will be brought into the net of MTD.

This will mean if you fall into either of these categories, from April 2022 you will need to keep your business or property records electronically and file quarterly returns within one month of the quarter’s end.

At present, if you are below the £85,000 VAT threshold, or not registered for VAT, you only need to complete your annual tax return, once a year, with nine months to do it in.

HMRC believes this will help your cash planning and make tax compliance less burdensome.  It’s a reverse engineered argument, of course, because the real reason is to try and close the tax gap and to cut down on HMRC operational costs through IT although to what extent it will do so and how much of the tax gap is due to these very small businesses and landlords is unknown and a matter for debate.

I think we can debate whether keeping records electronically for a small landlord with one property will actually improve their record keeping or not (£10,000 per annum income is, at the most, one property level in most cities, if not elsewhere) .  What is more questionable is whether forcing somebody to make a return five times a year (four quarterly and one annual return) will achieve anything at all.  What is beyond doubt is that five filings a year with four of those having a one month deadline will increase the workload and massively increase the sheer angst of being a small business or small property owner.

If you are a pensioner with a small property portfolio to supplement your meagre state pension – and a lot of people are in that position – then forget the four week holiday cruise you were saving up for:  you’ll need to employ an accountant or make sure your holiday doesn’t coincide with a state mandated quarter end.  And woe betide you if you fall ill.  These may be trivial examples and easy to deride, but they show how the state is continually becoming more and more demanding and less and less sympathetic.  There is no good reason for requiring vast numbers of small businesses to be given these sorts of deadlines when nine months has been felt to be reasonable before.

Mind you, if you don’t feel you want to buy and learn how to use accounting software by April 2022, you’ll need to employ that accountant to do the work for you in any case.  Time to put your prices or your rent up to cover the admin and angst.

The good news is that whilst this proposal was announced by HMRC last year, because of COVID-19, the changes necessary to implement it have not yet been included in a budget.

 So there is still time, if you think these demands are unacceptable, to let your MP know.

One local society's response to the planning changes

 

I'll confess that this post is less business related than some although the impact of planning changes will echo through the business community.  It follows on from my blog of my views on the future of the high street under the changes proposed by the Government in their recent consultation "Supporting housing delivery and public service infrastructure" which I discuss here.

Our local community group in South London  (I'll hold my hands up now in the interests of transparency - I chair it) responded to the Government consultation making the following major points:

• The proposals could result in a significant reduction in shops and small creative work units which are typically less profitable to developers than residential homes
• A reduction in the available of shopping premises will potentially exacerbate the demise of the local high street already under COVID pressures
• A reduction in creative workspace will similarly hinder the expansion of the enterprise economy much needed post-COVID and post Brexit
• Both these reductions run contrary to the idea of a "15 minute city" where everything is in reach without using cars
• The proposals would also have a significant impact on communities which has not been considered and considerably reduces community involvement in planning in their areas
• Local Councils should retain the ability to control the mix of residential/commercial/shopping within their areas to ensure that vibrant communities remain and this should not be left in the hands of developers
• Residents' views must be taken into account in larger scale change of use proposals which could affect their communities
• Protection must be included for Conservation Areas and any new rules should not override existing Article 4 protections
• There is no mention of s106 agreements which, given that this new right will apply to any size of conversion (potentially even converting a shopping centre into residential), means that considerable additional housing could be provided without any new funding for new schools, medical facilities, leisure, green space or the like
• Lack of income from s106 agreements (and potential reduced income from business rates) may place added financial burdens on Councils
• Reducing consultation times to 14 days on large infrastructure projects is unacceptable - it does not give long enough for the public to organise a considered response and, in some instances, where proposals are timed to coincide with holiday periods, entirely disenfranchise residents.

We were not alone in these views. Many local bodies as well as umbrella organisations such as the London Forum and Civic Voice, together with the Greater London Council and other local authorities,  have expressed concern over the proposals as has the British Property Federation.

Our society's full response can be read here.

How will the high street fare - new planning rules coming

 

One obvious effect of the coronavirus epidemic has been an accelerating trend of businesses leaving the high street, either through a decision to go on-line only or, more often, through insolvency.  

When insolvency beckons the remains tend to be picked over by on-line retailers: most recently Asos has bought the Topshop, Topman and Mis Selfridge brands from the failed Acadia; its Evans brand was bought by City Chic and Dorothy Perkins, Wallis and Burtons look like being bought by BooHoo.  None of these have expressed an interest in retaining the shopping estate and therefore some 12,000 jobs and around 500 shops are likely to go as a result.  All without taking into account the knock-on effect that the loss of these, often anchor, shops and the associated jobs will have on neighbouring businesses.

The government is now reviewing the comments made on its proposals to reform planning: “Supporting housing delivery and public service infrastructure”.  One of the major effects of its proposals would be to allow offices and shops to be turned into residential accommodation without the need for planning permission and therefore without local government control.  Government sees this as a significant way to boost housing stock and re-purpose disused shops.

There is considerable doubt however as to whether this will simply make matters worse.  A vibrant community is not made by cutting the heart out of its shopping centre and removing any effective control by the local authority developers will have an effective carte blanche to do what they will*.

There is no doubt on-line shopping is here to stay, but in many respects is less environmentally friendly than local shopping:  not least that it involves significantly more transportation and packaging.  But worse, the closure of high street arcades could move more shopping to bigger out-of-town units with lower operating costs and lower rates, just at the time we are seeking to reduce car usage.

Whilst outside the remit of the planning consultation, if the government wishes to keep city centres alive and compete with on-line retail, it is going to have to look at a radical reform of rates and business taxes.  A growing lobby of businesses are pressing for this and it is likely that only the combination of COVID-19 and Brexit has pushed it out of urgent consideration to date.  But COVID-19 is now making a change ever more urgent, so expect to see something in a future budget.

 __________________

* I wrote our local area’s response to these proposals, the summary of which are here.