Association of Accounting Technicians – Written evidence (DFC0044) |
1.1. The Association of Accounting Technicians (AAT) is pleased to have the opportunity to respond to this inquiry published on 12 September.
1.2. AAT is submitting this response on behalf of our membership and for the wider public benefit of achieving sound and effective administration of taxes.
1.3. The comments particularly reflect the potential impact that the proposed changes would have on SMEs and micro-entities, many of which employ AAT members or would be represented by AAT’s 4,250 licensed accountants.
1.4. AAT understands that recent increases in HMRC powers have been considered necessary to tackle egregious tax avoidance and evasion and is generally very supportive of such activities.
1.5. However, mindful that for the past twenty years there has been layer upon layer of anti-avoidance legislation introduced mostly in a reactive and somewhat ad hoc fashion, a strategic review of HMRC’s powers would likely prove valuable.
1.6. AAT has supported the concept of Making Tax Digital (MTD) from the outset, encourages members to embrace technology and recognises the benefits for members and their clients/employers in doing so. However, AAT has repeatedly expressed concerns about various aspects of implementation, much of which has thankfully, if belatedly, been taken on board.
2.1. AAT recommends that HMRC powers should be underpinned by six clear principles (see 3.1 (i) – (vi)) and that there should be a presumption that taxpayers are always seeking to be compliant.
2.2. AAT suggests that HMRC should adopt the ten principles set out in the OECD’s guidance paper “Fighting Tax Crime: The Ten Global Principles” (see 3.9-3.11).
2.3. HMRC should not impose late payment penalties until 30 days have elapsed. Most respondents to HMRC consultations on this subject thought HMRC’s original proposal for 14 days to be the date from which late payment penalties commence was unacceptable, as did AAT and over 90% of AAT’s licensed accountants.
What principles should underlie the design of HMRC powers, and where should the balance be struck between taxpayer and tax authority?
3.1. Six principles should underpin the design of HMRC’s powers:
(i) Equality & fairness – all taxpayers should be entitled to equal treatment by HMRC
(ii) Proportionality – whenever HMRC considers action against taxpayers it should be mindful of the scale and gravity of the matter in hand and whether it should be subject to a de minimis threshold.
(iii) Clear and Transparent – HMRC’s powers and penalties for introducing MTD for VAT should be simple to understand and clearly communicated to taxpayers.
(iv) Reasonableness – when seeking to obtain information from a taxpayer, HMRC should only seek what is ‘reasonably required’ to assess a taxpayer’s position and not go beyond this requirement.
(v) Reliance on technology – with HMRC’s drive to digitise public and business engagement with the UK tax system, AAT would like to see the introduction of a further safeguard to protect the “digitally willing taxpayer” found to be non-compliant through a system programming error, despite their correct entry of data and its timely submission.
(vi) Timeliness – the department should always act in an expeditious manner to minimise any potentially negative impact on the taxpayer.
3.2. After establishing the appropriate principles, the starting point for finding the right balance would be a presumption that taxpayers are always seeking to be compliant.
What principles should govern the development of HMRC powers in a globalised digital information age?
3.6. As a result, AAT suggests that HMRC adopt these ten principles, paying particular attention to the tenth OCED principle to “Protect Suspect’s Rights”[1] to protect taxpayers basic procedural and fundamental rights.
To what extent, or in what areas, is the existing balance of powers between HMRC and the taxpayer inappropriate or unfair?
3.7. Over recent years the balance of power does appear to have inappropriately tipped in favour of HMRC.
3.8. For example, the introduction of schedule 36[2] has heralded an increase in HMRC’s powers and a widening of their scope that has seen powers that were previously reserved for use against egregious tax avoidance and evasion being deployed against small businesses[3].
The Sub-Committee would be interested in examples of perceived unfairness, either in areas of policy or instances of enforcement.
