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I beg to move,
That this House
has considered e-petition 115895 relating to tax reporting for small businesses and the self-employed.
Members may be aware that it was announced less than two hours ago that, sadly, my predecessor but one as the Member for Hertsmere, Lord Parkinson—Cecil Parkinson—has died aged 84 after a long battle with cancer. He was a towering figure nationally, playing a central role in the great reforming Thatcher Governments of the 1980s, but he was also a brilliant local MP. He served Hertsmere from the constituency’s creation until 1992. Time and again, local residents remember him with tremendous warmth and fondness—something I experienced myself after I was selected as the candidate in 2014. My thoughts and prayers are with his wife, Ann, and the rest of their family. [Hon. Members: “Hear, hear.]
I thank you, Mr Davies, for chairing the debate, which I am introducing on behalf of the Petitions Committee, of which I am a member. I declare that I am an adviser to IPSE, the Association of Independent Professionals and the Self-Employed—details are in the Register of Members’ Financial Interests.
The petition calls on the Government to
“Scrap plans forcing self employed & small business to do 4 tax returns yearly”.
As of this morning, it had attracted 110,000 signatures.
As we all know from our constituencies, small businesses are the backbone of our local economies, employing thousands of people and generating wealth and prosperity for our communities. That was demonstrated to me last week when I had the pleasure of speaking to more than 50 small businessmen and women in Borehamwood. Their businesses ranged from financial services, through recruitment and solicitors, to digital markets. They were hard-working people from Bushey, Radlett and Potters Bar—I am sure Members have similar places in their constituency—and they all demonstrate tremendous energy and creativity. They are willing to put their careers and income on the line to build thriving businesses, and the national statistics bear that out.
According to the latest figures from the Federation of Small Businesses, small business accounts for 99% of all private sector business, with total employment of more than 15 million—more than 60% of all private sector employment in the UK—and turnover of almost £2 trillion. There is therefore understandable concern about any measures the Government might introduce that could distract small businesspeople from their already extremely demanding day-to-day work with additional new regulations or costs.
The wording of the petition and related press coverage reflect the worry that measures outlined in last year’s autumn statement might require small businesses to complete four tax returns annually. Understandably, given the time, effort and almost inevitable cost of employing an accountant to do the job, that is a cause for great concern.
I note from the Government’s response to the petition that they propose quarterly updates rather than full returns. Will the Minister, when he responds to the debate, expand on that point and put on the record unambiguously that the Government’s proposals do not amount to quarterly tax returns?
I welcome the debate and the Minister’s commitment to modernising the tax system—that is important to my constituents. Does my hon. Friend agree that the Government could get rid of some of the concerns being expressed by our constituents were they to make the guiding principle of any change in the reporting of tax that it should reduce administration and red tape for business?
I thank the hon. Gentleman for giving way and I congratulate him on securing the debate. On the burden on small businesses, does he agree that there appears to be no evidence that all small businesses or self-employed people already keep track of their affairs digitally? Will the Minister tell us what his evidence base is for asserting that any change to the requirements will not be cumbersome for them? The assumption is that they are already keeping track of things digitally, but many constituents tell me that they are not. Therefore, the change will be a burden.
I will come on to such points, but full consultation on any measures is important to inform exactly the situation faced by small businesses. The Chair of the Treasury Committee, my right hon. Friend Mr Tyrie, has pointed out the specific problem of those without access to computers and IT altogether.
Is the hon. Gentleman concerned about that point? In parts of my constituency especially, many small businesses do not have access to the internet at all, because the speeds are so low. To expect those businesses to exchange all that data with Her Majesty’s Revenue and Customs quarterly is unrealistic.
There is an issue, but the Government have said in their response to the petition that they will consider it. I hope for clarification on the question of the speed of broadband connection—businesses in my and many other constituencies rely on fast broadband, so for it not to be in place makes things difficult—and on the broader point about ensuring that small businesspeople who fill out tax returns have sufficient skills to do so. I also hope for reassurance from the Minister about a training programme and other online resources to enable small businesses to have those skills.
Despite what the Government have said in their response to the petition, the proposals announced in the autumn statement raise a number of issues, some of which have already been mentioned in the debate. I, too, will address such matters before other Members have the opportunity to examine them in more detail.
The Petitions Committee recently undertook a public consultation via Twitter, and I thank the Clerks for their hard work, which made it possible. Unbelievably, in 24 hours we received 1,285 tweets from 565 contributors, all of which can be seen by searching #HOCpetitions. The responses reflect concerns also expressed to me by the Federation of Small Businesses. I will briefly address some of those concerns.
The proposed measures, as I understand the situation, form part of the Government’s “Making tax digital” proposals, which most people agree is the right direction of travel. An end to bureaucratic form filling and associated unnecessary complications, and full access to digital accounts, all of which are promised in “Making tax digital”, would certainly be welcome. I commend the Government for their commitment to that agenda.
As we all know, however, the path to new Government initiatives, in particular those involving new IT, rarely runs smoothly, and we only have to think back to the introduction of tax credits or to the Rural Payments Agency under the previous Government for the evidence. I therefore urge the Minister to proceed with caution.
I note from the Government response to the petition that there will be consultation throughout 2016 and voluntary introduction before full phasing in by 2020. Many people are concerned that users should be fully consulted and systems properly tested before full roll-out. Furthermore, the system should be properly secure.
I thank my hon. Friend for securing the debate. I draw the House’s attention to my entry in the Register of Members’ Financial Interests: I am the founder of two small businesses. He rightly said that the Government should ensure positive digital competency in respect of businesses being asked to participate in the scheme, but is he also aware that more than 99% of VAT returns are filed online? A high percentage of HMRC documents are already filed online, which should give the Government great confidence when they roll out the reforms.
