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.)