3.9. HMRC’s Litigation and Settlement Strategy has often resulted in an unwillingness, or an inability, for Inspectors to exercise common sense when pursuing enforcement action. In many instances protracted action could have been concluded at a much earlier stage, resulting in a reduction of costs for both sides. For example, in Enquiry cases HMRC officers often cite the Litigation and Settlement Strategy whereby HMRC is required to resolve tax disputes in accordance with the law.
How should HMRC powers be differentiated to reflect the different problems being tackled e.g. careless error, sophisticated tax avoidance, and deliberate tax evasion?
3.10. HMRC’s powers should not only be differentiated in the ways suggested by the question but, as observed above, their powers should be amended to avoid penalising the “digitally willing taxpayer,” whose only reason for non-compliance arose out of an in-built systemic software issue.
How are HMRC’s powers operating in practice? Are they being used in line with their original policy intent?
3.11. As referenced earlier; HMRC occasionally appear to deploy an overly dogmatic approach to the exercising of their powers that is not in line with the policy intent. The result of this can be prolonged stress and worry for the affected taxpayer, an associated loss of productivity and increased costs for both parties.
What is the right balance of powers and safeguards in the security deposit regime and the assessment of offshore matters, for which amendments are proposed in clauses 33–35 of the draft Finance Bill?
3.12. AAT considers the existing pay-as-you-earn security deposit regime to work well in dealing with the most egregious cases where HMRC needs to protect the public purse by stopping rogue traders from phoenixing companies in order to evade tax and AAT anticipates the proposed extension will work in a similar vein.
3.13. However, AAT would not support the security deposit regime if HMRC sought to use it more widely. This is because HMRC provides a useful economic function in company insolvencies where it is usually the major creditor and therefore winds-up the majority of companies. This function can limit the damage that these insolvent companies can do to their suppliers and creditors. If HMRC obtains securities deposits then it is likely to delay the time that HMRC needs to take action and allow these insolvent companies to continue trading for longer. This in turn could increase the debts owed to suppliers and creditors.
Making Tax Digital for VAT
What key improvements have occurred, or new concerns have arisen, since the Sub-Committee’s report on Making Tax Digital for Business was published in March 2017?
3.14. There remains uncertainty for small businesses who are not VAT registered about if and when they will be required to participate in MTD. Government has not publicly commented on this issue for over a year, having previously said mandatory participation will be extended to non-VAT registered businesses “…only once the programme has been shown to work well, and at the very earliest in April 2020.”[4]
3.15. In addition, there has been no public mention of the £10,000 threshold for such future participation, possibly due to a realisation that this arbitrary figure was too low as suggested by AAT and various other bodies. Again, the lack of clarity adds unnecessary uncertainty to the SME community, their accountants and software providers.
How prepared are HMRC, businesses (small and large) and software providers for the implementation of Making Tax Digital for VAT in April 2019
3.16. HMRC does appear ready and prepared for MTD but has also left much to the last minute. This in turn has meant software providers have not been able to undertake as much forward planning or testing as they may have liked.
3.17. That said, the availability of MTD-compliant VAT return filing software has greatly improved in recent weeks, as evidenced by the gov.uk website which now reports, HMRC “…is working with more than 150 developers” and lists circa sixty developers who have “…already demonstrated a prototype of their software to HMRC”[5]
3.18. Many software companies will not have a VAT MTD-compliant product ready in time but the promise of a year-long soft-landing period and the availability of low-cost bridging software should minimize any disruption this could have caused.
3.19. With regard to business preparedness, there is a range of research and survey evidence from numerous organisations that suggest that businesses are not as prepared or even as aware of Making Tax Digital as they should be. Again, the promise of a year-long soft-landing period offers some comfort but greater awareness is vital.
3.20. Professional bodies such as AAT have a role to play here in raising awareness of MTD and what is required of its members so that they not only prepare themselves but their clients too.
3.21. Unfortunately, despite numerous requests and ongoing engagement, obtaining relevant information that can be utilised for this purpose has proved very difficult, with communications from HMRC being repeatedly delayed.
What are the potential costs of Making Tax Digital for VAT for businesses?
Businesses involved in the pilot programmes are encouraged to contribute their experiences.
