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As the prime minister has said, HM Revenue and Customs (HMRC) responded magnificently to the challenges posed by Covid-19, delivering internationally recognised support schemes in record time and with great efficiency. More than 12 million people and businesses have benefited as a result.
However, the pandemic has also revealed some serious flaws in a tax system that is increasingly inflexible and out of date. In particular, our hope was to design and deliver a scheme that covered the whole population of the self-employed, including the newly self-employed, in a fully up-to-date way. But it proved impossible to do so without exposing the system as a whole to huge risk of fraud and abuse.
This week, however, we announced a long-term strategy to create a modernised digital tax system. A more responsive and adaptable approach will make it easier for people to pay tax when and as they need to; it will reduce avoidable errors and it will help to combat fraud, evasion and abuse. But much more than this, it has massive scope to boost our national resilience and productivity.
In the first place, HMRC will extend its Making Tax Digital programme progressively over time. At present, it covers VAT for businesses above the £85,000 threshold, with more than 1.4 million businesses enrolled, submitting over six million returns.
Astonishingly, some 30% of businesses below the threshold have adopted it voluntarily, showing its effectiveness and appeal. From April 2022, the scheme will be extended to all businesses paying VAT. Giving businesses plenty of time will allow them to prepare, while also enabling the flourishing market in business software to develop new products for a digital tax future.
Making Tax Digital will then be extended to include business or property income chargeable to income tax over £10,000 from April 2023, and HMRC will consult on the design of a future Making Tax Digital extension to corporation tax. But underlying this will be a radical transformation in customer service.
Personal and business tax accounts will be brought together into a seamless service. The flow of information will move much closer to real time, and HMRC will have a strengthened capability to make the payments that have been so crucial in responding to the impacts of Covid-19.
From 2023, HMRC will be receiving up-to-date quarterly business information through Making Tax Digital. In a crisis, it will be able to pay grants out to the self-employed based on their most recent trading profits, and very quickly. And the next time round, HMRC will avoid the need to do eight weeks’ intensive work on extracting, cleansing and reconfiguring the relevant data to ensure it is robust and fit for use.
Many more people who recently set up in business could be helped, without exposing the scheme to fraud or organised criminal attack.
Much of the focus of these reforms is on resilience. But we also expect them to be beneficial for our productivity as a nation, moving the UK towards a more fully digital economy. Making Tax Digital is already making a difference, but the real gains are yet to come, as the long tail of British companies digitise their tax affairs.
The Enterprise Research Centre found in 2018 that for microbusinesses, web-based accounting software delivered productivity increases of over 10%. The Lloyds Bank UK Consumer Digital Index found last year that the most digitally engaged businesses save a day a week in administration by going digital.
These are potentially huge gains across the economy, and they are gains we need to make, both to weather the coming economic storm and for our prosperity over the long term.
This is a 10-year package of reforms, which will be rolled out in a progressive and consultative way, supporting individual and businesses as they go digital. But it is also vital to address public concerns en route as to the safeguarding of data and the need for proper constraints and safeguards on the powers of HMRC, and to ensure that services will be maintained or improved for those who are vulnerable, hard to reach or digitally excluded.
HMRC has worked to ensure that any additional costs to business are minimised. Free software will be available for businesses with the simplest tax affairs, and there will be a £10,000 business or property income threshold for income tax.
Covid-19 has hit us hard, but we are bouncing back. These reforms will be transformative, both for taxpayers and for our resilience and productivity as a nation.
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