That is an important point. While there are questions to raise, it is important not to get carried away. The overall direction of Government travel is towards having a digital system for tax returns, and I hope that Members agree that that is the right thing to do. The questions are about the speed and pace of roll-out and appropriate consultation.
The difference between VAT and what is contemplated here is that VAT returns have a threshold, so the very smallest businesses do not fill them out, but they will do so in this case. That is an argument for caution. Another concern raised by petitioners is the nature and financial cost of digital reporting. It would therefore be helpful if the Government gave greater clarity on the scale, cost and nature of the information to be provided. Estimates suggest that businesses already pay on average £3,600 a year to ensure that they are compliant with their tax and regulatory obligations and we, as a Government, must take away from that, not add to it. Surely, that is the measure of any successful tax reform. It is therefore vital that the net effect of the measure is to reduce, not add to, that regulatory burden.
Is it not right that, before the Government proceed any further with their proposals, they make a full analysis of not only the financial cost and burden they will put on small businesses, but the cost in time and infrastructure?
Much of the correspondence I have received on this from small businesses and those who write about small business is based on what seems to be a misunderstanding, but concern may go a long way to either hampering or aiding implementation. Do not the Government need to give almost as much thought to the communication about implementation as to the implementation itself to give small businesses confidence that they have thought through the regulatory burden that this requirement might be perceived to bring?
My hon. Friend makes an important point. As I alluded to earlier, a lot of press coverage has suggested that this requirement amounts to quarterly tax returns. Whatever reservations we may have, it is pretty clear that it does not amount to that. I would welcome the Minister’s explicit assurance about that.
Another concern raised by petitioners was that they would not have the software or skills to produce the required information. I would welcome a commitment to proper availability of information, software and, where necessary, training for small businesses. We all know the difficulties of getting in contact with HMRC by telephone, so I ask the Government to look at ways to ensure that such information is readily and easily available.
I am struck that among those who are self-employed, the greatest growth has been in the over-50s. About a year ago, Saga produced a report that said that they were something like 25% of the growth, but it did not point out that those people are overwhelmingly women who have built a microbusiness and many of them do not have the skills to follow up on such requirements. Indeed, earlier this morning, I was talking to a self-employed woman—a physical trainer—in her 30s who said, “What? Do we have to do this every time? I can’t possibly afford an accountant. My business isn’t big enough to do that.” Many women do not have the skills needed to do that effectively, so will the hon. Gentleman press the Minister to ensure that they get the training that they need?
The right hon. Lady makes an important point about the contribution of women to the economy. One of the Government’s great success stories is the rise in female labour participation. Many of those women are involved in small businesses or are self-employed. I hope that the consultation considers all those points carefully and looks at the impact on women who seek to enter the labour market through that route as well as those who have been in the labour market for a long time. As I said, I do not disagree with the direction of the Government’s reforms, but it is important that the consultation addresses those matters properly.
The Treasury Committee raised specific issues about how businesses that do not use computers will be able to adapt. It would be good to have more detail on that.
In conclusion, it is welcome that the Government are committed to digitising our tax service, as that should reduce costs and administrative burdens for business, but I look forward to the debate providing an opportunity to address and allay concerns that, in the process of introducing a digital tax system, the Government do not add to the burdens on business. As I said at the beginning of my remarks, small businesses are the lifeblood of our national economy, and I hope that these measures will aid the circulation of that blood rather than clog arteries.
I commend Oliver Dowden for bringing the matter to our attention. As is usually the case with Petitions Committee debates, we come here to speak on behalf of not ourselves or our parties, but the 100,000-plus individuals and small businesses who have expressed their concern.
I heard the Minister’s words in the Chamber about the Google issue and I take his point that small businesses are not being asked to commit to quarterly full tax returns. That is understood, but the very fact that so many people have signed the petition—every Member will be able to cite examples of constituents and local businesses who have expressed their worries—shows how worried people are, and that indicates clearly that the Government need to consult further.
This is not about whether we should implement a fully electronic, real-time tax system on the internet, as all that would provide benefits. The issue is not the technology, but bringing that technology into play and taking small businesses and the electorate with us. The charge against the Minister and the Government, which is not new or made in a cavalier way, is that there is a rush to judgment.
The Minister simply has to tell us that there could be a delay in implementing the quarterly information updates and that, rather than setting a band at £10,000, there could be a variation as to when small businesses of various sizes are brought into the system. He could tell us about checks and balances with regard to the delivery and effectiveness of HMRC’s system that must be addressed before activities such as updating quarterly are triggered. He could provide all sorts of safeguards so that we could reassure our constituents and give all-party support to the introduction of the new technology.
Like the hon. Gentleman, I and, more importantly, my constituents would be fascinated to learn how increasing the rate of reporting to quarterly—whether that involves a full report or an update—reduces the amount of administration faced by businesses. That is a crucial point. Did he hear the estimates at the time of the Chancellor’s announcement that HMRC would collect an additional £600 million as a result of the policy? Is the purpose of the change really to increase tax returns from small businesses? Deals such as that with Google, which was the subject of today’s urgent question, have caused great unease and real anger not just in my constituency, but right across the country.
I am happy to reinforce the hon. Gentleman’s point. Indeed, various Treasury papers suggest that the shift towards a paperless tax system will increase receipts by about £600 million. That is not a bad thing, and no one would oppose it if it happened, but the issue is that the Minister and HMRC are rushing to judgment in introducing the proposed system. They think that moves to put it in place will be so advanced by 2020 that they will be able to start instructing small businesses to update quarterly.
