Small Businesses: Tax Reporting

Debate between Chris Leslie and David Morris

Monday 25th January 2016 Westminster Hall

[Chris Leslie (Nottingham East) (Lab/Co-op)]

I commend all the speeches that we have heard so far, from across the party political divide, but particularly that from my hon. Friend the Member for Hove (Peter Kyle), who touched on the spirit of entrepreneurialism that many hon. Members speaking in the debate care about and has motivated them to take part. I think that it was the hon. Member for East Lothian (George Kerevan) who correctly said or implied that no one should turn their face against employing new technology to simplify or streamline what might otherwise be bureaucratic, wasteful paper-based systems. I do not think that that is really at the heart of the debate. I am less concerned about the shift from paper to digital than I am about the potentially even more seismic change from annual to quarterly reporting, updates, summaries, returns—call them what you will, there is definitely something that a small business will have to produce. In fact, I was wondering what the difference is between a return, a summary and an update. Perhaps the Minister was updated at the last general election rather than returned. I do not know, but it is on that specific point that we will want some answers.

My apologies, by the way, Mr Davies, if I am not able to remain in the Chamber until the end of the debate. I should also say that possibly we should all declare an interest—I point to my entry in the Register of Members’ Financial Interests—as individuals, because this proposal will not just affect businesses. In the Treasury’s update in the autumn statement and spending review, it was clear that the proposal will take in very many businesses and self-employed people, down to levels well below the VAT thresholds and others. I do not think, even though there are 110,000 signatures on this e-petition, that most people have quite realised the ramifications that the proposal could have for them as individuals submitting an individual tax return, as well as for those businesses that are affected.

This is not just about the move to doing things online; it is very much about the process of lodging the tax return or even update, because that is the thing that many people find particularly laborious. This is not about how things are written down; the issue is the process that takes up so much time and soaks up so much effort when a company is taking stock of the income that has been generated gross, of the expenditure that has gone out and of any gains or losses that have been incurred. When the Government say that in four years’ time there will be “at least quarterly” requirements to file “summaries” with HMRC, the Minister should not be too surprised if people hear that and feel that there will be at least a quadrupling of the administrative effort and exertions and the sweat and tears that sometimes go into that process.

My hon. Friend the Member for Hove has articulated sufficiently the broad points about why we should support SMEs; I have just a few specific questions about the Government’s proposals so far. Will the option of an annual tax return be abolished? Will companies still be able to make the return annually? Will this quarterly—or perhaps more frequently—arrangement be supplementing that? What exactly is proposed? The Minister says “at least quarterly”. Will he elaborate on how often he means by that?

Many small businesses and individuals will liaise with their accountants annually. They will collect together all the receipts or invoices and hand them over en bloc to their accountant, who will of course help with the recording of income, business expenses and so on. The accountant will examine those, perhaps audit them and agree a verified and checked final figure; and that is the point at which information is dispatched to HMRC. I want to drill down into whether the Minister is now saying that businesses and individuals will in effect be asked to submit raw, unaudited, almost “real-time” income and expenditure data directly to HMRC—disintermediated, if I can use that term, by taking the accountant out of the picture?

Will the Minister say a little more about where the accountancy and audit stage will fit into this process? That is a crucial thing for many businesses. They want to ensure that they are submitting information about their business activities in full, so that it is accurate. They will be anxious about what will happen if they make mistakes in those data, because they are going in on a real-time or near-real-time basis. They will be anxious about how that could ever be disentangled should administrative mistakes be made. Will not businesses now feel that they ought to incur even more accountancy costs, perhaps four times a year instead of annually, just to be on the safe side? The Minister can say, “There’s no need to do this. Just let us have access to your books and we’ll press send on Sage,” or whatever software the Minister envisages. However, I think that many businesses will want to take a precautionary approach. I can understand why they would do that, so will the Minister elaborate on that point?

What happens to the actual payment of tax owed? When will that be forthcoming? I think that the hon. Member for South Ribble (Seema Kennedy) touched on this point. Will an annual sum still be required, or are we in effect moving to some sort of pay-as-you-earn for small businesses? I have often found it a bit of an anomaly that many people who are employed have the tax deducted—dripping out as monthly payments—at source, but others have the option of making their tax payment sometimes 18 months further down the line. There is no particular incentive in that respect. There was, when interest rates were higher, the opportunity for people to forestall the payment of their tax and perhaps gain the benefit of holding on to that cash before parting with it and giving it to the Treasury. In this case, if we are moving to a sort of PAYE for small firms, it would be better if the Minister was honest and straightforward about it, because that would be a big change in the way business accounting works.

The hon. Member for Morecambe and Lunesdale (David Morris) made the point about seasonal businesses. He mentioned Christmas tree growers. There are many seasonal companies, which will do well in the summer months and perhaps less well in the winter or vice versa. Examples include window cleaners, sports coaches and people involved in holiday lettings. Of course, quarterly reporting arrangements will therefore be quite volatile over an annual period. Taking snapshots at a particular point in time will not necessarily give the final, smoothed, annual, true report of what the business may or may not owe in tax terms. There is a real question about peaks and troughs across the year and how that can be taken into account in a quarterly reporting arrangement.

[David Morris]

One thing that concerns me from what the hon. Gentleman is saying is that, if quarters are compared to relative years and HMRC thinks that something is amiss, it could enforce an investigation. Would the powers of investigation for HMRC be doubled overnight because it would have more of a dashboard—for want of a better word—on the computer to look between years and sectors and also types of businesses?

[Chris Leslie]

Many hon. Members will have filled in all sorts of electronic forms when purchasing goods and services. I can envisage an HMRC drop-down menu saying, “Pick the type of business that you are.” My concern is that not all businesses fit neatly into the categorisations provided by the computer. Whether the computer says yes or the computer says no, that does not always tally with the realities of those businesses’ needs. There is some virtue in the annual tax return arrangement, because it provides a smoother, more strategic overview of the tax liabilities of a business that is complex, even if it is small or micro.

There are bigger concerns about the design of the Minister’s proposal. For me, it is a bit of a distraction to get bogged down in the question of online versus paper. The core question is what is involved in moving to the quarterly summary and update arrangement. There are administrative issues, too, which people will worry about. HMRC has not exactly covered itself in glory in recent years in terms of customer responsiveness. I think 18 million phone calls went unanswered last year, and only 50% were picked up in the first half of 2015. Given that track record, I do not think the Minister should be surprised if people are a little bit wary about another big transformation coming, when they may want some help and support.

The Public Accounts Committee looked into HMRC customer responsiveness, and it was not exactly satisfied with some of the answers that it got. We need full assurance about HMRC’s competence on that matter. Principally, we need assurance about whether the Government are carefully thinking through this significant change, which could affect not only businesses and the self-employed, but many other individuals—perhaps tens of millions. The debate has been a worthwhile opportunity to pause and urge the Minister to think more carefully about the proposal.