Making Tax Digital
Discussion
PurpleMoonlight said:
RTI not working again this morning.
Thank goodness I ran all my monthly payrolls last week.In another news item, HMRC admits that the self employed and buy to let landlords on average understate their profits by 40%. It was always blindingly obvious to me that Self Assessment was a disaster. At long last HMRC admits it - and we now know the real reason why they are floundering around looking for an alternative system.
Any system that starts with the word "Self" is bound to encourage deceit and untruthfulness.
So said:
I'd be interested to know how they arrive at that "average".
My guess is that included in that is all the self-employed who avoid tax entirely. I don't think proper self-employed people, registered for self-assessment, under declare profits by anything like that percentage. They know full well that HMRC has benchmarks and a lot of people are basically honest (or scared).
There is also the matter that SA taxpayers often under-claim their costs.
When you consider that any slippage re-enters the economy, probably with a 20% VAT charge, I don't think the self-employed are really a problem are they? They might however constitute an opportunity, because they are easier to scare and tax more heavily than corporations.
I actually disagree.My guess is that included in that is all the self-employed who avoid tax entirely. I don't think proper self-employed people, registered for self-assessment, under declare profits by anything like that percentage. They know full well that HMRC has benchmarks and a lot of people are basically honest (or scared).
There is also the matter that SA taxpayers often under-claim their costs.
When you consider that any slippage re-enters the economy, probably with a 20% VAT charge, I don't think the self-employed are really a problem are they? They might however constitute an opportunity, because they are easier to scare and tax more heavily than corporations.
No doubt , like with any average, there will be some who are pretty much 100% honest and some who are 100% dishonest. I would say that the 40% figure represents those who actually complete SA returns. There must be many who don't submit any sort of return at all - and as a result don't appear in the "average" calculation at all.
HMRC may have benchmarks they can apply across the board to various self employment activities. Indeed, I know they once did because they used to publish them so that traders had an idea of the type of metrics they should be achieving. These ratios etc were published in documents called Business Enterprise Notes - or BENS. We used to keep a stack of them in the office and they were very helpful. That was BEFORE Self Assessment was introduced.
Once SA came in, the BENs were abandoned. We were told by the Inland Revenue (as was) that they would have sophisticated algorithms built into the SA system that would automatically throw up wayward figures without the need for human intervention by Inland Revenue staff. This was in 1995.
I can categorically state I know of not one HMRC enquiry or investigation that was triggered by ratios, margins or other metrics that did not comply with Revenue expectations for the relevant business sector. All investigations I have come across in the 24 years of Self Assessment based submissions have been down to HMRC picking up an omission of data of which they were already aware, such as a capital disposal or a missing bank interest amount. No investigations were related to odd figures in a profit or loss account or balance sheet.
So, the promise of automatic, software generated investigations and enquiries has never materialised. This was a significant pillar of how SA was supposed to work. It obviously failed in this area, hence their lack of trust in the SA figures they receive.
They are legally obliged to disclose the reasons why an investigation has been commenced. I always ask and they always tell. Maybe I'm good at charming them 
I'm sure there are cases where they do question submissions based on margins and other ratios. But these investigations are now quite rare - where once upon a time they were actually the most common type of investigation for self employed individuals.
In fact, most of the investigations I've been involved in since striking out on my own have been in regards to people who aren't actually self employed or buy to let landlords.
I'm sure there are cases where they do question submissions based on margins and other ratios. But these investigations are now quite rare - where once upon a time they were actually the most common type of investigation for self employed individuals.
In fact, most of the investigations I've been involved in since striking out on my own have been in regards to people who aren't actually self employed or buy to let landlords.
So said:
And out of those, how many were up to no good?
None. All down to errors or ignorance of what they needed to put on the return.Another important change to UK "taxes" has been kicked into the long grass. It just shows how significant changes to the system are just too hard to implement as they throw up all sorts of complications that were originally not envisaged. This is the second or third time the planned abolition of Class 2 NIC has been cancelled.
Hammond delays NICs overhaul
The Treasury has announced that Class 2 NICs, which were due to be scrapped next April, will now stay in place until 12 months later. The move is expected to save around £200m. Treasury officials said the delay had been caused after "legitimate concerns" were raised that self-employed workers on low incomes would see their pension entitlements and benefits hit. The LITRG said of the Treasury’s move: “This is a welcome announcement that shows the government is listening.”
Rovinghawk said:
I've long maintained that they best thing they could do with the tax system is simplify it. I accept that it needs a certain level of sophistication but I believe that 25% of the system's complicated details being removed would be a good starting point.