Buried in the small print of last November’s Treasury press notice is a suggestion as to one of the advantages that will come from the proposal:
“HMRC expects the number of calls” to its various call centres
“to reduce from 38 million in 2015-16” to a mere 15 million by 2020. Magically, as a result of the electronic vision being presented to us, about 23 million phone calls will no longer be made to HMRC. Does anyone here, the Minister included, actually believe those numbers?
In the run-up to introducing a new system, the likelihood is that things will go wrong. If we are lucky, we might make something like the proposed saving in calls 10 years from now, but I doubt that that will happen between now and 2020. I have great respect for the Minister, but I would like to hear him swear on his heart that he actually thinks we will deliver 23 million fewer calls.
From what I can gather, the whole point of having a trial period from 2018 is to iron out that anomaly in the system. Would the hon. Gentleman not agree that it is welcome that we are using small and medium-sized enterprises and self-employed people as a test bed, rather than putting through some sort of virtual reality programme?
I could not agree more. At the risk of repeating myself, I stress that the Scottish National party—I think this goes for all parties—agrees that this is the road to take and that we need to consult, but there is a question over the speed at which this is being done. I understand why the Treasury and HMRC have to sell things and to make promises about what they can deliver but, as the hon. Member for Hertsmere said, experience proves that the introduction of major IT systems rarely works out, particularly when they are on this scale. We are talking about getting 50 million taxpayers and small businesses on this system between now and 2020, but that will not happen.
The Government need to slow down and consult more. The Minister has to stop putting in place arbitrary timetables for when the consultation will work itself out. In particular, he has to stop telling us that he can implement the system in 2020 and impose quarterly returns, which is the thing that is worrying small businesses. Instead, he should concentrate on bringing the consultation to a point where everyone is on board, and then the system will come into play.
I want to reinforce an important point that other Members have made in interventions: we do not have full digital coverage in this country. When Culture, Media and Sport Ministers get up in the main Chamber and talk about getting to nearly 100% coverage, what is the target date? It is 2020, but that may slip. If the new system needs 100% broadband coverage, it makes much more sense to wait until that coverage is in place before switching over the entire British tax system, including the system on which small businesses depend, to a new one. That is another argument for delaying full implementation until 2025 or 2030.
I worry that there is a hidden agenda. Clearly, the Government are attempting to make cost savings. The very Treasury press statement that introduced the idea of moving quickly to a new electronic tax system by 2020 told us that HMRC seeks to make
“£717 million of sustainable resource savings” by 2020. The system is being put in place at the same time that HMRC is being expected to make major cuts. Again, that does not all stack up.
My real point to the Minister is that no one opposes the introduction of this system, but clearly there has been a catastrophic failure in how the Government have presented it to small businesses. We hear constantly from Ministers that they are pro-small business, so now is the time for them to honour those words. If they simply consult more, delay the introduction of the new system until they are sure that they have everyone on board and set aside the requirement for quarterly reporting until they are sure that the system is actually working, they will achieve success.
It is a pleasure to serve under your chairmanship, Mr Davies, and to follow George Kerevan—I made my maiden speech after he made his. I thank my hon. Friend Oliver Dowden for raising this important issue. I have had representations about it from many constituents. As somebody who has run a small business, I am happy to take part in the debate. I draw Members’ attention to my entry in the Register of Members’ Financial Interests.
The “Fixing the foundations” report by my right hon. Friends the Chancellor and the Business Secretary, which came out last July, focused on creating an even more competitive tax system. The aim is to cut corporation tax to make sure that we have the lowest rate in the G20 and attract inward investment, as well as to make paying tax simpler. The aim is that that
“will dramatically cut the cost of paying tax for business.”
As we all know, a record number of people—millions more of our constituents—are now self-employed and running small businesses. It is a generational shift, and this growing phenomenon will have an impact on many of our constituents.
As other hon. Members have said, the direction of travel—going digital—is laudable, and if the proposed system is properly implemented, it will increase the tax take, which is of course to be applauded. However, the stated aim is simplification, not only for the Revenue but for business, so I tentatively suggest that the Minister does not rush to make any changes. It is better that the switch takes places slightly later, but with fewer glitches. That would increase buy-in from the business community and reduce the frustration for constituents who are involved in making these quarterly reports—however we want to describe them. There are few more frustrating activities for small businesses, particularly sole traders without admin support, than being kept hanging on HMRC’s helpline.
The hon. Lady’s point reminds of a comment made by Richard Morse, the FSB’s representative in my area, who said that HMRC did not seem to realise that a lot of businesses in my constituency were sole traders and that the person doing the accounts—there is no separate accounts department—was also generating the business and doing the work. He fears that the proposed system will eat into profits and lead to less taxable income, and I hope the consultation can address his fears.
The FSB has made submissions, and it will carry on doing so. Ministers will also be listening to all our representations, which is why it is important that we are here to speak on behalf of our constituents. I welcome HMRC’s commitment to make more use of digital help, such as webinars, webchat and YouTube videos, and I hope it will increase the use of those.
I am sure that the consultation went through this, but I have concerns about when tax would be payable and when penalties would be incurred. I understand that three months does not seem like a very long time, but a four-week or six-week penalty period could pass quickly for a sole trader in busy periods, such as the summer if they are involved in seasonal business. Will the Minister address that point?
My hon. Friend David Morris referred to test runs. Perhaps I missed this information, but I would like to know exactly who did those test runs and over what period. It is essential that the tests are done over an extensive period, with different sizes of business, so that glitches are eliminated and the system runs really well when it is in place.
