A Recipe for a Car Crash

HOUSE OF LORDS

taxadvice

The House of Lords Finance Bill Sub-Committee recently took oral evidence on economic preparation for Making Tax Digital which is planned to become compulsory (under threat of penalties) for many VAT registered business in April 2019.

Concerns were raised on a number of points including the costs (both in monetary and management time), the lack of general preparedness and the difficulty in so many businesses seeking to implement new computer systems in the 5 months or so to April 2019.

Lord Hollick said, “To rush this in with very derisory estimates of the costs and indeed the turbulence that it is going to cause seems to be a recipe for a bit of a car crash”.

Evidence was given that fully developing the relevant software was impossible because “Some key facts are missing.  We do not know what the penalty amounts would be for either late filing or failing to pay tax.  We do not know exactly which taxes will be affected and when.  We do not know fully how appeals will be handled”.

Some of the exchanges seem just plain bizarre, or maybe there is another English language which I do not know about?

House of Lords : “Will the information come to the HMRC cloud in real time, so it will be privy to it as it arrives?  Or how?”

CEO Software House : “I do not know about real time.  That has not been defined yet”.

Is Dr Who involved?

Or consider the following (truly priceless) description of HMRC strategy in this area.

At the Office of Tax Simplification we have done some strategic thinking as to how the technology may improve the user experience in tax administration in the longer term.  We have observed that in some countries real time information is now a key part of the tax administration strategy; transitional level data is provided in real time to the tax administration, which enables real time calculation of profit”.

Is it just me that thinks the fact that this is a quote from a Director at the Government Office of Tax Simplification is somewhat ironic?

The only remarkable simplification in this sentence is that it seems to suggest a cash ledger [“transitional level data”] is sufficient to calculate business profits.  What about stock, bad debts, capital versus revenue, income recognition etc., etc.?  How are they all to be dealt with by the harassed business men, trying to work out which button to press on his mobile phone app, whilst also trying to do his job, negotiating a price and trying to actually get paid?  (Assuming the business man on the other side of the transaction can work out which button to press for payment that is).

Of course, the “profit” point is not directly relevant for the first phase MTD dealing with VAT, but therein lies the nub.  The stated benefit by HMRC of all this cost and disruption is that there will be fewer transposition errors or errors in addition.  Even if this unproven assertion turns out to be true, the anticipated benefits are projected to be relatively minor.

If an Authoritarian State (say North Korea) introduced a system whereby to be in business you had to buy a Government licensed computer program to record all your transactions, which was shared in real time with the State, with fines on the business owner for errors, would our elected Members of Parliament not make disparaging remarks and point out how much more competitive the market was (say in South Korea) because the business owners there could choose which software suited them best or even adopt it to suit their business, or their innovations.

Message to MP’s, Government, HMRC and Office of Tax Simplification, introduce MTD if you wish but make it voluntary.  SIMPLES!

You may be scared no-one would volunteer to join?

If so, what does that say about the quality of the whole idea!?

The Importance of getting ‘It’ Right

Recent Tax Cases reinforce the message : Get Advice : Get It Right : Document It.

The case of D. George shows the common promise of “you will be looked after on a third party sale” can fall foul of horrid tax consequences if there is no advance advice and documentation.

On a separate, and totally different technical argument, a taxpayer and spouse undertook (for presentational purposes) a development project through an associated company, which they owned jointly. Circumstances, with a crash in the development value, made their ideas change. In the end, the company was wound up without repaying the director’s loan which funded the development work. As a result, the owners were not deemed to have incurred the crucial enhancement expenditure on the development, and so obtained no tax relief on £250,000 paid out.

Painful lessons on both counts.

1. Get Advice
2. Get It Right
3. Document It.

If in doubt, repeat step one!

Making Tax Digital (MTD) for VAT – Are you Ready?

VAT Tax Advice

Recent surveys suggest that only 50% of affected businesses are aware of the new rules being brought in from April 2019 in relation to VAT. Even those who are aware of the changes are not prepared, with 20% of those who are aware of them currently have no plan at all.

If you have followed this blog, you will be aware that we have been critical of the proposals under MTD (see here) however HMRC and the government have continued to press ahead with them and it appears very likely that the rules for VAT will be coming in in April 2019, and will be compulsory!

From that date, all businesses who are required to be VAT registered (i.e. they are above the VAT registration threshold) with be required to comply with the MTD for VAT rules. From April 2019, such businesses will be required to keep business records digitally from the start of their accounting period and will need to file in an MTD approved manner.

A spreadsheet can be used to keep records, however MTD-compatible software will be needed to send HMRC the VAT returns and so bridging software might be required in order to transfer the data between systems. HMRC have announced a ‘soft landing’ for digital links, giving businesses until April 2020 to make sure there are digital links between software products, but preparation now makes sense, because it is a radical departure in terms of there being a Government prescribed method for record keeping.

If you are concerned about the new rules and would like help understanding them, please get in touch with David Stebbings. It is better to be prepared now rather than waiting until April!