They are trying, but simply removing bits and pieces of the current set up merely complicates other areas in unanticipated ways. I'm afraid we're are stuck with this mess - barring a complete revolution.The example of trying to cancel Class 2 NI is a perfect example of why "simplifying" merely throws up legal and computational nightmares.
Self employed individuals pay two types of NI, Class 2 and Class 4.
Class 2 is simple and low value. For 2016/17 it amounts to £145.60 for the whole year. Even though it is low it is very important because it is the Class 2 payment that counts towards your state pension.
Class 4 is MUCH higher (9% of most of your taxable net profit over around £9,000). However, even though it is a much higher amount than Class 2, Class 4 DOES NOT COUNT as a contribution. It is really a disguised form of tax.
Both Osborne and Hammond wanted to abolish Class 2 (as it is a fairly trivial amount) and use a slightly increased Class 4 payment as the counting contribution. This has turned out to be fraught with problems as the underlying legislation dates back to the dawn of NI (which goes back over 100 years). That's why they keep putting it off.
Thanks. I'm thinking of setting up a new religion. I'll figure out its core belief system eventually -
You will not have to follow the MTD rules if HMRC are satisfied that any of the following apply:
your business is run entirely by practicing members of a religious society whose beliefs are incompatible with the requirements of the regulations (e.g. those religious beliefs prevent them from using computers)
or,
it is not reasonably practicable for you to use digital tools to keep your business records or submit your returns, for reasons of age, disability, remoteness of location or for any other reason,
or
you are subject to an insolvency procedure.
If you think any of these apply to you then please contact the VAT Helpline to discuss alternative
You will not have to follow the MTD rules if HMRC are satisfied that any of the following apply:
your business is run entirely by practicing members of a religious society whose beliefs are incompatible with the requirements of the regulations (e.g. those religious beliefs prevent them from using computers)
or,
it is not reasonably practicable for you to use digital tools to keep your business records or submit your returns, for reasons of age, disability, remoteness of location or for any other reason,
or
you are subject to an insolvency procedure.
If you think any of these apply to you then please contact the VAT Helpline to discuss alternative
Interesting news item e-mailed to me this morning -
HMRC to focus on £3.5bn missing economy
HMRC is weighing up a proposal to strip firms of their operating licences if they don't pay enough tax. The proposals are the latest attempt by the taxman to bring more small firms across a panoply of industries into the tax net. The aim of the proposals, which are open to consultation, is to “promote compliance by enabling customers to get their affairs right from the outset”, according to HMRC. However, it would also affect firms looking to renew their operating licences. They may see their right to operate withdrawn unless their tax affairs are in proper order. The move could slow down the process of obtaining and renewing licences, according to tax experts.
You can see that this is their main reason for attempting to scrap Self Assessment.
HMRC to focus on £3.5bn missing economy
HMRC is weighing up a proposal to strip firms of their operating licences if they don't pay enough tax. The proposals are the latest attempt by the taxman to bring more small firms across a panoply of industries into the tax net. The aim of the proposals, which are open to consultation, is to “promote compliance by enabling customers to get their affairs right from the outset”, according to HMRC. However, it would also affect firms looking to renew their operating licences. They may see their right to operate withdrawn unless their tax affairs are in proper order. The move could slow down the process of obtaining and renewing licences, according to tax experts.
You can see that this is their main reason for attempting to scrap Self Assessment.
I would assume that they are looking at organisations that need permits to trade - or who are monitored by professional bodies. I can see the professions coming under the spotlight here.
Also, waste recycling, food processing, pharmaceutical and chemicals (anything with health or safety implications) etc. all have to obtain licences to be able to operate.
Also, waste recycling, food processing, pharmaceutical and chemicals (anything with health or safety implications) etc. all have to obtain licences to be able to operate.
The problem is Self Assessment. It's a licence to lie. They are struggling to come up with a system that allows them to get an accurate picture on people's true income levels.
The problem is, they USED to have a system that worked but they ditched it when they created Self Assessment.
Now they are trying to create a new system that goes back to the way they did things pre 1995 - but with about one quarter of the staff.
They THINK Making Tax Digital will be the panacea. We all know it really won't really.
The problem is, they USED to have a system that worked but they ditched it when they created Self Assessment.
Now they are trying to create a new system that goes back to the way they did things pre 1995 - but with about one quarter of the staff.
They THINK Making Tax Digital will be the panacea. We all know it really won't really.
ninja-lewis said:
Yes and no.