I have a particular concern about adjustments for capital allowances. I am thinking particularly of my own business, which is in the building trade, as we have had to make large capital investments in the following year, and there are also issues such as amortisation. I know that the impact on working capital came up in the digital consultation carried out by the Petitions Committee.
In conclusion, the move to digital taxation is the right direction of travel if we are to meet business challenges of the 21st century, but it needs to be done after a thorough consultation, of which this debate is only one part, even if that means the current timescales are missed by a few months.
May I thank Oliver Dowden for securing the debate? I share his condolences for the family of his predecessor, who passed away today. Even though his predecessor was not a Labour Member, he certainly made a big impact on politics in his day, and that legacy will be remembered for a great deal of time.
I am the Member of Parliament for Hove, in the city of Brighton and Hove, which is one of the most entrepreneurial cities in the whole country. It also has one of the highest rates of self-employment in the country. The self-employment rate for 16 to 64-year-olds in work is 13.5%, against a national average of 10%, with 55% of those people working in construction and 36% in professional, scientific or technical trades. That shows the nature of self-employment in the south, and self-employment is often a gateway to entrepreneurialism. Many of those self-employed people will go on to set up limited companies and become creators of wealth and employment, which drives the economy in Brighton and Hove.
Statistics, however, do not cover the nature and challenges of making the move to self-employment or setting up a microbusiness. I became self-employed early in my career and then moved on to set up a limited company and a microbusiness. I co-founded a local business, which, looking back, was the most educative experience of my life. We learn a huge amount when we decide to jump in with both feet and set up a business, as an enormous breadth of understanding and skills goes into setting up an enterprise and becoming an entrepreneur.
One key thing I learned from that experience was the nature of the risk involved in becoming self-employed or running a microbusiness. When we talk about people who are self-employed or run small businesses—sometimes as their friends, but particularly as policy makers—there is often an assumption that growth is linear, and that money increases and risk diminishes each year, as they get used to growing business and to the sector they are involved in.
My experience was very different. Growth came on the back of extreme risk and extreme vulnerability, followed by a period of comfort. I then had to make a decision: should I stay in my comfort zone or take the decision to move out of it, back into extreme risk and vulnerability? The business jumped into periods of growth, with each jump and each improvement in annual figures coming on the back of a period of risk. As the business employed more people and its growth increased, the risk did not diminish; it got greater and greater, because more depended on the business’s success. I have a huge appreciation for entrepreneurs who are growing businesses, because there is no inevitability about the success of any business. It comes only on the back of extreme hard work and the ability to take risk on behalf of a business and the people who depend on it.
Few people enter self-employment or set up small businesses with all the skills they need to do so. They sometimes lack skills in sales, admin, accounting, marketing, social media and product development. No one inherently possesses all those skills—particularly accounting—when they go into business or become self-employed. It is very unlikely that all of the 55% of self-employed people in the city I live in who work in construction have all the administrative and accounting skills they need. Talk of changes to accounting and reporting can therefore be extremely intimidating to them.
Gaps in people’s skills can be not just intimidating but terrifying. While people are learning skills, or worrying about lacking them, they are not doing. They are not out there selling, building the relationships that every business and self-employed person needs or winning new business. We must be mindful of that when we heap new regulation, and changes in accounting and reporting, on people who are self-employed or run small businesses. Talk of regulatory change can be intensely worrying for those who lack accounting skills. People who are worried become risk-averse and do not have the boldness of character we need in our entrepreneurs, particularly in the small business sector.
The self-employed have a lot to worry about. One third of them will earn less than the minimum wage for two or three periods in a year. They have no statutory holiday, and the working time directive does not cover their work. All of us will have heard stories from knocking on doors and talking to constituents at community events or reading their correspondence. I was struck by one particular story when I was campaigning during the general election. I knocked on the door of a tradesman who was self-employed and always worrying about the next contract. He told me, as he held his young baby in his arms, that he had never once been on a full week’s holiday with his wife and children. Instead, his wife takes the children away for a week once a year and he goes to meet them for the weekend, because he cannot take the risk of not completing a contract. That type of experience is repeated throughout the self-employed sector and the microbusiness sector. People in those sectors make a lot of personal sacrifices in order to drive the economy, particularly in the south of England.
The hon. Gentleman is making a powerful speech, and he tells a strong story about the constituency of Hove, which is relevant to my constituency next door. Does he agree that the pressures on small businesses are made even worse by the fact that they often struggle to get hold of HMRC advice right now, whether on the phone or by other means, because tax offices are closing? As well as having a bigger consultation on the issue, the Government should look again at the resources going to HMRC.
The hon. Lady makes an incredibly important point. We have both been involved in local government issues and campaigned on national issues. Every moment that a self-employed person spends on the phone to the local council, HMRC or any other Government Department is a moment they are not spending getting new business, delivering new contracts and earning the money that will give them the security they need in the long term.
We know that HMRC has a lamentable record on customer service, which the Minister graciously acknowledged in answering questions in the main Chamber recently. I know that he will focus on that issue, and people such as myself and Caroline Lucas will continue campaigning on it, because it is extremely important. In the interests of fairness, I will also carry on campaigning against my council in Brighton and Hove, which is a Labour-run council, to ensure that it offers better services for, and better contact with, its local businesses and self-employed people.
I am well aware that people who run big businesses in the city that I represent, whether American Express in Brighton, Kemptown or EDF in my constituency of Hove, have a named contact in the local authority. That contact is called the chief executive. If the chief executive of one of those big businesses wants to get the council on the phone, they call the council’s chief executive. However, the drivers of our local economy—people who run companies that employ fewer than eight people, which make up 90% of the businesses in our city—do not have a named contact in the local authority. There are no consequences if a phone is not picked up, or if a message is not returned. That symbolises how power is distributed in the wrong direction.
