Going with tax as you go?

Big changes are on the way in taxation. The UK government’s Making Tax Digital (MTD) programme saw many businesses sign up to the pilot scheme to keep records digitally, and submit tax returns electronically using MTD-compatible software. MTD becomes compulsory for all VAT registered businesses from April 2022 – and is mandatory from April 2023 for income tax self-assessment (ITSA), and from April 2026 for corporation tax.

Meanwhile, HMRC is consulting on moving to a more ‘real time’ tax system, with proposals for ‘timely payment’ of taxes alongside digitisation. This would see taxes paid earlier – and, perhaps, more frequently. But what would be the impact of a move to what some describe as a ‘pay as you go’ tax model?

Farming for taxes?

RSM tax partner George Bull expresses concern that if businesses pay HMRC quicker, “they will have less money to build the business – which includes modernising the business with new equipment, new systems, new procedures and expanding it with more people,” he says.

“There will be a trade-off if HMRC wishes to be paid every month or every quarter by a small business, instead of nine months after the year end – and that cash flow hit will hold the business back.”

With plenty of “really agile” finance and accounting packages, Bull believes there’s “no problem with finding software to keep the records and make the returns to HMRC” – but the amount of resource businesses will have to put into keeping records up to date needs to be considered. And what of those businesses where taxable profits don’t accrue evenly over the year?

“What happens if, towards the end of a business’s accounting period, it has a large amount of qualifying expenditure, like a big item of plant and machinery?” Bull asks. “If we move to real-time taxation where returns are made every month or every quarter – would it get an immediate repayment of the previous month’s tax, or does it wait until the settling up account for that year? ” HMRC must consider the impact of pay as you go tax and MTD on seasonal and cyclical small businesses, says Andrew Oury, tax partner at Oury Clark.

A sector with many seasonal and cyclical businesses, such as farming, “is going to be affected by MTD in a different way than the professional services industry, which has a more linear income model”. For example, an arable farmer may not be able to accurately estimate the amount of grain in his barn, as well as its value, in an instant at the year-end.

“The whole farming industry [might] have to stop at year-end to work out accounts for the government and then pay the money over – and that’s without taking into account weather patterns,” he argues.

“You could end up with HMRC looking at a farmer’s average profitability over a timespan and say ‘this is how much you owe per quarter’,” Oury adds. “But if a farmer has had a bad year and tries to claim a rebate, how will that work year-in year-out? It’s impossible to even this out when it’s at the heart of your business. Furthermore, businesses have always had idiosyncrasies – unexpected periods of fallow earnings for example – and the Covid-19 pandemic [saw] an example of this on a huge scale.”

He adds another “huge factor” that could influence MTD uptake is the poor broadband connection in some rural areas. Oury expressed concern that MTD was “designed with a linear mindset that only has one goal: to meet revenue targets” – a concern also voiced by George Bull. “It’s about cash flow for HMRC,” Bull says. “But cash flow is a zero-sum game: if HMRC gets better cash flow out of this, then it stands to reason that small businesses will suffer worse cash flow.”

A no-brainer?

However, Nichola Ross Martin, managing director of Ross Martin Tax Consultancy, believes real-time taxation “is a no-brainer”, and is more concerned with whether HMRC will be ready in time. For taxpayers, she says, “in practical terms, the first issue is not cash flow but accounting periods”.

“It will make life easier for HMRC if everyone ensures they have the same accounting period end, and it would be even easier if that’s the same as the end of the tax year. You cannot currently take part in the MTD [ITSA] pilot unless you have a 5 April period-end. It’s no coincidence that the Office of Tax Simplification has released a paper on changing the 5 April tax year-end to 31 March, or maybe even to 31 December.”

Ross Martin agrees cash flow could be a potential issue for taxpayers for any move into a quarterly payment cycle, and that four new payment deadlines is likely to be “very tough, especially for start-ups”, adding: “It will be a case of monitoring cash flow and keeping a ‘tight ship’. I hope that HMRC will allow MTD reporting to bed in for a couple of years.”

An HMRC spokesperson said HMRC had “liaised with many stakeholders and business representative organisations”, including SME representatives, in designing MTD, and emphasised its call for evidence on timely payment “is not an announcement of any changes to tax payment timings, and no significant changes will be made within this Parliament”, with potential reforms being “introduced slowly… in close collaboration with stakeholders”. 

Santhie Goundar is a freelance journalist