The old system wasn't anymore effective than Self Assessment since it also relied on the tax payer supplying details of their different income sources. Bar a pilot study in 1981, the Inland Revenue at the time did not have the power to randomly sample tax returns for accuracy (as they do now). The 1981 study of 5,500 self-employed tax returns estimated that 20% of returns had probable understatements of income and a further 40% had possible understatements.
That's before you consider that two-thirds of initial assessments were estimates because the taxpayer hadn't yet submitted their accounts. Hardly surprising that around 20% of assessments were subject to appeal. And that was just 3 million tax returns.
MTD for Individuals should help address this for non-self employed taxpayers through pre-population of tax returns with data already held by HMRC. So instead of the taxpayer entering employment, pension and interest income in their SA return, HMRC will pre-populate their Personal Tax Account with PAYE figures and data obtained from pension providers (already in public beta testing) and banks (coming in 2018). This part is relatively low profile and more or less proceeding unhindered so far.
The controversial part, MTD for Business, is really more about making accounting digital than tax per se. In particular HMRC want to reduce careless errors that occur due to incomplete records. The quarterly submissions are mainly intended to ensure that businesses are actually maintaining timely accounting records. The long term expectation is that this will happen in properly integrated accounting software - i.e. the act of raising an invoice automatically flows the transaction through the ledgers and ultimately into the year end tax calculation. But it is still fundamentally a taxpayer self-reporting their income and expenses. HMRC don't expect it to be a pancea for Self Assessment issues.
The pre-1995 system relied heavily on local tax inspectors but it was a system that was struggling with the rapid rise in self employment from 2 million in 1979 to 3.5 million in 1990. Today that's climbed to 4.5 million people in 2017 and the trend is showing no sign of slowing thanks to the Gig Economy. Then there's the massive rise in individuals receiving property income, be it BTL landlords or increasing short term lets facilitiated by the likes of AirBnB to name a few sources.
The real system designed to mitigate the Self Assessment and under-declaration risk isn't MTD, it's Connect which now generates nearly all HMRC enquiries. MTD merely makes use of the data and infrastructure that powers Connect.
I have absolutely no issue at all with the Connect programme. I really hope it works. It's an example of what "Joined Up Government" should actually do.The old system wasn't anymore effective than Self Assessment since it also relied on the tax payer supplying details of their different income sources. Bar a pilot study in 1981, the Inland Revenue at the time did not have the power to randomly sample tax returns for accuracy (as they do now). The 1981 study of 5,500 self-employed tax returns estimated that 20% of returns had probable understatements of income and a further 40% had possible understatements.
That's before you consider that two-thirds of initial assessments were estimates because the taxpayer hadn't yet submitted their accounts. Hardly surprising that around 20% of assessments were subject to appeal. And that was just 3 million tax returns.
MTD for Individuals should help address this for non-self employed taxpayers through pre-population of tax returns with data already held by HMRC. So instead of the taxpayer entering employment, pension and interest income in their SA return, HMRC will pre-populate their Personal Tax Account with PAYE figures and data obtained from pension providers (already in public beta testing) and banks (coming in 2018). This part is relatively low profile and more or less proceeding unhindered so far.
The controversial part, MTD for Business, is really more about making accounting digital than tax per se. In particular HMRC want to reduce careless errors that occur due to incomplete records. The quarterly submissions are mainly intended to ensure that businesses are actually maintaining timely accounting records. The long term expectation is that this will happen in properly integrated accounting software - i.e. the act of raising an invoice automatically flows the transaction through the ledgers and ultimately into the year end tax calculation. But it is still fundamentally a taxpayer self-reporting their income and expenses. HMRC don't expect it to be a pancea for Self Assessment issues.
The pre-1995 system relied heavily on local tax inspectors but it was a system that was struggling with the rapid rise in self employment from 2 million in 1979 to 3.5 million in 1990. Today that's climbed to 4.5 million people in 2017 and the trend is showing no sign of slowing thanks to the Gig Economy. Then there's the massive rise in individuals receiving property income, be it BTL landlords or increasing short term lets facilitiated by the likes of AirBnB to name a few sources.
The real system designed to mitigate the Self Assessment and under-declaration risk isn't MTD, it's Connect which now generates nearly all HMRC enquiries. MTD merely makes use of the data and infrastructure that powers Connect.
It was the original lame brained plan for the introduction of quarterly submissions that annoyed me. I have no doubt it will eventually arrive but the original timetable was lunatic. Luckily, they have seen some sense and we are now looking at a more sane and gradual implementation of what is a pretty fundamental change to the way we will be doing things in future.
The pre 1995 system might have been struggling but the answer would have been to INCREASE the number of trained staff to cope. The government, of course, was doing the opposite.