It would be wrong if we designed and implemented policies that put people off wanting to become self-employed. The calls that Members from all parties have made in this debate, imploring the Minister to ensure that there is a period of consultation, have been extremely well put.
I thank the hon. Gentleman for sharing his experiences as an entrepreneur. As someone who has run a small business, I completely understand the point that he is making about fear of change. Does he therefore agree that if the Government showed that the new policy could be intuitive and easy to understand and implement, many of the potential hurdles that he has highlighted could be put to one side? If some of the tech entrepreneurs who I know are prevalent in his constituency could be involved in designing the implementation and roll-out of the measure with the Government, that would go a long way to addressing the issues that he has raised.
I am extremely grateful for that thoughtful intervention, and I have some sympathy with the hon. Gentleman’s points. However, when policies are thoughtful, intuitive and in the interests of business, businesses usually flock to take them up. In this case something has clearly gone wrong in one of two ways: either it is being communicated in the wrong way, but it is a great policy; or it is a poor policy that is being communicated in the right way but is not managing to hit home. The purpose of the debate is to decide which it is.
The policy needs to be tested and communicated better. We need to ensure that people who run businesses—smart people who want to do the right thing by paying their taxes and ensuring that their businesses are not disproportionately burdened—are fully involved as the policy is implemented in the long run. In my view it certainly should happen in the long run, because at the moment, people are being put off going into self-employment or setting up their own business.
Interestingly, on the train up here today, when I was speaking to my brother, who works as a postman in the Brighton, Pavilion constituency, he told me that one of his colleagues had seen on the news that this debate was coming up and had talked about self-employment. His colleague was self-employed for a number of years—more than a decade—but moved away from it because of the fear of the accounting, bureaucracy and regulation that was being heaped on to self-employed people.
The freedom that is associated with self-employment has diminished. As well as the burden of regulation, people fear not having the skills that they need, and they fear the unknown. Because they are not a trained accountant or an experienced administrator—rather, they are a skilled labourer—they fear that they might step outside regulatory measures without being aware of it. That was enough to drive my brother’s colleague away from self-employment and back into paid employment. We should be wary of that, because it would be a huge shame if entrepreneurship were to become the preserve of the middle classes. I do not believe that entrepreneurial spirit is class-based or education-based; it is evenly distributed, even though it is not evenly expressed in our economy.
Public policy on the self-employed needs to be got right, particularly for people who run small businesses or microbusinesses. At the moment, I do not believe that Government policy across the board is on their side. Let us take one example—the much vaunted, much hyped productivity plan, which I know the Minister is keen to refer to often in the Chamber and in the media. It is interesting that in the Government’s flagship productivity plan there is not one single mention of the self-employed, who make up 15% of the workforce and number 4.5 million people. The fastest-growing employment trend in our country does not warrant a single mention in the productivity plan.
In my constituency there is a fantastic business called Crunch, which has been set up specifically to supply accountancy services to people who are self-employed or running microbusinesses. I know that the hon. Member for Brighton, Pavilion, went to visit a couple of weeks ago, which was absolutely fantastic. It now provides services not only right across our city but right across the south of England, and it is great that people are starting to notice just how fantastic the business is and how important its services are. It provides light-touch, fast, responsive support to people setting up businesses. The great thing about being able to visit it is that because it has thousands of customers, it can harness insight into real-time trends in self-employment and see the impact of public policy on the small business and self-employed sector. I know that quite often, HMRC and Government Departments struggle to get real-time data on the impact of Government policy.
One prediction that Crunch makes about the negative impacts of policy is that the leap from 0% to 7.5% in basic rate dividend tax will hit lower-earning company directors the hardest. Those are probably self-employed people who are moving their company to limited status, have a very small number of employees and pay themselves through dividends. Everyone wants to make sure that the right people are paying tax, but the proposal could have the most negative impact on people on lower incomes who run microbusinesses. For example, a limited company director paying themselves primarily through dividends would pay £1,528 more tax a year on pre-tax profits of £48,000, whereas a director with £78,000 of pre-tax profits would pay only £1,343 more.
We can also see from the statistics that the change in income tax for a microbusiness from 2015-16 to 2016-17 will have a negative impact of 21% on somebody earning about £40,000. The equivalent impact on somebody earning £58,000 will be minus 1%. There is something regressive, not progressive, about the changes to dividend tax, and we need to shift the tax burden so that it is progressive, not regressive. If the Minister does so, I know that he will be met with support from both sides of the House. I would very much welcome his comments on that point.
I am extremely grateful for that intervention, and I have a lot of sympathy with my hon. Friend’s comments and the example that she has given. It is definitely worth mentioning that, and I am sure the Minister will respond to it.
Crunch, the company in my constituency that I mentioned, has a proposal for the Minister. I hope he will take it away with him, because Crunch represents a large number of self-employed people and microbusinesses. It says that the transition will be most challenging for microbusiness owners,
“as it leads to a steep hike in tax overnight.”
“either deferring the introduction of these changes for at least 2 years”, which would enable businesses to have time to adapt,
“or introducing a 3 year credit to keep dividend taxes at 0% for those business owners on the basic rate.”
I support those proposals, and I hope that the Minister will consider them in the same spirit.
It is difficult to devise policies that support self-employed people, because many people go into self-employment because they enjoy the freedom. Increasingly, however, we see a trend whereby larger employers are restructuring and people are being forced into becoming self-employed at a time when they would otherwise not have done so. This area of policy is not dissimilar to youth unemployment in the challenges it provides for policy makers. Self-employed people, like young unemployed people, are hidden away behind front doors in neighbourhoods and communities. They often work from home, so there are problems of connectivity and how they network as a group. It is certainly easy to overlook them. The fact that they are hidden and dispersed in neighbourhoods makes it difficult to target them as one group.
