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Comment on news that small businesses could file tax returns by telephone

By CreditMan Monday, January 25, 2016

Members of the UK200Group of independent accountancy and law firms have today commented on news that small businesses could be allowed to file their tax returns by telephone. According to figures from HM Revenue & Customs (HMRC), two in every five self-employed workers are either unable to use the internet or need help using government services online. David Gauke, Financial Secretary to the Treasury, says those who really cannot ‘go digital’ will not have to and could instead file information by telephone.

Jonathan Russell, Partner at UK200Group member firm ReesRussell:
The Government has never yet managed to provide a telephone service which has been successful so there is little prospect of one for businesses to file their information to be any better. Many small businesses have no need nor any desire to be digital and there remain many who simply do not trust the security of doing things online, even if they have the ability to do so. As an adviser, one of the biggest fears of businesses doing things on the telephone is that, as with some HMRC forms, there may be seemingly innocuous questions asked which could open the business to greater scrutiny. It has to be remembered that HMRC terminology does not necessarily have the same interpretation that is common usage. A telephone helpline is certainly going to be needed to explain to the business what exactly is needed and I suspect so HMRC can understand that what they seem to want is not actually readily available.

Andrew Jackson, Head of Tax at UK200Group member firm Fiander Tovell LLP:
Submitting information by ’phone is not an option, except for a very small numbers of taxpayers – the load on HMRC’s systems would be too high.

However, the fundamental problem here is not how the information gets from a business’s systems to HMRC, it’s how the information gets into the business’s systems in the first place.

The proposals are predicated on the assumption that all businesses keep electronic records, and so all that is needed is to extract a couple of totals from those records and you can get a rough idea of the taxable profits. This is not the case for a large number of small businesses who rely on accountants to do that data entry at year end.

The idea also falls down when you look at the fact that income and expenditure in the first three quarters of the year may bear no relation to the annual profit – quite apart from businesses being seasonal, the annual investment allowance means that a profitable business may have no tax to pay if it invests significantly in equipment. Forecasts are much more interesting figures than actual results.

The proposals make more sense if you start at the other end and work backwards. HMRC want a quarterly estimate of a business’s likely profitability. Excellent, all we need there is a single number: this could be either an estimate of the quarter’s results, an updated year to date number, or an updated forecast for the whole year. So far, so much like the quarterly regime for large companies. All that would be needed from a system perspective is a single box on the business’s online tax account.

This online tax account could then allow the business and HMRC to have a simple overview of income tax/corporation tax, PAYE, VAT, auto-enrolment, which bank accounts the business has, which properties it owns, and all sorts of other useful information which could be kept up to date when the quarterly review comes along.

You could make the income reporting a bit more detailed by making it three-line accounts, or putting in a forecast of capital expenditure. Again, these would only require a few boxes. With an estimate of profit and a little bit of historic asset information, a (very) rough estimate of the tax liability could easily be generated, helping the business plan its cashflow. That could be very sensible.

To require details of all transactions however, would be unduly onerous. HMRC could make no good use of the information, unless it is going to prepare an estimated tax return for every taxpayer, which would be a huge and pointless drain on resources, especially as it could only provide an estimate of the tax due and not a final figure. As most businesses would not normally have the information in any sensible state for tax purposes (a sensible state for management purposes is of course very different and varies between businesses), requiring them to have it available for upload would be a significant cost – in order to get no more accuracy than could be obtained by entering the single figure estimate of profit.

I suspect that despite having set the threshold for reporting at £10,000, HMRC have failed to appreciate that it is not normal for a business to have an accounting department with a sophisticated accounts system, updated in real time.

Now if they were to set the threshold at £10 million, it would be another matter – even for a £1 million business it might be feasible. But £10,000 is an individual running a part-time business, quite possibly while holding down a job too. It is an entirely different world – one which HMRC ought to at least visit before seeking to impose rules on it.