Behind-The-Scenes of Tax Going Digital in the UK

Categories: Tax

From 1st April 2019, every UK business with an annual turnover above £85,000 had to register for Making Tax Digital (MTD).

The government initiative is designed to make it easier for individuals and businesses to submit tax returns and “keep on top of their affairs”.

What happened?

Predictably, the mere announcement of MTD caused something of a panic and scramble as businesses large and small quizzed their accountants about what MTD would look like in practice and what action they needed to take.

Similarly, accounting software providers locked themselves away and developed interfaces to HMRC’s systems in order to provide this promised land of easier tax.

Making Tax Digital is now in full effect, but the behind-the-scenes effort on behalf of the government and businesses has been colossal.

A fascinating report by ICAEW reaveals what went into the process and the challenges experienced along the way.

We’ve picked out the most interesting bits for you.

Lessons learned

If you’ve been through the MTD process, you probably have your own list of lessons learned (some good, some bad).

The ICAEW report neatly summarises the universal lessons learned:

  • automated tax return filing provides significant benefits, but third parties (such as software providers) are key, and it inevitably changes the relationship between a business and its accounting firm;
  • productive relationships between accounting software providers and information suppliers are key to building tools that benefit businesses;
  • moving to a simpler model was crucial in order to create a digital equivalent of the old system;
  • some people will still refuse to use digital tax methods (or simply can’t), and they need to be catered for; and
  • legal support for digitisation must always be considered.

The report looked at the digitisation of tax across the world and concludes that some systems are harder or easier to convert. This is down to key factors within each system, such as tax morale and the need to “crack down on the grey economy”.

How each stakeholder views taxation

When digitising a tax system, there are three stakeholders whose needs, frustrations, and long-held beliefs need to be taken into account.

1) The individual taxpayer

There are two certainties in life: death and taxes.

That much-used quote accurately sums up how the taxpayer feels about tax. It’s a chore, and often seen as too heavy-handed.

They want simplicity and the ability to legally pay the minimum amount of tax due. That’s unlikely to change.

2) The business

Businesses aren’t that dissimilar to individual taxpayers; they’ll work with their accountants to legally pay as little tax as possible and view the process as a roadblock to productivity whenever it arises.

3) The agent

Tax is a big part of the agent’s (or accountant’s) service provision. It’s what they do.

However, they’re all for simplifying the process, because the more tax returns they can process, the more they can provide a great customer service and scale that element of their business. They also want their clients to be informed and happy.

How good is the UK at digital tax?

The UK sits in the D7 of digital-led governments (alongside Israel, New Zealand, South Korea, Canada, Uruguay, and Estonia) and is considered one of the most advanced countries in the field.

Our government’s revenue principally comes from taxes, and VAT plays a big role in that. The PAYE structure for most employees and abundance of small businesses under the filing threshold limits the amount of work required, but the country isn’t without its complex tax affairs.

For instance, substantial investment firms and those involved in property still have to make returns, and corporation tax needs processing for the 4 million limited entities currently in operation.

Since MTD made its appearance in 2019, 99% of VAT returns are now filed online, and the government is investing substantially in bolstering its digital administration.

Their overarching goal is to reduce the need for an annual tax return and instead create a single view of each taxpayer’s affairs on the website. MTD is seen as the first stage of this process.

What’s the challenge going forward?

The UK tax system is a complex beast, and HMRC’s desired model will ask the majority of businesses to start filing quarterly.

For many, there’ll be costs associated with doing this, relating to hardware, software and tuition. The cost of implementing MTD alone has been criticised for being at odds with any net benefit for the economy; how much will further digital transformation cost?

HMRC is now providing agents with access to everything their client can see and do, but this is only for certain services. Despite this, they are working closely with developers to create an API for software compliance, which would help smooth the continuation of digital transformation.

Need help with MTD?

We appreciate that people are still struggling with the move to MTD. It was never going to be as simple as the government suggested, but that’s why teams like ours exist.

For help with MTD, or anything VAT-related, just get in touch with our friendly team, today.