During a speech presented at a recent Armstrong Watson event, the Financial Secretary to the Treasury David Gauke included information on the latest thinking surrounding the subject of “Making Tax Digital”.
“But today, I’d like to focus on an aspect of tax which is perhaps closer to home: about how we are modernising the system by which taxes are paid.
I’m sure that the memory of filling in this January’s tax return will be fresh in your minds. You’ve almost certainly had more pleasurable experiences! Nobody enjoys paying tax; that’s one of the things I don’t think any government can change.
But what we can do is make it easier.
The system now has, quite simply, not kept up with the march of technology.
You have taxpayers taking out 18-month old records, staring at them for a while as they try to figure out what they were doing back then, and then tentatively use them to fill in a lengthy HMRC form.
Or, they can go to their accountants, drop a large carrier bag of records on their desks, and get them to work it all out. Then they pay their final tax bill on money made up to 21 months previously.
It’s a system designed for a world of paper, ledgers: book-keeping in a literal sense.
Now compare that to the way we carry out other activities.
Shopping for groceries online … making a GP appointment online … sorting out your road tax from the DVLA website in just minutes … paying your invoices off a smartphone at 4am if you want to!
Business are harnessing the opportunities of the digital age too, fundamentally transforming their operations and the services they provide. It’s the customers that reap the benefits.
That is the context of our reforms to HMRC.
It is only right that the government keeps pace with the world around us. That is why we are seeking to transform HMRC into one of the most digitally advanced tax administrations in the world. Making tax digital is at the heart of these plans.
At the Spending Review, the Chancellor announced a £1.3 billion investment in HMRC to make this vision a reality. This will see the end of the annual tax return, and, in its place, will introduce simple, secure and personalised digital tax accounts for businesses and individuals.
Importantly, these changes deliver what businesses and individuals have told us they need.
In particular, many businesses have said they want more certainty over their tax bill, and don’t want to wait until the end of the year, often longer, to find out how much they have to pay.
Businesses have also said they want tax to be more integrated into the way they run their business, rather than something done separately, and many months later.
The use of digital tools – accounting software or smartphone apps – will, for the first time, create this desired integration.
Importantly, taxpayers would have 24/7 access to digital accounts, as well as having a complete view of all their tax liabilities and entitlements, allowing them to send HMRC information and payments simply and efficiently.
Businesses will be able to see in their digital account what each update means for their tax position as the year goes by.
This will also make it easier for business to understand how much tax they owe, giving them far more certainty over their tax position, helping them budget, invest and grow.
Unnecessarily bureaucratic form-filling will be eradicated – taxpayers will not have to tell HMRC information it already knows.
And unnecessary time delays will also be eliminated, because the tax system will be operating much more closely to ‘real time’. This will keep everyone up to date, removing the risk of missed deadlines, unnecessary penalties, debts arising and errors in the tax system being carried forward from one year to the next.
Beyond helping businesses get their taxes right, making tax digital will also help them improve and develop their business. Targeted guidance and alerts will make them aware of relevant entitlements and reliefs, or wider government services to support business growth.
Apart from the modernisation of business practices, there is another important prize – one we cannot ignore. Each year around £6.5 billion of tax goes unpaid because of mistakes made by small businesses when preparing and filling in their tax returns.
These reforms will improve the quality of record keeping, reducing the likelihood of mistakes and contributing £920 million to the Exchequer in additional revenue by 2020, then £600 million a year thereafter.
This is good news for businesses – and good news for the Exchequer too.
But with big changes come challenges and concerns. So I would like to take this opportunity to address some of these concerns; because I do not underestimate the scale of these changes, and it is important that we get this change right.
First of all, this transformation does not – repeat, not – mean four tax returns a year.
What it means is that by 2020, most businesses will be keeping track of their tax affairs digitally, updating HMRC at least quarterly via their digital tax account.
Importantly, these quarterly updates will not involve the complexity of a full tax return, where the business, or their agent, has to gather together and manually input data onto an electronic or paper form, and then perform various calculations.
Instead, updates will be generated from digital records and in most cases, little or no further entry of information will be needed. It will be much quicker, easier and far less burdensome than the current process. The agony of the annual tax return will be a thing of the past.
Second, I make no apologies for the scale of our digital ambition.
With the government and local authorities investing £1.7 billion to bring superfast broadband to over 95% of the UK by 2017, this is possible.
And the Prime Minister announced at the end of last year that we are looking to implement an updated broadband Universal Service Obligation for those not covered by the superfast plans.
Some have said that it is overly ambitious to rely on digital as the primary channel. The fact is that we are going with the grain of the way small businesses are already moving. The benefits of digitisation are readily accepted by the majority of small- and medium-sized organisations.
And whilst there has been plenty of debate on the challenges – a lot of that online – I am heartened see that many businesses, and their agents, are already forging ahead. Already, 2 million small and medium-sized businesses are using software for their payroll and their VAT.
We’ve also seen the rise of companies providing digital accounting services, using exactly the sort of technology and processes that will be needed when we make tax fully digital.
Just last week, I met FreeAgent, one such company, whose software is already being used by 45,000 customers. And we are working with other innovative firms, such as Intuit and Xero. That is where the market is heading.
HMRC, too, stands ready to deliver the digital agenda.
The HMRC performance figures for this year bear repeating.
This year saw a reduction of almost a quarter in the number of people submitting a paper tax return – that’s over 340,000 fewer people doing things the old way.
Meanwhile, the percentage of people using online filing has increased once more – from 85% to 89%.
More than 825,000 customers accessed their Personal Tax Account as they completed their tax returns.
Comment
We make no apologies for including such a large part from his speech because it is interesting to get the government’s official take on their approach to digitalisation.
