Making Tax Digital – Your Thoughts Welcome

As you may be aware, new proposed rules on tax compliance, called Making Tax Digital, are being consulted on at present.  We are planning on preparing our own response to the consultation document, and would welcome your thoughts to take on board and incorporate into our thoughts on a response.  In fact, we would suggest you send in your own response, but we would still welcome your input on the points raised.  They are important.

Of the proposed changes, the “digital tax system” is perhaps the one that will cause the biggest changes to advisors, businesses and individuals.  It is under this that the proposed “end of the tax return” would occur.  Individuals will make changes to their digital tax account throughout the year and it is proposed that information would feed in automatically from real-time PAYE and banks and building societies.

A significant proposal is that, under these rules, businesses will be required to keep digital records and to provide quarterly updates to HMRC with summary data from these records.  There appear to be no proposals to help businesses with the cost of appropriate software.  Bearing in mind there would then be an annual taxable profit calculation due after the year end, what is the reason behind the proposal for quarterly reporting?

It is proposed that this would commence from April 2018 for income tax purposes.  The main exemption from the rules will be businesses with turnover of under £10,000, which would seem to help few.

Some of the particular issues that we will look to raise concern the following:

  • The rules are proposed to be mandatory. This certainly raises concerns for certain taxpayers as noted below.  One has to wonder why the rules should be mandatory, when it is claimed by HMRC that they will be welcomed by most taxpayers?
  • Certain individuals and sole-traders may find the rules particularly difficult. These might include elderly taxpayers and those who are not computer literate, or do not own appropriate equipment/software.  Whilst it may be news to those in power, not all people have a PC and certainly not all have mobile phones with internet access (which was claimed to be the solution to not having a PC).
  • Entering sensitive and important financial information on one’s phone may not be ideal in any event. Other HMRC suggestions include asking a family member for help.   However, this overlooks the fact that financial information can be sensitive even (or perhaps particularly) amongst family members.  We feel that this aspect should not be overlooked in the drive towards digital taxation.  We would commend the article in Taxation by Robin Summers FCA on this point.
  • Businesses will be required to submit information to HMRC on a quarterly basis. This could be particularly onerous in the case of small businesses where a multitude of things could [and will for some] cause problems. It may be fine when things are running smoothly, but why add extra burdens?   Life suggests that, unfortunately, there can be upsets…Family problems, business problems, partnership splits, illness, death of [someone] …etc. etc.…  In such circumstances surely no- one would expect the first priority of a business should be to file an HMRC form, ahead of [say] visiting their dying mother?  Once behind, such a short reporting period would make it increasingly difficult to get up to date.  Recent practical experience with HMRC would suggest a “reasonable excuse” let out may be insufficient!  [See previous blogs and recent case law.]
  • Even for the biggest business, access to accurate up-to-date information at short notice could be difficult. Hence, the idea is likely to cause a significant increase in work on administration.  The proposals suggest this would fall disproportionately on small business.  Such businesses, especially start-ups, may therefore decide to opt out of being “HMRC Customers”.  Creating barriers to joining the “Tax Club” would not, in our opinion, appear to be a sensible way forward.  Do people agree?
  • It may be noted that Stock Exchange listed plc’s do not have a compulsory requirement to publish detailed figures every quarter. Why should it be fair to make a small family firm subject to more onerous conditions?
  • The requirement to keep digital records, “as close to real time as possible” again could cause issues for those with limited access to/comfort with technology. There may also be many in businesses where keeping digital records in real time could prove an excessive burden in a practical sense. For example, someone travelling on a music or comedy tour, where time pressures are high.  For them building a pile of receipts is the best that can be hoped for in the short term.  Their Accountants can then help them do the reporting at the end of the year.
  • Business innovation requires flexibility and imagination, not an obsession with bureaucratic record keeping? Such a tight time table as proposed may be ok for a smooth running, continuing business, but growth and change require intensive resource.
  • Importantly, for those with any conception or imagination on what it is like to run a business, [for example, Accountants with real clients] they may blanche at the thought that the first objective of an entrepreneur should be to file Government forms when he is working all hours to try to get a business to produce a profit.  Yes, there should be an obligation to report to HMRC, but there should be a fair interval between striving for an objective and sending in a report on the result.  Sending in a football score after 22.5 minutes is a waste of resource all round. Outcomes can change over time.  Income Tax is based on the profit for the year.
  • Many businesses are seasonal, so use “quiet periods” to catch up with administrative matters. This often enables them to keep staff employed throughout the year, rather than laying them off.  How does the Government wish such businesses to cope with the change?
  • We feel adding extra administrative burdens can only put up an extra barrier to entrepreneurship. Does the Government wish to reduce the economic benefits inherent in the creation of small business, or just encourage them to join the Black Economy?

Of course, others may have other views.  We would like to hear. Please let us know.

The full consultation documents can be found at https://www.gov.uk/government/collections/making-tax-digital-consultations.  Honestly, we would be very interested to hear your thoughts.

Bayliss – HMRC Seek Extra Penalties From Failed Avoidance Scheme

Another week and another case involving a failed tax avoidance scheme.

This time, perhaps more worryingly, HMRC were arguing that the return was submitted fraudulently or negligently by the taxpayer and therefore sought the extra penalties that would be due in such circumstances. This shows a new aspect of the targeting of anti-avoidance schemes and suggests users of schemes could expect the costs of failure to rise higher, whether in penalties or fees for defending them.

Ultimately, the taxpayer won in this case. Of particular interest was the fact that the Tribunal found that relying on the advice of a trusted accountant was helpful in suggesting that he had not acted negligently. It appears the courts confirm that obtaining suitable professional advice is worth paying for in the long run!

Mr Bayliss participated in a scheme marketed by Montpelier Tax Consultants (Montpelier). The scheme involved a Contract for Differences (CFD) and was sold as generating a £539,000 capital loss for Mr Baylis in 2006–07. It was agreed by all the parties that the scheme had failed and additional tax was due, however the taxpayer appealed against penalties raised by HMRC on the basis that ther return was submitted fraudulently or negligently.

The Tribunal determined that in accordance with established case law, in order to prove fraud HMRC had to prove that the appellant did not have an honest belief in the correctness of the return. The Tribunal was persuaded on the basis of the evidence and facts that Mr Bayliss did believe that his tax return was correct and so there was no fraudulent behaviour.

On the question of negligence, the Tribunal felt that the correct test was that set out in Blyth v Birmingham Waterworks Co (1856), that of ‘the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent and reasonable man would not do’. They also considered the test in Anderson (decʼd) [2009], ‘to consider what a reasonable taxpayer, exercising reasonable diligence in the completion and submission of the return, would have done’.

HMRC used a number points to support their argument that Mr Baylis was negligent, including that:

  1. the transaction did not stand up to commercial scrutiny and the appellant failed to check the commercial reality;
  2. the appellant had not kept copies of the documentation, whereas a reasonable person would have done so;
  3. It was a complex financial transaction and the appellant should have obtained proper independent financial advice, but he relied on informal advice.

The Tribunal agreed with HMRC that some of the taxpayer’s behaviour could have been deemed to be careless, but on balance found that HMRC had not done enough to prove that the appellant was negligent in filing an incorrect return.

Interestingly, they felt that relying on his accountant was helpful in this respect, stating “We are persuaded that the appellant relied fully on Mr Mall, a chartered accountant on whom he had relied for a number of years, and on what he believed (based on Mr Mallʼs recommendation) to be Montpelierʼs expertise.”

The tribunal allowed the appeal on the basis that HMRC had not proven that Mr Bayliss acted fraudulently or negligently in submitting an incorrect return.