New online rules could mean double whammy tax bills for small firms

As parliament debates the digitisation of business taxes today, accountant Patrick King explains how flawed proposals could result in 'double whammy' tax bills - and a cashflow crisis for some companies.

by Patrick King
Last Updated: 05 Feb 2016

Google may be big and beefy enough to conduct its own bespoke negotiations with HMRC. But most smaller firms aren't - they are stuck with the same often paper-based tax reporting and collecting systems they've had for years.

Dragging these into the digital age seems like a great idea, but what if government plans - being debated in parliament today - mean you could end up facing a bill for two year's liabilities in the course of only one tax year?

Just in case you missed it, George Osborne unveiled his £1.3bn tax digitisation project during the 2015 Spending Review, announcing that HM Revenue and Customs is working on a vast plan to provide a single location online for all individuals and businesses to manage their tax affairs.

Supported by software and mobile apps, tax payers will be expected to make four quarterly disclosures instead of the current single tax return each year. The system will mean enabling tax payers to register, file, pay and update information at any time - 24 hours a day, seven days a week.

Ambitious? Undoubtedly. Long overdue modernisation for HMRC? Unquestionably.
But as MPs debate the tax reporting proposals in Westminster today, there remain some key unanswered questions: What will be the timing for payments, and how will the implications for cash flow management be softened?

100,000 protestors - do they have a point?
There’s no doubt that the proposed plan has caused a stir. Indeed, the 2020 plan is being discussed in Parliament because more than 100,000 people signed a petition calling for it to be scrapped. The petition claims too many people and businesses rely on non-computer filing to make the digital project worthwhile for everyone.

That, of course, remains a critical issue to be addressed. A tax system that disadvantages large numbers of people and businesses is hardly equitable. It’s worth bearing in mind too that the government hardly has a stellar background in IT projects. You only need look at the NHS patient records project to see how things can go badly awry.

But as mentioned, our concern for making tax digital goes beyond the practical implications of digitisation to juggling payments under the forthcoming regime.

The big risk we see is that because business will be submitting quarterly returns, government will also demand quarterly payments for the current year from the moment digital tax management is introduced.  While the published documents do not say quarterly payments will be demanded it is clear from information in the public domain that government believes the UK has the slowest corporation tax payment rate in the G20 and clearly quarterly reporting offers a golden opportunity to address this.

Working through a number of scenarios gives cause for serious concern. Naturally, our scenarios involve making some assumptions because there is scant information around at the moment (itself a major cause of uncertainty) but they provide a basis for asking some serious questions of HMRC.

What could go wrong?

If you are already paying your tax in quarterly instalments then you are among the least at risk, potentially facing two quarterly payments in one go as the new system launches (one in arrears and one for the current year).

But much worse awaits a company that does not currently pay in four instalments. Such a business forced to go quarterly under the current digitisation plan faces the pain of paying two year’s worth of tax liabilities in a single 12-month period. Not an inviting prospect and hence our warning of an impending cash flow crunch.

Of course, this can all be avoided, but the government needs to come up with effective transitional arrangements to avoid the crunch. If it fails to do this then business will have no choice but to begin stockpiling cash ready to pay looming tax bills.

And that’s not a happy consequence for the UK economy just when it needs businesses to spend cash on investment rather than hoarding it in preparation for a hefty future demand from the taxman.

So far information emerging from HM Treasury has provided little detail on how this cash flow crisis will be handled. But 2020 isn’t far away. The sooner transitional arrangements are clarified, the sooner UK companies can focus on what they do best - running successful businesses. If not, the next four years will be all about the cash flow crunch.

Patrick King is head of tax at accountants MHA Macintyre Hudson

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