The Chamber’s view is that most self-employed taxpayers are honest – as HMRC itself often says. If that is the case, then Making Tax Digital is difficult to justify.
Unlike VAT, it does not change how much tax is paid or when the government receives its money. For an honest taxpayer, the final tax bill is exactly the same.
It is a little like going to a restaurant where the waiter brings you a bill after every course, but does not ask you to pay it. At the end of the meal those bills are set aside and a completely new bill is produced covering everything you actually ordered.
The system proposed under Making Tax Digital works in much the same way. The quarterly updates required under the scheme do not determine how much tax is paid and they do not bring forward the payment of tax.
Nor is quarterly data necessarily a reliable guide to how a small business is trading. Many traders record income when invoices are paid and expenses when suppliers are settled. A payment arriving a few days earlier or later can move thousands of pounds from one quarter to another, even though the underlying business has not changed.
For the same reason, the quarterly figures are of limited value as a guide to economic activity.
The obvious conclusion is that the policy is really aimed at reducing the tax gap among those who are either dishonest or disorganised.
But for the genuinely dishonest, submitting four inaccurate returns instead of one is unlikely to present much of a difficulty. There is also a psychological question. When a system appears to assume that everyone may be cheating, the honest taxpayer may begin to wonder whether they have been foolish to declare everything correctly.
The difficulty is that in order to tackle a minority, the entire self-employed sector must comply. Some traders may find themselves submitting up to eight updates a year despite having done nothing wrong.
There are also questions of fairness. Making Tax Digital currently applies to the self-employed but not to companies or many other self-assessment taxpayers. At the same time, automated risk systems may flag perfectly innocent situations – for example when a trader’s income falls because they have been ill or unable to work.
The Chamber’s concern is that the long-term effect may be to push more traders into forming companies simply to escape the regime. If normal fluctuations in quarterly returns begin to trigger requests for explanations, many traders may conclude that running a small business is becoming more trouble than it is worth or may drift into the informal economy.
Parliament’s own Public Accounts Committee, in a report pointedly titled Making Tax Difficult, asked HMRC to prove that quarterly reporting is worth the burden it imposes. It is still waiting for an answer. So are Sudbury’s small businesses.
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