From my personal experiences of dealing with the Inland Revenue in that pre self assessment era, I found they were
a) more competent
b) more diligent
c) more switched on
d) more knowledgeable
e)more human and reasonable
f) more likely to spot inconsistent issues with accounts and tax returns
I attended an Inland Revenue hosted seminar for practising accountants in 1995 where they explained to us how fantastic self assessment was going to be and how they were going to use smart software to assess data on tax returns., They also told us that it would be much harder for incorrect or inconsistent data to "slip through" unnoticed because of this smart software.
My actual experience has been the complete opposite,. Far more errors and inconsistencies have slipped through because the smart software they boasted about in 1995 never materialised. The ONLY errors picked up tend to be when something HMRC already knows about is either omitted on the return or the amount entered is different to what they have received from third party informants (such as banks, employers or pension providers).
Self assessment is 100% useless at reviewing and checking the veracity of self employed trading figures or rental income and expenditure amounts - something which use do be carried out by knowledgeable Inspector of Taxes i.e. knowledgeable human beings..
The Government's own Public Accounts Committee has heavily criticised HMRC's plans for Making Tax Digital and related projects-
HMRC plans to transform the tax system by 2020 have come under heavy fire from the committee. The 15 major programmes include the closure of national offices and relocation to 13 large regional centres; implementing the Making Tax Digital initiative for businesses and individuals; and introducing Universal Credit.
While HMRC said that the programme was the “right strategic approach”, the additional workload stemming from Brexit would hamper its ability to deliver the programme’s 250 projects. It acknowledged that the programme would have been more achievable had it implemented the projects in sequence rather than at the same time.
As a result, the tax authority said that it "it did not believe it is credible…to continue with the transformation programme as it is” and that it would carry out a “reprioritisation exercise” to accommodate the extra workload.
HMRC plans to transform the tax system by 2020 have come under heavy fire from the committee. The 15 major programmes include the closure of national offices and relocation to 13 large regional centres; implementing the Making Tax Digital initiative for businesses and individuals; and introducing Universal Credit.
While HMRC said that the programme was the “right strategic approach”, the additional workload stemming from Brexit would hamper its ability to deliver the programme’s 250 projects. It acknowledged that the programme would have been more achievable had it implemented the projects in sequence rather than at the same time.
As a result, the tax authority said that it "it did not believe it is credible…to continue with the transformation programme as it is” and that it would carry out a “reprioritisation exercise” to accommodate the extra workload.
Latest bit of news.
As we know, a few months ago, the implementation of quarterly Income Tax MTD submissions for sole traders, partnerships and landlord income was postponed until April 2020 at the earliest, subject to the newly announced MTD for VAT running smoothly.
HMRC has now announced that they have managed to recruit TWO software companies so far who are designing software compatible with HMRC's software that will allow quarterly reporting for Income Tax purposes - namely Iris and Rhino.
Given that Iris in particular is by no means a cheap option (and a system generally used by accountants in practice rather than small businesses themselves), I wonder what the uptake will be. HMRC so far has not acknowledged that any other software by any other provider is compatible.
"At the time of writing, there are just two names on the list currently capable of filing the quarterly updates required for MTD: practice software giant IRIS and Rhino, a solution provided by Essex-based firm Rhino Accounting, which appears to offer the MTD submission as part of its service bundles for businesses of different sizes. However, HMRC is confident they will soon be joined by others".
Edited to add -
Oh - and by the way, their online filing for all taxes has crashed this morning.
Bodes well, doesn't it.
As we know, a few months ago, the implementation of quarterly Income Tax MTD submissions for sole traders, partnerships and landlord income was postponed until April 2020 at the earliest, subject to the newly announced MTD for VAT running smoothly.
HMRC has now announced that they have managed to recruit TWO software companies so far who are designing software compatible with HMRC's software that will allow quarterly reporting for Income Tax purposes - namely Iris and Rhino.
Given that Iris in particular is by no means a cheap option (and a system generally used by accountants in practice rather than small businesses themselves), I wonder what the uptake will be. HMRC so far has not acknowledged that any other software by any other provider is compatible.
"At the time of writing, there are just two names on the list currently capable of filing the quarterly updates required for MTD: practice software giant IRIS and Rhino, a solution provided by Essex-based firm Rhino Accounting, which appears to offer the MTD submission as part of its service bundles for businesses of different sizes. However, HMRC is confident they will soon be joined by others".
Edited to add -
Oh - and by the way, their online filing for all taxes has crashed this morning.
Bodes well, doesn't it.
Edited by Eric Mc on Monday 19th March 12:03
I think the VAT MTD system will be relatively painless - although I am very wary over the fact that businesses will effectively be downloading their entire accounting records (not just quarterly totals) each time they make a submission.
