As the Prime Minister has noted, HM Revenue and Customs (HMRC) have responded magnificently to the challenges posed by the COVID-19 pandemic, delivering internationally recognised support schemes in record time and with great efficiency in order to support individuals, businesses and the self-employed.
The pandemic has also exposed the constraints imposed by our system of tax administration, which is badly in need of renewal. It is now clear that a more resilient, responsive and adaptable system underpinned by modern digital infrastructure would have been able to provide better targeted support, and to more people.
Today the Treasury and HMRC are publishing Building a trusted, modern tax administration system, which sets out our 5 to 10-year vision for tax administration. A core part of that vision is the future roadmap for Making Tax Digital (MTD). We are announcing today that the Government will be extending MTD to the remaining VAT registered population from April 2022, and to unincorporated businesses and landlords who file Income Tax Self Assessment returns from April 2023 if their annual gross income from business or property sources is £10,000 or more.
The need for resilience
Our goal is to improve the resilience, effectiveness and support offered by the system for taxpayers, but it may be helpful to set out in more detail the underlying rationale behind this new approach. Many colleagues across the House will have received representations from self-employed constituents about the Self-Employed Income Support Scheme, in particular that it has not adequately reflected their current profit levels, or that they have not been eligible for a grant because they only started trading in 2019/20. These problems are symptomatic of the wider need for tax modernisation, and both of them will be addressed through it, among much else.
Real-time data would have provided the Government with a more accurate picture of the trading and profit levels of the self-employed. Quarterly reports submitted before the introduction of SEISS on 26 March would have provided almost a further full year’s data after the cut-off date of 5 April 2019. This would have enabled the Government to pay SEISS grants based on self-employed people's most recent trading levels, and increased the support some would have received, reflecting year-on-year growth in trading profits.
During the pandemic, we have also seen more and more businesses going digital, with the significant productivity benefits which that brings, and this too would be supported by a modernised tax system.
Making Tax Digital
The COVID-19 pandemic has demonstrated the importance of digitisation in creating a strong and resilient economy. MTD puts British business on a path toward the considerable productivity advantages associated with the transition to more digital ways of working. We want MTD to remain at the forefront of embedding that beneficial shift.
Today, as part of our wider plans to modernise tax administration, we are announcing a future roadmap for the MTD programme. With MTD for Income Tax in place from 2023, HMRC will have up-to-date quarterly business information. As set out above, this would have enabled HMRC to pay SEISS grants based on self-employed people's most recent trading levels, improved the flexibility of their response, and increased the support some people would have received, reflecting year-on-year growth in their trading profits.
We also intend, as part of wider modernisation plans for tax administration, to look at the long delay before the self-employed need to register with HMRC and submit trading data. With earlier registration and information, it would have been possible to support many more people who recently set up in business, without exposing the scheme to fraud or organised criminal attack.
It is also true that modern data systems would enable even faster policy implementation. The Self-Employed Income Support Scheme could have been delivered more quickly and without, as it proved, the need for HMRC to do eight weeks’ intensive work on extracting, cleansing and reconfiguring the relevant data to ensure it was robust and fit for use in calculating payments.
Five years ago, the Government set out an ambition for HMRC to become one of the most digitally advanced tax authorities in the world. Since then we have seen other countries taking decisive steps forward to modernise and digitise tax systems so that they can offer a better, more efficient experience for taxpayers. New Zealand and Denmark already offer businesses and taxpayers the benefits of more regular tax reporting and filing. In the most recent PriceWaterhouseCoopers/ World Bank Paying Taxes index (2020), looking at the ease of paying taxes across the globe, the UK trailed both these countries, along with a number of other digitally advanced tax systems. In Australia, the Smarter Data initiative allows sole traders and individuals to manage most of their tax affairs online, including updating their personal details, report and pay tax, and manage their pensions and pension contributions for their employees. Going further, Australia have recently published plans to consolidate their tax accounting systems to deliver a single whole-of-client account service by 2023.
It is time for us to do the same. By pushing ahead now with the next stages of Making Tax Digital, we avoid the danger of falling behind.
