This briefing is provided ahead of the remaining stages of the Finance (No. 2) Bill to inform the debate. These issues apply equally to banks and building societies.
We support the concept of a modern tax system using digital technology designed to make it easier for individuals and businesses to comply with their tax obligations. But we have significant concerns related to the timing, lack of detail and scope of Making Tax Digital (MTD).
The concerns of small businesses have already been aired, but there are also impacts on building societies - as third party information providers - and their customers. HMRC has the opportunity to tackle these concerns before the estimated £25 million implementation costs for building societies and their members (their customers) rise further.
HMRC originally proposed an April 2018 start date and its response document repeated this. However, during recent industry discussions, officials explained that they would not require building societies to change the scope, frequency or format of current reporting by April 2018. We welcome this clarification but urge HMRC to circulate their proposed timetable as soon as possible. Implementation involves systems changes that will take between 18 months and two years to achieve.
Building societies have already made significant investment in their systems to comply with the automatic exchange of information requirements (AEOI). Implementation of this was made more difficult and therefore more expensive, by HMRC’s very late issue of rules and technical specifications, which were subsequently changed. Costs could have been avoided if the reporting requirements for MTD and AEOI had been synchronised by HMRC as the information reported is similar.
HMRC has started to engage with the financial services industry on MTD, which we welcome although it is rather late in the day. While HMRC has established some high level principles, detailed proposals on third party information provision are still missing.
One issue for building societies is the huge volume of HMRC-led IT changes requiring scarce IT resources. A minimum of 18 months and up to 2 years is required from the issue of final rules and specifications to change or build systems.
Longer time periods may be needed by smaller societies which do not have internal IT resource but have to compete for limited external specialist resource. This period allows the building societies time to analyse the change, establish requirements including changes to IT systems, obtain board approval, run tests and implement the changes, all alongside other required regulatory change.
The personal savings allowance removes 95% of taxpayers from the payment of savings tax, irrespective of future interest rate changes. This means that MTD proposals for third party information providers will capture just 5% of the taxpaying population.
Financial institutions, such as building societies, already report to HMRC on the interest payments made to ALL taxpayers via the annual ’section 17 returns’ (s17).
HMRC refers to a future move to ‘real time’ reporting. As currently envisaged we are unsure of the benefits to either HMRC or the taxpayer. Financial Institutions complete their annual returns manually. This process can take 2-3 months to provide assurance that data and formatting are correct. To require this to be performed more frequently will demand significant additional resource – human and systems - the cost of which may well have to be passed onto customers. The level of data quality assurance may also fall.
While HMRC may receive more tax earlier in the year if all its proposals go ahead, the overall tax take will not change. On the other hand, the cost of implementation by building societies and HMRC itself will be considerable.
If the MTD proposals go ahead, HMRC will need to mount a timely and comprehensive consumer information campaign covering the changes and the timing. We note that there was no publicity about changes to PAYE codes from April 2017.
As part of this campaign taxpayers should be informed clearly that any question they have on their tax situation must be directed to HMRC, not to third party information providers which cannot provide tax advice.