UK taxpayers are legally obliged to report any taxable income and profits to HMRC, but with the tax office rapidly withdrawing manual reporting options, should taxpayers have to pay to comply digitally?
In 1997 the first electronic personal tax return was submitted to HMRC, or the Inland Revenue, as it was known then. Since that time, the digitisation of UK taxes has advanced with a speed approaching that of a wildfire, with chunks of manual compliance disappearing every year.
Not everyone is digitally savvy
Nowadays, the majority of taxpayers are on board with the digital age and happily engage with online banking, pay for parking with an app, vote for their favourite dancer on Strictly, all on their smart phones. However, many people (usually middle-aged and older) have never interacted with any organisation digitally, with a significant percentage not trusting the internet especially when it comes to paying a bill.
In commercial transactions, many suppliers offer a discount to encourage customers to declare and pay digitally. For example, car park operators often offer a 10% discount for booking and paying via an app and thereby reducing the operator’s cost of maintaining ticket machines. Where there is a cost, or if using a digital service is perceived as difficult, some customers will avoid the transaction (for example, park elsewhere) or look for an old-school option such as paying in cash.
Unfortunately, looking for an old-school non-digital option is simply not possible for most interactions with our wonderful tax authorities.
Who pays for digital software?
Despite HMRC’s misguided terminology, taxpayers are not customers, as they do not have a choice over whether to engage with the tax system. If digital is the only compliance path, then the taxpayer is under a legal obligation to use (and presumably pay for) some form of tax compliance software.
Almost all tax software is no longer free, so someone has to pay for it; the key question being, should this be the taxpayer or HMRC? In the early days of tax digitisation HMRC provided free software to encourage take-up of the digital submission route, but the freeware is usually restricted to taxpayers with very basic tax affairs and very modest levels of income.
A handful of these freeware solutions are still around, such as HMRC’s Basic PAYE, and it’s worth noting that when MTD (Making Tax Digital) was first proposed in 2016, HMRC promised that they would make available a software solution for those with simple tax affairs. Regrettably they have thusfar failed to keep their promise and provide taxpayers with a free solution.
Complexity is increasing
As taxes become fully digitised HMRC is actually removing or severely restricting the free compliance options. Take VAT, for example; before MTD, VAT compliance was relatively simple – the business owner could type the box totals into an online form on the HMRC website. Only those with relatively complex accounting systems had end-to-end software solutions that submitted the VAT return directly and digitally to HMRC. Now every VAT-registered business has no choice but to pay for MTD VAT software.
A similar story has played out for corporation tax (CT). Since 2011 all companies have been required to tag the totals in their accounts using the accounts format iXBRL and submit those figures digitally to HMRC. For smaller companies with simple tax affairs, the submission of the annual accounts and corporate tax return to HMRC is combined into one free online process. However, the companies eligible to use the HMRC free service, is being reduced every year and I expect the free service will cease to be an option in a year or two.
What can possibly be done
A major concern is that as tax becomes ever more complex, HMRC will exclude more and more taxpayers from the few free online compliance services it still provides, forcing those taxpayers to buy tax compliance software, or pay an accountant to submit the tax return.
This raises a number of questions, especially as HMRC are saving significant sums not only from digitisation itself, but also by providing very little free-to-use tax compliance software. So, what questions should we be asking:
- As HMRC are saving money, don’t they have a moral duty to help certain groups of taxpayers to comply with their reporting obligations at no cost to the taxpayers?
- If so, how should those protected groups of taxpayers be clearly defined?
- Should all businesses be excluded from HMRC-provided freeware on the grounds that businesses exist to make a profit, and should be able to afford tax software?
- Should charities and trusts have to pay? Those organisations can have very complex tax affairs, but do not make profits.
- Which individuals and organisations should be protected from the cost of tax compliance?
- And lastly, why haven’t we yet had an informed debate about the creeping cost of tax compliance?
Accountant’s view
Pretty much all businesses, except micro-businesses (one-man-bands and small partnerships), will have paid for accounting software which normally includes an element to allow tax submissions to HMRC, so no problem there.
There are, however, hundreds of thousands of individuals, micro businesses, small charities and the like, who still use manual systems, with perhaps the odd spreadsheet thrown in. In my opinion, HMRC has a moral, if not a legal, duty to help them by providing free tax submission software, but please let me know what you think in the comment section below.
