This article was first published in the May 2016 UK edition of Accounting and Business magazine.

Tucked away in the 2016 Budget ‘red book’ is a reference to a new ‘pay-as-you-go’ tax system, aimed squarely at small businesses, the self-employed and landlords. The suggestion is that by 2018 those businesses that are keeping records digitally and providing regular digital updates to HMRC can, if they wish, adopt pay-as-you-go tax payments.

The move will form part of the government’s wider Making Tax Digital initiative, aimed at both businesses and the individual taxpayer.

According to the Treasury document, pay-as-you-go will enable businesses, the growing army of self-employed workers and the potentially dwindling number of landlords to choose payment patterns that suit them and allow them to better manage their cashflow. This system will, the red book asserts, be voluntary. At the same time, chancellor George Osborne has pledged to explore options that will simplify tax rules for these taxpayers, to reduce administrative burdens and ensure that regular digital updates work smoothly.

The moves are a very clear indication of the direction of travel in HMRC’s digital thinking. But no matter how much HMRC or the Treasury protest, the view among some tax advisers is that this is a stepping stone to compulsory quarterly digital reporting and an accelerated form of tax payment.

‘If the aim is to accelerate tax payments so that we move wholly towards quarterly payment on account, that is going to have a dramatic and adverse impact on the self-employed and landlords,’ says George Bull, a senior tax partner at RSM. Bull says there is HMRC data suggesting that £17bn of income tax is paid by the self-employed; by bringing forward payment dates for self-employed income tax to coincide with quarterly returns under the new digital tax accounts system, the chancellor could accelerate tax collection by anything up to a one-off windfall of £6bn, Bull speculates. ‘This would be cash sucked out of these traders’ businesses,’ he says, ‘but where is this cash going to come from, because they are not noticeably cash rich?’

And this is Bull’s fear: ‘Although pay-as-you-go is offered as something that people can adopt, I would be very surprised if within a year or two of this facility being offered, it didn’t become a mandatory requirement. HMRC, the software providers, the banks and tax advisers have got to regard this as a clear, definite direction of travel.’

Richard Morley, tax partner at BDO, agrees. ‘The 2016 Budget slipped in pay-as-you-go tax payments as optional, but you can see where HMRC is going,’ he says. ‘HMRC wants to move to a situation where it is collecting tax earlier.’

Heated debate

It is this feared direction of travel that is making the debate around digital tax accounts so heated. Treasury secretary David Gauke is on record as saying that another key component of the move to digital tax accounts, quarterly updates, ‘does not – repeat, not – mean four tax returns a year’.

And speaking at the recent Xerocon conference, Brigid McBride, HMRC’s head of application programming interface and third-party software, said: ‘One of the things our customers tell us, particularly in the small business community, is that they would like certainty over their tax affairs. We would like to collect and process information affecting tax as close to real time as possible to stop tax due or overpayments building up and help businesses manage their tax and cashflow more effectively. This will give them greater certainty over what they owe, and by updating our information in real time we believe we can give businesses that certainty.’

McBride reiterated the government’s position that from April 2018 all businesses, including those individuals who are self-employed and letting out property, will update HMRC at least quarterly where it is their main source of income. ‘When I say update, I mean a very light approach in line with very simple digital solutions that we are designing and rolling out,’ McBride said.

But there is still a great deal of uncertainty among tax advisers, and even software providers, about the extent and compulsory nature of the new digital tax accounts, both for businesses and individuals. As Gary Turner, UK managing director of accounting software provider Xero, says: ‘Having shared that we are going to build this modern tax system, there is still a vacuum in terms of the technical detail. Is it four tax returns or one? I think even HMRC itself would concede it has not won the communications battle.’

But Turner is sure that HMRC will take on board the concerns that people have. ‘There will not be a sudden switch in two years’ time,’ he says. ‘HMRC has a determination to change but also takes a pragmatic view. They will take on board the concerns that people have.’

Turner has some sympathy for HMRC’s position, arguing that frankly the taxman doesn’t want every scrap of financial information. ‘I think people are quick to forget that online filing for payroll came out in 2002 and real time information (RTI) has been around for three years, and it works at scale; there are one million employers in the UK, and there are and tens of thousands of businesses doing their VAT returns online every month. So this isn’t their first rodeo. They don’t want all your banking transactions; they just want to know what your interest has been.’

However, ACCA is less sympathetic. Commenting after the parliamentary debate in January on digital tax accounts that made reference to RTI, ACCA said: ‘We have highlighted that this initiative [RTI] cannot be seen as comparable as it was simply the transfer of a recognised and existing process to an online-only format. We recognise that the current proposals involve what for many businesses will be an entirely new process, and crucially will impact upon the three to four million of the smallest businesses not affected by RTI who cannot be expected to engage an accountant or bookkeeper four times a year to assist.’

As Morley says, ‘It is difficult for very small business and the self-employed to report once a year, let alone four times a year. It will be a further obligation. In an ideal world, everyone would like to keep on top of their affairs and make sure everything is up to date, but people do miss filing deadlines.’

Risky business

Morley also raises the risks surrounding the technology; security and confidentiality will be key to the success of HMRC’s digital transformation: ‘Will the technology be fit for purpose? Will it enable me to do what I want to do and keep my information confidential and safe?’ he asks. ‘HMRC will have to allay people’s concerns over security.’

HMRC recognises this risk. In an IT strategy report published earlier this year, HMRC noted: ‘[The] move towards a digital service increases the risk to all of HMRC, government and UK plc. The ambition to transform the IT delivery model, at the same time as develop services and the infrastructure required to deliver new digital services, is a challenge and comes with significant levels of risk.’

At the same time, concerns still remain over how the digitally excluded, which could include many self-employed people, will be catered for in this new era. As mentioned, the Budget announced a commitment to explore simplifying the tax rules for people and businesses that will be keeping records digitally, and providing regular digital updates to HMRC through the new digital tax accounts. This could include flexible payment options for these groups.

But as Anthony Thomas, chairman of the Low Incomes Tax Reform Group, says: ‘While we welcome any move to simplify the tax rules, it is unclear from the announcement whether such simplification will extend to the taxpayer who is unable to engage digitally, or whether the benefit will be confined to those who can manage their tax affairs online. Although we are supportive of the government’s ambition to exploit digital technology to assist tax collection and compliance, a very significant proportion of the population, often the most vulnerable, remain digitally excluded.’

Which is why a £71m investment in HMRC’s services, also announced in the Budget, could prove crucial. ‘This investment will be essential to help taxpayers get to grips with their new digital reporting requirements as HMRC’s Making Tax Digital programme is rolled out over the next four years,’ says Chartered Institute of Taxation president Chris Jones. ‘If Making Tax Digital is to proceed as planned, and on time, then the government must make sufficient resources available to ensure that high-quality education and support is available to every taxpayer who needs it.’

Philip Smith, journalist