It would be welcome if the Government examined professional development, which would not be burdensome and would link directly with the policy that the Minister is considering. Self-employed people as a sector underinvest in their own professional development, and other spending trends among self-employed people include a fall in pension contributions every year for the past five years. The key measures of their long-term strategic thinking about their own professional development show that there are challenges that are intrinsic to the self-employed.
Anyone who goes into full-time employment with a company looks at the professional development that if offers. That is a key magnet for talent. Self-employed people are so worried about month-to-month living that they do not invest as they should. We must tackle the productivity challenge among the self-employed and microbusinesses. The Government should launch a consultation into that so that we can work cross-party to get deep into what trends are emerging and how we can support the sector. The challenge of professional development would then be won.
May I declare an interest and refer hon. Members to my declaration in the Register of Members’ Financial Interests? I am the Government’s self-employment ambassador and as such it is my task to engage with people in the self-employment sector to find out exactly what concerns them and exactly what they would like from the Government on all matters of self-employment.
I was a small businessman for the better part of 30 years before entering Parliament. I know that I do not look old enough but, believe you me, I spent every year building my business up, just as Peter Kyle outlined. It was a steep learning curve of trepidation and fear most of the time, but when one gets a hand on the roller coaster, one begins to make a success of it.
It has just been made clear that this is not going to be a new form of taxation every quarter, but the self-employed sector is frightened that it could become the new VAT. The sector could be given a bill over a period of, perhaps, 10 years from the date when the new policy comes in and becomes law, and HMRC could mutate that to become a collective every quarter. Rightly, the self-employment sector is very worried that that might happen with this policy. From my research and what I have just been given from the Treasury, I am sure that will not happen, and I am sure the Minister can assure me of that at the end of the debate.
The sector is concerned that the proposal could be a predictor of turnover. As I outlined, when I was self-employed, I worked year on year, until I started to be comfortable. Some years were good and some were extraordinarily bad. As the hon. Member for Hove eloquently said, this is not a matter of one size fits all. Self-employment differs across the sphere. Some business may be seasonal, a classic example being a man who grows Christmas trees. He should have a good December, but during the rest of the year he will have to have other self-employment.
We do not want online registration to become a yardstick with which to beat the self-employed. I know from my experience of being self-employed that turnover can fluctuate. We have just been through a deep depression and we have seen its effects on small businesses as well as large businesses. We do not want HMRC to start saying that business X did better in quarter one four years ago than it is doing now. Self-employment does not work that way. Businesses evolve and sometimes they become smaller and sometimes they enlarge. One size does not fit all.
Not all self-employed people are computer savvy. Some 20% are not online, especially in rural areas. That may include the farming community and its business models, up to 40% of whom are not computer literate and cannot get their heads around online formulations.
The hon. Member for Hove, who spoke eloquently and forcefully, said we do not want it to become more complicated for the self-employed to get in touch with HMRC to sort out their problems.
It is welcome that, to introduce the policy by 2020, a voluntary scheme will be looked at. That would be pivotal in the success of the policy. What should also be looked at is wider consultation across the whole self-employment sector. The Federation of Small Businesses should be consulted at length, as should British Chambers of Commerce, the Association of Independent Professionals and the Self-Employed and a whole host of other self-employment bodies with a firm stakehold in the self-employment sector and society.
Some business anomalies come and go and HMRC should recognise that and help. I referred to the chap who grows Christmas trees once a year. I was in the retail and service industry, which fluctuates between holiday periods and between periods when there is more spending on the high street and recessions. That should not be used as a sort of dashboard for small businesses in particular towns or regions or even across the country because they vary from someone running an IT business on the internet and selling small goods all the way to a big business on the verge of going multinational. Such businesses cannot be predicted.
HMRC has estimated
“that £6.5 billion in tax goes unpaid every year because of mistakes made when filing tax returns.”
We do not want that to become £12 billion, which may be a stretch of the imagination, but when any new system comes in, there are new challenges. We must make sure we get this right from the start. We do not want the self-employment sector to feel that Big Brother is on to them with a turnover predictor that becomes the new form of VAT. I do not think that will happen, but it must be said. Will the policy eventually lead to quarterly payments? From what I have seen from the Treasury, I do not think it will and I am sure the Minister will reassure us on that.
What must also be taken into account is that cash flow can be very unpredictable and many businesses are paid on a 90-day cycle, which is one quarter. That could skew and distort the figure that comes across a business’s dashboard with HMRC if it goes online.
To sum up, I hope this will not become the new VAT. I was a self-employed businessman for the better part of 30 years and I have seen all sorts of changes over that period from successive Governments of all political parties that had an effect on the way my business and others in my area ran. HMRC should set up special classes. The change should not be something that is just learned online. There should be a dedicated centre where self-employed people can be told what to do, so that they are not pressured into becoming semi-accountants, instead of earning money and being an entrepreneur and creative.
One part of the “Making tax digital” myth-buster that concerns me is where it says that people
“who genuinely can’t use digital tools…will be offered alternatives, like nominating someone else to update their information for them, or giving information by phone.”
In plain English, that reads to me like using an accountant. That should be taken into due consideration with these classes to ensure that people do not spend more and more of their time and money on employing more accountants to deal with quarterly returns.
