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The Actuary The magazine of the Institute & Faculty of Actuaries

New digital tax system to cut business costs and save £8bn through avoidable error

Plans for a new digital tax system will ensure millions of businesses get their tax bill right first time and save £8bn lost through avoidable taxpayer error, according to details by HMRC released yesterday.

'Paper-based processes make no sense in the 21st century' ©Shutterstock
'Paper-based processes make no sense in the 21st century' ©Shutterstock

Its Making Tax Digital (MTD) project will require most businesses to keep track of their tax affairs digitally, updating HMRC on a quarterly basis without the need for an annual tax return, by 2020.

The government believes that this will give businesses a clearer view of their tax position as they go through the year, reducing the costs, uncertainty and worry they face when HMRC is forced to investigate them.

“We know that the majority of businesses want to get their tax right first time, but the latest tax gap figures show that too many find this hard, with more than £8bn a year lost in tax as a result of avoidable taxpayer error,” HMRC customer strategy and tax design director general, Jim Harra, said.

“MTD will help businesses to get their tax right first time, and will help reduce the likelihood of errors, lower the chance of unwelcome compliance checks and give them greater certainty that they are getting things right.

“The appetite for digital services is growing and traditional paper-based processes make no sense in the 21st century where the vast majority use digital services.”

The government believes that the project will:

• Allow businesses to continue to use spreadsheets to record receipts and expenditure which can be linked to software to automatically update HMRC
• Make sure businesses which cannot go digital will not be required to do so
• Provide free software to the majority of the smallest businesses
• Pilot the digital systems to ensure the software is user friendly before they are rolled out.

However a Treasury select committee argued earlier this month that they had concerns at the planned speed that MTD is to be implemented at, as well as fears about the costs and administrative burdens small businesses could face.

Committee chair, Andrew Tyrie, said: “Carefully introduced, the digitisation of tax records and reporting can be an opportunity to greatly improve the administration of the tax system for the long term. Without sufficient care, MTD could be a disaster.

“Implemented carefully, with long transitional arrangements where necessary, and, having drawn on information from fully inclusive pilots, MTD could be designed for the benefit both of the economy and of the tax yield. But with a rushed introduction, it will benefit neither.”

HMRC have said they will work closely with all stakeholders to ensure their views are reflected in the development of making tax digital.