Drowning the self-employed in paperwork will ruin the economy
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It was back in autumn 2015 when then chancellor George Osborne announced his so-called plan for “Making Tax Digital” which would eventually mean the self-employed having to submit “at least” four income tax returns a year.
These tax returns were rebranded as digital updates that, if a future government so wished, would leave open the possibility of eventually becoming monthly.
Almost ten years on and the change has not yet happened, continuing to be mired in controversy with ballooning costs and abandoned pilot testing. Already delayed by the Conservatives four times, the scheme’s introduction is currently postponed until 2026 – well after the next general election, avoiding any unfortunate reckoning with the electorate.
The annual tax return, due on January 31, usually involves for most not just the confirmation of income but the checking of allowances and expenses that requires a significant amount of time, professional fees and stress. The criticism from those affected is not so much aimed at moving over to submitting digital returns (many already use online submissions) but towards the requirement to submit updates several times a year.
Treasury ministers and HMRC insist the change is to make the submission of information easier and less costly for those liable for tax, but scepticism continues to be strong and the evidence of greater expense only mounts. In the opinion of tax professionals and the National Audit Office (NAO), submitting returns quarterly will be an additional financial and time resource burden placed on the self-employed and small businesses.
A report from the spending watchdog, the NAO, blasted HMRC’s Making Tax Digital programme as out of control, with costs now five times the original forecast, rising from £226m in 2016 to £1.3bn in 2023.
Moreover Comptroller and Auditor General Gareth Davies reported HMRC’s cost-benefit analysis of the project failed to include £1.5bn in upfront costs liable taxpayers will have to pay over the first five years. If included it would have shown the total amount paid by government and self-assessed taxpayers exceeded any additional tax revenue. In plain language the scheme does not raise additional revenues, it costs money.
Tax professionals have been just as critical. A survey by the Chartered Institute of Taxation (CIOT) of over 500 tax advisers revealed 95pc were not confident about HMRC’s ability to oversee the introduction of the Making Tax Digital plans for income tax, and 70pc thought even postponing the start date to April 2026 was unrealistic.
Learning from the introduction of digitalising quarterly VAT returns, Alison Kerrey of CIOT said: “Members have seen no improvement in accuracy of VAT returns, or increased productivity… but report increases in compliance costs.” Only ministers and HMRC parrot the lines the digital scheme will bring savings.
Ministerial oversight of projects such as Making Tax Digital is becoming a real problem in today’s revolving-door politics.
Since George Osborne first stood up to make his announcement there have been seven chancellors over the last ten years involved in the slow car crash that is HMRC’s digital tax plan: Osborne, Hammond, Javid, Sunak, Zahawi, Kwarteng, and Hunt.
For junior ministers, who can be expected to handle the detail, it is even worse, with eight Financial Secretaries to the Treasury – the minister who holds the direct responsibility – coming and going. There have been ten different Chief Secretaries to the Treasury in addition.
The reality for those facing the change is a significant bureaucratic imposition with a genuine administrative burden, requiring the purchase of specialist software and the waste of much otherwise productive earning time in filing data.
Based on a self-employed electrician’s average rate of £55 an hour the cost to 13 million self-assessed taxpayers spending an hour submitting quarterly returns would be £2.9bn a year, an additional £1.1bn in costs never to be recouped. Purchasing third-party software to handle the task will add further to the costs, suggesting the NAO report is accurate.
For an economy struggling to achieve economic growth, higher taxes are being made even worse by additional administration, reducing productivity. The self-employed represent a powerful engine of economic growth, surely everything should be done to encourage more people to start their own businesses, not make it harder?
Is there hope? Jeremy Hunt has noticed, “The economies that are growing faster than us – North America, Asian economies – tend to have lower taxes”. A pity he hadn’t understood that before he hiked taxes to unheard of levels.
He still has time to repent – and should remove altogether the undisguised threat to the self-employed of quarterly tax returns at the same time.
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Brian Monteith is a former member of the Scottish and European Parliaments.
