Harriet Sim considers how digital tax accounts will affect her clients and her work as a tax agent.
It's proposed that every individual and small business will have a digital tax account (DTA) by 2020. This is part of the grand plan to reform the UK tax system, moving the majority of tasks to a digital platform (aka Making Tax Digital).
DTAs are being introduced for two obvious reasons:
- to remove the requirement for the taxpayer to provide HMRC with information that it already holds; and
- to prevent time delays by providing ‘real-time’ data.
Both of these changes seem reasonable.
HMRC’s Connect program allows them to have access to a frighteningly large amount of financial data and, along with direct access to bank accounts, this means that the tax system becomes streamlined and more practical from every angle.
How will this affect tax agents?
Something that surprises me is the work that HMRC seem to be offloading on to tax agents. It appears that the DTA will be a ‘self check’ rather than a ‘prepare and compute’ function. So tax agents will be expected to audit their clients’ financial affairs, but how much work will this involve for us?
It is clear there will be tasks for which the taxpayer is still likely to need to engage a tax adviser, such as; advising on tax advantageous investments, CGT computations, the structure of property portfolios, and incorporation or disincorporation decisions.
I have a few questions for HMRC, which I hope will be answered by the Making Tax Digital consultations (when they appear!)
- Are HMRC adopting the responsibility themselves when it comes to the calculation of the tax position?
- Whose responsibility will it ultimately be if it the tax is incorrectly assessed?
How to advise clients
Firstly, and probably most importantly, we need to embrace the MTD developments and reassure our clients that, when the changes eventually arrive, they will be positive. Change is always unsettling, but in present circumstances the only thing we can do is give feedback to HMRC, and this leads onto our second job - be involved.
HMRC may not engage with agents throughout the process. Instead they will work directly with the software providers, and possibly with taxpayer focus groups. But there is nothing to stop us communicating with software providers to keep updated with HMRC’s progress.
By informing our clients about developments, hopefully ahead of HMRC’s general publicity, we can retain a level of trust, especially for clients who do not fit easily into the new MTD format. We need to identify these ‘extraordinary’ clients in advance of the implementation of the new MTD systems, and to ensure they are aware of how the changes will affect them.
We will need to maintain relationships with our current clients and be transparent in our dealings with them, for there will be clients who will no longer require our services. We will, however, need to explain the MTD developments to them in a timely manner and not let them make decisions based solely on HMRC’s publicity.
We should also keep a look out for potential new clients. There will be numerous planning opportunities as a result of having a ‘real time’ account of financial positions on the DTA. For example, is the taxpayer in the 60% effective tax rate band? Let’s advise them ASAP!
We mustn’t lose sight of how impacted taxpayers will be by this change to MTD - perhaps just as much as we will be. The bookkeeping routines they have become accustomed to may no longer be viable. Client record-keeping may need to be adapted.
A key question will be: who will ‘approve’ HMRC’s information on the DTA? If it is us the tax agent, how will we check the numbers?
Although we do not have much detail on the DTAs at present, there is a lot that we can be doing.
We need to remind ourselves of the ever-growing importance of moving towards digitalisation. It is becoming part of our lives and we, as tax agents, need to provide our clients with peace of mind on the issues connected with it. It will provide a number of planning opportunities for us, which we should continue to emphasise to our clients.
I do believe that the introduction of DTAs is a step in the right direction. It is going to require an immense amount of time-consuming planning, on both sides: HMRC and tax agents.
My fear is that HMRC has not spent enough time considering the detail of the MTD proposal before its announcement. Without sufficient testing and feedback, the intended benefits may not be achieved and result in a system which would not be fit for purpose.
As ATT President Michael Steed recently said, when asked for his advice for the chancellor; "Slow down on the rush on Making Tax Digital" - exactly what I've been thinking!
Harriet Sim is a Tax Executive at CKLG Limited, a Xero Gold Partner firm in Cambridge.