PROBLEMS ON HORIZON FOR MAKING TAX DIGITAL AS BREXIT COULD PLAY HAVOC WITH PENALTY FRAMEWORK AND VAT RULES

The long awaited HMRC consultations on the government’s Making Tax Digital proposals have finally been released. According to Jason Piper, tax and business law manager at ACCA (the Association of Chartered Certified Accountants), while at first glance it appears that there is some comfort in there – at least for smaller businesses – it is clear on closer examination that all is not well.

‘As we trawl through the pages looking for further detail, one thing becomes painfully clear. The delay to the process resulting from the EU Referendum and ensuing Brexit-inspired chaos hasn’t just compressed an already ambitious timetable to a point where many of the most respected voices in UK tax have publicly expressed serious doubts about its viability. The decision for the UK to leave the EU has an even more fundamental impact on the proposals, and one which has not been addressed.’

According to Piper, the most challenging aspect for taxpayers of the new regime will be working out what they need to submit, when and how. And in turn, the most challenging aspect for the draftsmen and administrators will be dealing with taxpayers who fail to get that right.

‘The penalty regime for tax has always been driven by return deadlines, with fixed “drop dead” trigger points built into the timetable. But under Making Tax Digital (MTD), the initiative formerly known as “Death of the Tax Return”, that anchor point for the process disappears. What’s worse, the penalty regime will need to recognise and take into account the intentions and technical capabilities of those who’ve failed to report properly. In short, the whole basis of compliance promotion will have to be revisited.

‘Up until 24 June, there was one tiny ray of sunshine in this, a small island of stability to which taxpayers and their advisers could cling. VAT is an EU tax, and EU law demands that a return be submitted. With that fixed point from which to hang the penalty framework, there would be no need to revise the volumes of law and precedent governing taxpayers obligations to file for VAT. The Brexit vote throws all of this into confusion.’

Jason Piper believes that at some point in the next few years, most likely around the end of 2019, VAT in its current form will cease to apply in the UK and it will almost certainly have to be replaced by an economically similar UK consumption tax.

‘In designing that tax, the UK Government will have a choice between perpetuating the return based format, or exercising its freedom to align the operation and administration of the new tax with all the other activity related business taxes under MTD. Operationally a consistent reporting and penalty basis would benefit business; timetabling issues driven by misalignment of fiscal years, accounting periods and VAT staggers could be abolished. Legally it would reduce the volume of regulation, and crucially enable HMRC to apply a consistent policy across all areas of business reporting.

But says Piper, there is a problem;

‘Currently, HMRC is planning to make the switch-over to MTD style reporting for VAT during 2019/2020. Should the Government compound the upheaval of MTD for VAT with the revolution of introducing a new tax on an entirely different basis after just a few reports? Or retain the historic legal basis, embedding the complexities of dual penalty regimes?

‘Or perhaps there is a third way – abandon MTD for VAT until we know just what’s going on. Business has enough on its plate without short term transitions which will be obsolete before they even come into force. A coherent approach to creating a uniform basis for business taxes across the UK seems an obvious priority.’

The long awaited HMRC consultations on the government’s Making Tax Digital proposals have finally been released. According to Jason Piper, tax and business law manager at ACCA (the Association of Chartered Certified Accountants), while at first glance it appears that there is some comfort in there – at least for smaller businesses – it is clear on closer examination that all is not well.

‘As we trawl through the pages looking for further detail, one thing becomes painfully clear. The delay to the process resulting from the EU Referendum and ensuing Brexit-inspired chaos hasn’t just compressed an already ambitious timetable to a point where many of the most respected voices in UK tax have publicly expressed serious doubts about its viability. The decision for the UK to leave the EU has an even more fundamental impact on the proposals, and one which has not been addressed.’

According to Piper, the most challenging aspect for taxpayers of the new regime will be working out what they need to submit, when and how. And in turn, the most challenging aspect for the draftsmen and administrators will be dealing with taxpayers who fail to get that right.

‘The penalty regime for tax has always been driven by return deadlines, with fixed “drop dead” trigger points built into the timetable. But under Making Tax Digital (MTD), the initiative formerly known as “Death of the Tax Return”, that anchor point for the process disappears. What’s worse, the penalty regime will need to recognise and take into account the intentions and technical capabilities of those who’ve failed to report properly. In short, the whole basis of compliance promotion will have to be revisited.

‘Up until 24 June, there was one tiny ray of sunshine in this, a small island of stability to which taxpayers and their advisers could cling. VAT is an EU tax, and EU law demands that a return be submitted. With that fixed point from which to hang the penalty framework, there would be no need to revise the volumes of law and precedent governing taxpayers obligations to file for VAT. The Brexit vote throws all of this into confusion.’

Jason Piper believes that at some point in the next few years, most likely around the end of 2019, VAT in its current form will cease to apply in the UK and it will almost certainly have to be replaced by an economically similar UK consumption tax.

‘In designing that tax, the UK Government will have a choice between perpetuating the return based format, or exercising its freedom to align the operation and administration of the new tax with all the other activity related business taxes under MTD. Operationally a consistent reporting and penalty basis would benefit business; timetabling issues driven by misalignment of fiscal years, accounting periods and VAT staggers could be abolished. Legally it would reduce the volume of regulation, and crucially enable HMRC to apply a consistent policy across all areas of business reporting.

But says Piper, there is a problem;

‘Currently, HMRC is planning to make the switch-over to MTD style reporting for VAT during 2019/2020. Should the Government compound the upheaval of MTD for VAT with the revolution of introducing a new tax on an entirely different basis after just a few reports? Or retain the historic legal basis, embedding the complexities of dual penalty regimes?

‘Or perhaps there is a third way – abandon MTD for VAT until we know just what’s going on. Business has enough on its plate without short term transitions which will be obsolete before they even come into force. A coherent approach to creating a uniform basis for business taxes across the UK seems an obvious priority.’