3.22. It is hard to determine the potential cost for business, HMRC’s own calculations are detailed in a December 2017 technical note but these are far from certain[6]. The FSB has previously made reference to costs of £2,770 which were brought into question by the Treasury Select Committee.
3.23. What is more certain is that, in the first year, businesses will face a range of costs from almost nil for those already filing their VAT returns using software, to a significant step cost increase for those switching from manual bookkeeping.
3.24. For many in business, any increase in the cost of compliance attributable to MTD is likely to eventually be outweighed by the availability of added value functionality built-in as standard to much of the MTD-compliant software.
How could the penalty regime and the new VAT interest regime proposed in the draft Finance Bill be improved or simplified? What are the implications of having different penalty regimes for different taxes?
3.25. AAT wholeheartedly agrees with HMRC that, “…simplifying and harmonising late submission penalties, late payment penalties and interest will make the tax administration system clearer and simpler.”
3.26. Unfortunately, HMRC plans in relation to penalty interest will achieve the opposite of this ambition. It was very clear from HMRC consultations on this subject that most respondents thought HMRC’s proposal for 14 days to be the date from which late payment penalties commence to be unacceptable[7].
3.27. This was for a variety of reasons comprising:
(i) insufficient time to allow for internal HMRC delays/postal delays
(ii) insufficient time for personal factors e.g. holidays, illness etc and
(iii) insufficient time to make payment arrangements
(iv) it is contrary to the stated objective of “harmonising…late payment penalties” as true harmonisation would result in a 30-day timeframe,
(v) the proposed reduction has almost no support from the accountancy profession as indicated by AAT’s member survey which found less than 3.5% of AAT licensed accountants believed that 14 days after the due date is sufficient time to pay, that 30 days is required (47%) and that many favoured an even longer period of time (46% believe customers should have 60 days or longer to pay).
3.28. It is disappointing to note that, in contrast to the views of the clear majority of respondents to the previous consultation, HMRC is proceeding with an unnecessarily short penalty period. AAT acknowledges that HMRC has devised a “compromise” solution involving no penalty in the first 15 days and half the penalty being payable if unpaid between days 16 and 30, but this introduces unnecessary complexity.
3.29. So, in addition to failing to harmonise penalties or deal with any of the other identified problems above, the proposed compromise fails to “simplify” adding unnecessary complexity instead.
3.30. AAT accepts that HMRC is in a difficult position, that the current VAT regime effectively results in penalties being levied from day one and therefore a move to payment 30 days later would represent a sizeable change and could drive a negative change in taxpayer behaviour.
3.31. Yet such a change would achieve the stated objectives of simplicity and harmonisation, be considerably fairer to taxpayers and acknowledge the views of licensed accountants who deal with such matters from a taxpayer perspective on a day-to-day basis. As a result, AAT suggests that the Economic Affairs Committee should encourage HMRC to reconsider its position and instead adopt a simple 30-day rule.
4.1. AAT is a professional accountancy body with approximately 50,000 full and fellow members and over 90,000 student and affiliate members worldwide. Of the full and fellow members, there are more than 4,250 licensed accountants who provide accountancy and taxation services to over 400,000 British businesses.
4.2. AAT is a registered charity whose objectives are to advance public education and promote the study of the practice, theory and techniques of accountancy and the prevention of crime and promotion of the sound administration of the law.
28 September 2018
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[1] Page 68, OECD Fighting Tax Crime: The Ten Global Principles
http://www.oecd.org/tax/crime/fighting-tax-crime-the-ten-global-principles.pdf
[2] 2008 Finance Act
[3] Business Advice, 12 September 2017, “HMRC targets small businesses in tax avoidance crackdown” https://businessadvice.co.uk/tax-and-admin/year-end/hmrc-targets-small-businesses-in-tax-avoidance-crackdown/
[4] Hansard, 6 September 2018:
[6] Making Tax Digital for Business, December 2017:
[7] Making Tax Digital – sanctions for late submission and late payment, summary of responses, December 2017: