Small Businesses: Tax Reporting

Debate between Chris Leslie and Rob Marris

Monday 25th January 2016 Westminster Hall

[Rob Marris (Wolverhampton South West) (Lab)]

It is a pleasure to appear before you again, Mr Hanson. I give my thanks to the Chartered Institute of Taxation and the Federation of Small Businesses in particular. I also thank the petitioners and those who tweeted in response to the petition.

Broadly, Labour welcomes greater digitalisation, but I think that the Minister—he is an honourable and painstaking Minister—has been a victim of some wooliness in this whole saga. Fears have been expressed that the Government are about to do things that the Government say that they are not in fact about to do. That is always a difficult thing for politicians, and we face that whatever our political party. We are well able to defend our views and those of our party, but it is more difficult to deal with people misunderstanding our views and then attacking those misunderstood positions. We have to go through a double process with them: first, we have to sort out what our position is and then we have to justify it.

The change is a question of timing, software and the assistance that will or will not be available. As I understand it—the Minister will be able to confirm this or say I have got it wrong—a lot of HMRC stuff is already done online: VAT is online; there is real-time information for PAYE returns; and company accounts are being submitted in what is called iXBRL. No doubt, the Minister will know what that stands for; I do not. There is also the digital tax account and the agent online self-service, which is not to be confused with the agent secret service and which is for such people as accountants to deal with HMRC regarding the tax affairs of their clients.

What the Government are doing—it is very understandable; it is happening all over society—is an attempt to externalise costs. That is what it is in economic terms. We see it all over the internet with the use of online services. Many Members will be familiar with this, but years ago people would go to a travel agent, and the travel agent bore the overheads. Now, people go online and book with an airline or a travel company, and they are bearing the overheads, because they are paying for their computer, the heating and lighting in their home and so on.

HMRC is externalising its own costs, which is understandable because HMRC is not a profit-making centre. If its costs of operation are lower, taxpayers benefit. However, we know from other examples that externalising costs does not always go smoothly. I will quote from paragraph 1.5 of the Chartered Institute of Taxation’s very helpful briefing:

“Making Tax Digital is a huge project that is going to bring in fundamental changes to the tax system and how both taxpayers and their agents interact with it. It has the potential to create a simpler, more workable tax system if it is developed and implemented in the right way but it must be managed carefully and in consultation with taxpayers, tax professionals and software developers alike.”

That sets the scene quite well in terms of what one ought to aim for in government, whatever one’s party: to have an inclusive process that runs smoothly and not too quickly. It is not clear that the other online initiatives in HMRC have gone so well. The CIOT states:

“There is evidence that past changes in reporting obligations have led to an increase in compliance costs for businesses, and that HMRC tend to under-estimate these costs.”

In the spending review, HMRC tells us that the measure will save businesses £400 million a year, which would be very welcome, particularly for small businesses. I hope the Minister will clarify that, because I keep hearing about the effects on small businesses. We absolutely focus on that, about which more later, but I am not sure whether there is a de minimis or upper threshold. Perhaps the Minister will elucidate, because I keep reading, “This is an attack on small business; big business does not have to do this, and therefore it is unfair.” That might be the case, but at the moment it is not clear to me that, if the measure were brought in, it would not apply to big businesses; or, to get rid of the double negative, when this comes in, it will apply to big businesses. So we need to know who the policy will apply to.

We all know from the debate today that there is a big risk of increased costs for businesses, and that those increased costs are likely to fall to a greater extent on small and medium-sized enterprises, which do not have accounts departments. So, proportionately, the hit taken by smaller businesses, if this were to go wrong, would be much bigger because of the initial set-up costs. Even if there is free software from HMRC, it has to be installed on a computer, if the small business has one. There is increased staff time in preparing and checking all the records four times a year and a potential increase in the fees of agents, particularly accountants. Some small businesses might need to engage an accountant, whereas previously they might not have done so.

All that costs money, and if HMRC were to raise queries four times a year, in contradistinction to once a year, the likelihood is that those queries would not be a quarter as many or a quarter as complex and that, when a whole year’s worth of quarterly queries is added up, it would take more staff time and cost more for businesses, particularly, but not exclusively, for small businesses.

There is a question of timing. I understand there will be consultation this spring, so the hares are now running. We have a petition of 110,000 signatures. Organisations have considerable concerns, many of them expressed today, particularly on two aspects that are linked. There is the sanctions aspect and whether sanctions would be applied for failing to do a quarterly update. My hon. Friend the Member for Nottingham East (Chris Leslie) was right: we could use a multitude of words for this measure, but we must not use the word “return”. Returns are for taxing, winning elections and birthdays when we get happy ones. Generally, we do not say, “Happy tax returns.”

[Chris Leslie]

Many happy updates.

[Rob Marris]

Indeed.

I hope the Minister can elucidate whether the software will be free, as has been indicated in some of the material I have read. If it is to be free, or paid for by the individual, when will it be available? Perhaps it is available now; there is no sense in having the system and no software to deal with it.

Perhaps the Minister will correct me if I am wrong, but I understand there has as yet been no impact assessment, which seems to be a rather large lacuna in what hon. Members and outside organisations engaged in this matter agree—it does not mean it is right if we all agree, but the tendency increases—is a pretty big change and may presage bigger changes on a more widespread basis.

It would be helpful for business if HMRC went about saving money—externalising costs, being more efficient, whatever we want to call it—before cutting staff so much. To cut staff and introduce this new measure is a triumph of hope over experience when it comes to computerisation programmes, whether in government or in the private sector.

I have another question for the Minister on the vexed question—in spite of the agent online self-serve system—whether there will be synchronicity by April 2017. At that point, quarterly updates will have to be filed by businesses and agents will have access to all the information online—not just the information of their clients, but HMRC’s—and will interact with HMRC digitally, because otherwise there is a risk that businesses will file updates four times a year, but their agents will not be fully engaged in that process that has happened before, and that is a concern.

As for staffing, there are lots of different ways to count staff. When I have probed this, there has been a difference of opinion between HMRC and the Office for National Statistics. However, if we look at the broad trend, the ONS and HMRC agree that since April 2010, when the Conservative-led Government started, there was a cut of almost 20% in HMRC’s staff by April 2015, and there are more cuts in staff to come. On the centralisation of offices, for example, which has been adverted to, only 90% of staff will transfer to the centralised regional offices, according to HMRC’s own figures. So a greater loss of staff is likely. Loss of staff per se is not a bad thing if an organisation is running more efficiently, but it seems to me to put the cart before the horse to say we will lose staff at the same time or even before we bring in this online stuff. Again, it is a triumph of hope over experience.

Will the Minister tell us about the practicalities and exactly what data will be submitted? My hon. Friend the Member for Nottingham East referred to this key question. The Government are saying to businesses, “We want you to provide some information four times a year,” to put it at its most neutral. What information will be required four times a year? The likelihood is that businesses will no longer have a choice about how to keep their records, because, although they may retain that choice in theory, for practical purposes, they will have to keep that information in a way that is compatible with the HMRC model. That may be a good thing, but uniform models in business are always a little suspect, because they can crowd out innovation. So there is a question mark there in terms of that forced uniformity, unless HMRC, for example, comes out with two or three different sets of free software, which I doubt, but perhaps the Minister can tell us more about that.

If, as has been suggested in some of the material—again, perhaps the Minister will clarify—this is a system whereby we press a send button and all the information squirts out the computer, down the broadband, if we have broadband, to the HMRC server, that will leave HMRC with a whole lot more information, and the hon. Member for East Antrim (Sammy Wilson) quite reasonably asked what HMRC will do with that information. He has been around for even longer than I have—he is pulling a face, but I do not mean his age; as an hon. Member of this institution, he has been here longer than I have. So, as he knows, the likelihood is that with any splurge of data from businesses hitting the send button, because they have it in the format provided in the software or whatever, a lot of the information will never be looked at. Businesses will supply all that information, but it will not be looked at; it will only clog up HMRC and potentially the system. That might lead to a lower rate of compliance, and none of us wants that.

Furthermore, experience tells us that if people are submitting information four times a year, the likelihood—not the certainty—of errors creeping in goes up about fourfold. Again, that is not necessarily the case, because the system might be a simple one, understood by businesspeople who are simply running a business and not having to be an accountant on the side, so they might be clearer about what they are supplying and therefore less likely to make errors. To expect that, however, would again be a triumph of hope over experience. The greater likelihood is that, with quarterly updates, there will be a considerable increase in errors—if not fourfold, threefold.