And if the VAT threshold is reduced, many, many businesses will need to start filing MTD quarterly than was originally envisioned.
Eric
.
And if the VAT threshold is reduced, many, many businesses will need to start filing MTD quarterly than was originally envisioned.
Eric
.
The whole point of MTD is so that HMRC gets a much fuller picture of a business' activities. Otherwise, what is the point.
All the talks I have attended - run by the ACCA - have stated categorically that the aim of MTD is to obtain the underlying data behind the totals HMRC have been getting from time immemorial.
Yes - they will get the totals they will always have obtained. But they will also get a lot more than previous. The legislation is now in place to allow them to collect this data without having to resort to enquiries as was always the case previously.
VAT is just the start of teh process (after they had to recognise the absurdity of their previous Self Assessment MTD timetable). The process is still ongoing.
All the talks I have attended - run by the ACCA - have stated categorically that the aim of MTD is to obtain the underlying data behind the totals HMRC have been getting from time immemorial.
Yes - they will get the totals they will always have obtained. But they will also get a lot more than previous. The legislation is now in place to allow them to collect this data without having to resort to enquiries as was always the case previously.
VAT is just the start of teh process (after they had to recognise the absurdity of their previous Self Assessment MTD timetable). The process is still ongoing.
jammy-git said:
LeighW said:
I hope you are right, and if indeed you are involved in the development, then I can only assume you are. However, that is most certainly not what the presentations (including one my firm attended with HMRC themselves just two weeks ago) have been telling firms of accountants! However, if you are right, then one would have to ask, "What is the point?", as it shows them no more information than the existing system does?
Maybe stage 1 is just to get a system that covers what the existing systems do, but gives them a base to extend from.plasticpig said:
LeighW said:
I hope you are right, and if indeed you are involved in the development, then I can only assume you are. However, that is most certainly not what the presentations (including one my firm attended with HMRC themselves just two weeks ago) have been telling firms of accountants! However, if you are right, then one would have to ask, "What is the point?", as it shows them no more information than the existing system does?
I don't work for HMRC ; I develop accounting software. As others have said it's stage one of a process. Given the time constraints for the April 2019 live date I would put money on what I have posted is pretty much what will be used in April 2019. They need to give the software companies time to implement and test the API. If they are going to introduce massive changes they will need to do so pretty quickly given the life cycle of software updates. I have no faith in HMRC or its software.
markcoznottz said:
Are there enough people at hmrc who 'give a f
k' to actually make it work? . Presumably they think it will make them money, how much more tax is there out there?. Can't be hard to find (e.g.) builders who aren't declaring: lives in a 700k house massive mortgage, two financed cars, holidays, kitchens, pony lessons, etc , earns 19k a year.
They claim they are losing out on £3 billion per annum.k' to actually make it work? . Presumably they think it will make them money, how much more tax is there out there?. Can't be hard to find (e.g.) builders who aren't declaring: lives in a 700k house massive mortgage, two financed cars, holidays, kitchens, pony lessons, etc , earns 19k a year. They claim that MTD will magically make that £3 billion flow into their coffers.
They are living in cloud cuckoo land.
Apart from implementing MTD for VAT, which they claim is still on schedule for April 2019 (we shall see) - it looks like MTD for all other services is dead in the water.
HMRC confirmed that introducing further digital services for individuals will be delayed, including the roll out of the Simple Assessment for income tax, real time changes to PAYE tax codes and Making Tax Digital (MTD) for Individuals.
Digital services impacting small numbers of customers have also been halted, such as paying Inheritance Tax, applying for Tax Advantaged Venture Capital Schemes and PAYE settlement agreements.
Furthermore, HMRC will not move ahead with an online service for new tax credit claims as no new tax credits claims will be made after January 2019.
The massive tax impacts (especially VAT and Customs Charges) has finally been recognised by HMRC as being far more important than making us all jump through computer hoops to make life easier for them.
HMRC confirmed that introducing further digital services for individuals will be delayed, including the roll out of the Simple Assessment for income tax, real time changes to PAYE tax codes and Making Tax Digital (MTD) for Individuals.
Digital services impacting small numbers of customers have also been halted, such as paying Inheritance Tax, applying for Tax Advantaged Venture Capital Schemes and PAYE settlement agreements.
Furthermore, HMRC will not move ahead with an online service for new tax credit claims as no new tax credits claims will be made after January 2019.
The massive tax impacts (especially VAT and Customs Charges) has finally been recognised by HMRC as being far more important than making us all jump through computer hoops to make life easier for them.
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