Specifically, we are announcing that Making Tax Digital will be:
• extended to VAT-registered businesses with turnover below the £85,000 VAT threshold from April 2022 – 30% of these businesses have already joined voluntarily; and
• introduced for Income Tax Self-Assessment for businesses and landlords with income over £10,000 from April 2023.
We will also consult in the Autumn on the detail of extending Making Tax Digital to incorporated businesses with Corporate Tax obligations. This will improve the information held for these businesses too, adding to our capacity to improve their resilience and productivity.
We are making this announcement now to give businesses certainty, and to respond to the calls from many organisations for a clear roadmap for the next stages. There are no new requirements until 2022, and HMRC will support businesses in making the transition.
Boosting productivity
Much of the focus of these reforms is on resilience. But we also expect them to be beneficial for our productivity as a nation, moving the UK towards a more fully digital economy.
We know that the UK’s productivity lags significantly behind other similar countries such as Germany and Making Tax Digital will be an important step in making UK business more competitive. Making Tax Digital has already been helping British business on a path toward the considerable productivity advantages associated with more digital ways of working. The Enterprise Research Centre (2018) found that for micro-businesses, webbased accounting software delivered productivity increases of over 10%.
HMRC want to ensure that the tax system continues to meet the needs of the increasingly digitally engaged business population and support the 62% (YouGov, February 2019) of businesses which are in favour of having all tax accounts administered digitally.
Gaining digital skills should also boost the productivity of the UK’s “long tail” of unproductive firms, significantly fewer of which adopt even basic digital technologies compared to the EU’s best performers. The Lloyds Bank UK Consumer Digital Index 2019 found that the most digitally engaged businesses save a day a week in administration by going digital. Making Tax Digital also supports the taxpayer by reducing the scope for avoidable errors, which cost the Exchequer £8.5 billion in lost revenue in 2018-19.
In March the Government published an assessment of the rollout of Making Tax Digital for VAT. This found that after one year the service is working smoothly, and that for many businesses MTD is a natural extension of the way they already operate. Since 2019 over 1.4 million businesses have started using the service, submitting over 6 million returns.
We have listened carefully to feedback from businesses, agents, software developers and accountancy representative bodies, and are confident that today’s announcement provides businesses, landlords and agents with the certainty they need and adequate time to make the necessary preparations. HMRC will expand their pilot service for Income Tax from April 2021 to allow more businesses and landlords to test the full end-to-end service.
Minimising costs
In the past, smaller businesses have raised concerns with colleagues about the administrative burden of adopting digital tools. To address this issue, we have worked to ensure that any additional costs to business have been minimised. Free Income Tax software will be available for businesses with the simplest tax affairs. There are already over a dozen free packages available for VAT as part of a highly competitive market with over 500 products for different business needs. Many subscription-based software products already being used by many small businesses were upgraded to Making Tax Digital for VAT for free.
The Government has, however, also committed to a £10,000 income threshold for MTD for Income Tax. This means that 2.75 million of the smallest businesses, although not required to join, can choose to join MTD for Income Tax voluntarily.
Over the summer, HMRC will hold further discussions with businesses and their representatives to develop and assure the estimated implementation and administrative costs. It is currently estimated that the average additional cost of complying with MTD is about £20 a year for each business, with a transitional cost to make the change-over of about £175. This includes efficiency gains in tax administration, but not the wider productivity benefits of going digital. Invariably, costs will differ from business to business, and are influenced by factors including size and complexity of business, degree of digital capability and cost and functionality of software solution employed.
Alongside these reforms, we will also be taking forward work on law and practice in order to bring the tax administration framework up to date, both to enable future transformation and to inhibit tax avoidance still further. In addition, we will explore issues bearing on the appropriate timing and frequency for payment of different taxes, and the technology infrastructure that may be needed to support that.
This long-term package of reforms will be delivered incrementally and consultatively, recognising public concerns as to the need for proper constraints and safeguards over HMRC powers, and ensuring that services will be maintained or improved for those who are vulnerable, hard to reach or potentially digitally excluded. It supports and extends HMRC’s vision to be a trusted, modern tax and customs department. Ultimately, in boosting our resilience and productivity as a nation, it has the potential to yield huge benefits for us all, both individually and collectively.
With all good wishes, and my thanks,
RT HON JESSE NORMAN MP