It must also be asked what the penalties are if a quarterly return is not filed on time. Again, that concerns the self-employed sector. Those people want to know what the new system will look like, what it will involve and how, in reality, it will affect their business. We must get this right. We cannot let the estimated £6.5 billion of losses get any larger. It is good that the Government are grasping this nettle. It is a fact, whether we like it or not—everyone in this Chamber knows—that this kind of taxation filing will be done online eventually, because that is the way things are going. It is inevitable; that is the way of life. We all, from whichever side of the political divide, accept that. However, we must ensure that we do not place extra burdens on businesses and that they remain productive and creative, as we have one of the largest sectors for self-employment not in Europe, but in the world.
I commend all the speeches that we have heard so far, from across the party political divide, but particularly that from my hon. Friend Peter Kyle, who touched on the spirit of entrepreneurialism that many hon. Members speaking in the debate care about and has motivated them to take part. I think that it was George Kerevan who correctly said or implied that no one should turn their face against employing new technology to simplify or streamline what might otherwise be bureaucratic, wasteful paper-based systems. I do not think that that is really at the heart of the debate. I am less concerned about the shift from paper to digital than I am about the potentially even more seismic change from annual to quarterly reporting, updates, summaries, returns—call them what you will, there is definitely something that a small business will have to produce. In fact, I was wondering what the difference is between a return, a summary and an update. Perhaps the Minister was updated at the last general election rather than returned. I do not know, but it is on that specific point that we will want some answers.
My apologies, by the way, Mr Davies, if I am not able to remain in the Chamber until the end of the debate. I should also say that possibly we should all declare an interest—I point to my entry in the Register of Members’ Financial Interests—as individuals, because this proposal will not just affect businesses. In the Treasury’s update in the autumn statement and spending review, it was clear that the proposal will take in very many businesses and self-employed people, down to levels well below the VAT thresholds and others. I do not think, even though there are 110,000 signatures on this e-petition, that most people have quite realised the ramifications that the proposal could have for them as individuals submitting an individual tax return, as well as for those businesses that are affected.
This is not just about the move to doing things online; it is very much about the process of lodging the tax return or even update, because that is the thing that many people find particularly laborious. This is not about how things are written down; the issue is the process that takes up so much time and soaks up so much effort when a company is taking stock of the income that has been generated gross, of the expenditure that has gone out and of any gains or losses that have been incurred. When the Government say that in four years’ time there will be “at least quarterly” requirements to file “summaries” with HMRC, the Minister should not be too surprised if people hear that and feel that there will be at least a quadrupling of the administrative effort and exertions and the sweat and tears that sometimes go into that process.
My hon. Friend the Member for Hove has articulated sufficiently the broad points about why we should support SMEs; I have just a few specific questions about the Government’s proposals so far. Will the option of an annual tax return be abolished? Will companies still be able to make the return annually? Will this quarterly—or perhaps more frequently—arrangement be supplementing that? What exactly is proposed? The Minister says “at least quarterly”. Will he elaborate on how often he means by that?
Many small businesses and individuals will liaise with their accountants annually. They will collect together all the receipts or invoices and hand them over en bloc to their accountant, who will of course help with the recording of income, business expenses and so on. The accountant will examine those, perhaps audit them and agree a verified and checked final figure; and that is the point at which information is dispatched to HMRC. I want to drill down into whether the Minister is now saying that businesses and individuals will in effect be asked to submit raw, unaudited, almost “real time” income and expenditure data directly to HMRC—disintermediated, if I can use that term, by taking the accountant out of the picture?
Will the Minister say a little more about where the accountancy and audit stage will fit into this process? That is a crucial thing for many businesses. They want to ensure that they are submitting information about their business activities in full, so that it is accurate. They will be anxious about what will happen if they make mistakes in those data, because they are going in on a real-time or near-real-time basis. They will be anxious about how that could ever be disentangled should administrative mistakes be made. Will not businesses now feel that they ought to incur even more accountancy costs, perhaps four times a year instead of annually, just to be on the safe side? The Minister can say, “There’s no need to do this. Just let us have access to your books and we’ll press send on Sage,” or whatever software the Minister envisages. However, I think that many businesses will want to take a precautionary approach. I can understand why they would do that, so will the Minister elaborate on that point?
What happens to the actual payment of tax owed? When will that be forthcoming? I think that Seema Kennedy touched on this point. Will an annual sum still be required, or are we in effect moving to some sort of pay-as-you-earn for small businesses? I have often found it a bit of an anomaly that many people who are employed have the tax deducted—dripping out as monthly payments—at source, but others have the option of making their tax payment sometimes 18 months further down the line. There is no particular incentive in that respect. There was, when interest rates were higher, the opportunity for people to forestall the payment of their tax and perhaps gain the benefit of holding on to that cash before parting with it and giving it to the Treasury. In this case, if we are moving to a sort of PAYE for small firms, it would be better if the Minister was honest and straightforward about it, because that would be a big change in the way business accounting works.
David Morris made the point about seasonal businesses. He mentioned Christmas tree growers. There are many seasonal companies, which will do well in the summer months and perhaps less well in the winter or vice versa. Examples include window cleaners, sports coaches and people involved in holiday lettings. Of course, quarterly reporting arrangements will therefore be quite volatile over an annual period. Taking snapshots at a particular point in time will not necessarily give the final, smoothed, annual, true report of what the business may or may not owe in tax terms. There is a real question about peaks and troughs across the year and how that can be taken into account in a quarterly reporting arrangement.
One thing that concerns me from what the hon. Gentleman is saying is that, if quarters are compared to relative years and HMRC thinks that something is amiss, it could enforce an investigation. Would the powers of investigation for HMRC be doubled overnight because it would have more of a dashboard—for want of a better word—on the computer to look between years and sectors and also types of businesses?
