Introduction

The Northern Ireland Tax Committee of Chartered Accountants Ireland is pleased to have the opportunity to comment on the above consultation launched on 15 August 2016 as part of the Making Tax Digital (“MTD”) project. Information about Chartered Accountants Ireland and the Northern Ireland Tax Committee are provided on the previous page.

We would be happy to discuss any aspect of our comments herein and to take part in any further consultations/initiatives in this area that there may be in the future. We wish to comment briefly on some specific aspects of the current consultation. Our comments herein have been compiled from feedback received from our members via various channels over the course of the last few months.

Chartered Accountants Ireland welcomes any move to simplify paying tax, particularily where this also improves transparency for taxpayers. However we are concerned that voluntary pay as you go (“PAYG”) will inevitably lead to mandation of quarterly payments of tax in future. There can be no doubt that mandated quarterly payments of tax would lead to cash flow difficulties for many businesses particularly given the current economic climate in the context of the UK’s planned exit from the European Union.

Mandated more regular payments of tax would also result in an increased compliance and administrative burden which would have a particular impact on small businesses.

Repayments

One of HMRC’s key aims in developing the PAYG proposals is to make voluntary PAYG flexible. HMRC regularly comes in for criticism in the area of its inability to make timely repayments of tax and is often criticised for not being flexible or speedy enough where repayments are concerned.

We are aware that a new approach to tax repayments was launched in August this year whereby taxpayer’s can get their money back direct from HMRC via their Personal Tax Account without the need for a cheque or trip to the bank.

We would suggest that this process be reviewed after a year to assess its uptake and any issues that may have arisen. It seems sensible to us that such a process should also be available to businesses opting into voluntary PAYG, subject to the foregoing review and assessment being undertaken. It is clear that voluntary PAYG would create additional cash flow difficulties for businesses who chose to use it if overpayments are not freely and speedily returnable.

We note that the consultation document refers to the making of repayments being subject to minimum and maximum payment limits for security/administrative reasons. In a voluntary system, we do not believe that there should be any minimum or maximum repayment limits, subject to the taxpayer having at least satisfied the usual payment on account rules. To set such limits would restrict a business from having the flexibility to request repayments where there is a working capital or other cash flow need and would, in our opinion, make voluntary PAYG very unattractive.

Complexity

A second key aim in developing the PAYG proposals is to make voluntary PAYG simple. The consultation sets out worked examples to illustrate how voluntary payments might look on a digital tax account. We find it difficult to see how these examples demonstrate anything other than the complexity that these proposals would create.

Comparing voluntary PAYG to how credit cards work ignores that tax is much more complex especially in scenarios where different taxes are due on different payment dates.

There are also added complexities around how voluntary payments of tax would be allocated by HMRC systems, in addition to what would happen with repayments. The transition to voluntary PAYG for businesses will be even more complex when payments on account already made are factored into the equation.

HMRC’s systems would also need to be set up to prevent unexpected payments being sent back, automatically. HMRC is currently in the process of a major IT transition from its Aspire outsourcing contract to a new mix of in-house and external service providers. Timed with the MTD proposals, this raises concerns about whether HMRC’s systems will be able to cope with the inevitable scale of change MTD will require where voluntary PAYG is concerned.

Payments on account rules

HMRC is keen to explore whether the existing payments on account rules should “revisit the sums paid as payments on account to match more closely to the sums being reported under MTD” (Question 8).

The consultation document refers to the potential for payments on account “mandatorily based on the quarterly updates submitted so far”. In our book this is mandatory PAYG twice a year by the back door and would clearly bring payment dates closer to the point when profits arise. For the reasons outlined earlier we would not be supportive of changing the current payment on account rules. This would have a disproportionate impact on small business from a cash flow and administrative and compliance burden perspective.

To link payments on account to quarterly submissions would also not be realistic for businesses not making tax adjustments quarterly or with seasonal fluctuations in activity.

For businesses concerned with potentially making overpayments, such businesses would find themselves forced to make tax adjustments every quarter to ensure their payments on account are as close as possible to their final liability. This removes from those businesses the freedom to choose when to make tax adjustments as opposed to carrying these adjustments out as part of the MTD end of year activity. This would inevitably increase the administrative and compliance burden on those businesses and the cost of doing business with HMRC.

We understand reduced errors is one of the key premises of MTD (though we have our reservations if MTD would achieve this). In situations where such businesses are unable to afford the services of an agent and then undertake the work themselves this could lead to more errors in the tax system, and not less.

Trial outcome

The consultation document mentions that HMRC was planning a randomised controlled trial with self-assessment taxpayers in summer 2016 to test out “behavioural approaches around voluntary take up of more frequent tax payments”. We would be interested to see the outcome of that trial, assuming it took place, as the consultation document seems to suggest that HMRC was exploring taxpayer appetite for voluntary PAYG.

This seems at odds with the consultation document at part 1.4 which states that feedback from earlier consultation events gave “a clear message that voluntary pay as you go was a positive step forward, giving businesses the opportunity to budget towards their tax bills”.

Bankruptcy/insolvency

We note that voluntary payments will sit on the taxpayer’s digital account as a credit to be allocated against liabilities as they become due. The consultation document is however silent on how such credits will be treated in bankruptcy/insolvency situations. Such credits should not be used as a form of Crown preference.

Conclusion

As mentioned earlier, we are supportive of any proportionate measures taken to make paying tax simpler. We remain unconvinced that voluntary pay as you go will be simple. Nor are we convinced that digital tax accounts and quarterly updating will facilitate voluntary pay as you go particularily in scenarios where tax adjustments are not made on a quarterly basis or for seasonal businesses which experience fluctuations in activity.

It seems to us that HMRC is equating the activities of book-keeping and accounting with the preparation and submission of tax returns. A taxpayer’s income tax liability stems from the latter activity; the former is only a starting point.

Chartered Accountants often advise their clients to budget for and set money aside to fund payment of their tax liability. Many taxpayers do so but would not find PAYG attractive as it means the cash is simply not available to them for working capital and other business needs, if required.

As a final point, we are also concerned that the tax legislation rules underlying the income tax calculation in particular are becoming increasingly complicated. For example, the introduction of the dividend allowance and personal savings allowance from 6 April 2016 will make most tax calculations more complex and have added greatly to the complexity of the UK tax system.

This complexity will only increase in subsequent tax years when changes to the deductibility of interest for landlords begins to be restricted coupled with the introduction of the £1,000 tax free limits for property income and trading income.

Freedom of Information

We note the scope of the Freedom of Information Act with regards to this submission. We have no difficulty with this response being published or disclosed in accordance with the access to information regimes. This response will be published on our own website in due course and will be available to all of our members and the general public.

Source: Chartered Accountants Ireland, www.charteredaccountants.ie