Many hon. Members will have filled in all sorts of electronic forms when purchasing goods and services. I can envisage an HMRC drop-down menu saying, “Pick the type of business that you are.” My concern is that not all businesses fit neatly into the categorisations provided by the computer. Whether the computer says yes or the computer says no, that does not always tally with the realities of those businesses’ needs. There is some virtue in the annual tax return arrangement, because it provides a smoother, more strategic overview of the tax liabilities of a business that is complex, even if it is small or micro.
There are bigger concerns about the design of the Minister’s proposal. For me, it is a bit of a distraction to get bogged down in the question of online versus paper. The core question is what is involved in moving to the quarterly summary and update arrangement. There are administrative issues, too, which people will worry about. HMRC has not exactly covered itself in glory in recent years in terms of customer responsiveness. I think 18 million phone calls went unanswered last year, and only 50% were picked up in the first half of 2015. Given that track record, I do not think the Minister should be surprised if people are a little bit wary about another big transformation coming, when they may want some help and support.
The Public Accounts Committee looked into HMRC customer responsiveness, and it was not exactly satisfied with some of the answers that it got. We need full assurance about HMRC’s competence on that matter. Principally, we need assurance about whether the Government are carefully thinking through this significant change, which could affect not only businesses and the self-employed, but many other individuals—perhaps tens of millions. The debate has been a worthwhile opportunity to pause and urge the Minister to think more carefully about the proposal.
I apologise for the fact that I cannot stay for the end of the debate, because I am needed elsewhere at about 6 or 6.30 pm. It is a pleasure to serve under your chairmanship, Mr Davies.
I am broadly supportive of the propositions. A lot of the points that I wanted to make have already been made, but I do not apologise for making them again, because I know that the Financial Secretary is in listening mode. I am particularly pleased to see that the Minister for Small Business, Industry and Enterprise is in the Chamber, because we know that she is very committed to small businesses.
When I had a proper job, as I often say to people, I had my own small business. We use the term “small business” quite loosely in this place. I was interested to hear Peter Kyle talk about small businesses that made a profit of £70,000 a year, and I must admit that I wish that mine had made that sort of money. I want to focus on the microbusinesses—those very small companies. My business employed only four or five people. The hon. Gentleman, whose predecessor I remember well—he was a great friend of mine—made some good points. As he said, as a small business grows, its burdens are not alleviated but increased. Someone who employs five people has to worry about not one mortgage but five, and about five people’s futures.
I am concerned, as are some of my constituents, that the proposals may place further administrative burdens on small business owners. Some people think that a small business owner sits there in a big, expensive coat, smoking cigars and counting the money that comes in, but I and many Members who have outlined their experiences know that that is not the case. The small business owner or microbusiness owner has to be the salesman one day and the buyer another day. They are the credit controller in the morning, the HR manager in the afternoon and also the accountant. They have to do all those jobs at once.
I am pleased to hear the reassurance that we are not talking about making tax returns every three months. I hope that the Financial Secretary will give us more reassurances, because we need to get those out to our small business community. The quarterly update is fine, if that is where it stays, but I worry about regulation creep. I am slightly nervous that this is the thin end of the wedge and that, if we are not careful, the process will become one of quarterly tax returns. The implementation will be the key, and I would hate for the Sir Humphreys to pick this up by the scruff of the neck and turn it into something that we do not want.
I have heard that the proposal promotes savings to business, but I am slightly nervous about that. From my time running our business, I know that if there is a saving to be had, a small business owner will grab it by the scruff of the neck pretty sharpish. My business used to distribute engineering equipment. If I was selling an item of machinery, the market would dictate what I could sell it for, and my profit was dependent on how much I could buy it for and how much it would cost me to distribute it. If there are savings to be had, most small businesses that I know will already have grabbed them with both hands, so I am slightly nervous about that suggestion.
I flag up the point made by my hon. Friend David Morris about businesses that are not online or computer literate. This proposal will put them online, so will they be forced to buy such things as computers, and will their overheads and administrative burden increase? I leave that question hanging for the Minister to deal with.
My High Peak constituency is rural. Although the Government have put a lot of money into broadband coverage and the situation is getting better quickly, it is still a problem, particularly in some of the most remote areas. We have not talked a great deal about the farming community, but we must remember that farmers are small business owners by virtue of what they do. In High Peak—the clue is in the name; it is high, and there are peaks and hills, with very remote farms—farmers are struggling with their broadband, as are those in a lot of areas in my constituency. Only 64% have superfast broadband, which is another problem.
I was recently approached by three businesses, all on the same trading estate. Bells Shoes sells hundreds and hundreds of pairs of shoes on the internet. Interestingly, the company has always had a retail outlet in Buxton—I think I bought my first pair of work shoes there many years ago—but its business is now very much online. What used to be a retail outlet is now more of an online outlet, with the retail supplementing it, but the business struggles because its broadband is not fast enough.
Many in the Chamber will not have heard of Otter Controls, but I promise them that they will have used a product produced by Otter Controls, which makes thermostats. Every time we switch on a kettle and it trips off at boiling point, we can bet our bottom dollar that there is an Otter Controls thermostat inside. I could talk at great length about the history of the company, because it is fascinating. Again, it employs a lot of people, but the nature of its broadband is getting in its way. I realise that this is not a debate about broadband, but I think that it is a key aspect of what we are talking about and how we move things forward.
I understand and agree that we have to move things online. We have to progress because we need to remain competitive. However, I worry that bringing in this change so quickly might be a bit previous and that we could be a little ahead of the game. I am nervous about it, as our some of our small businesses. I speak regularly at the Glossop Business Network, and I am sure that the next time I visit the network, the matter will be raised with me.
The proposal sounds simple, as it should be, but I worry that it might get overcomplicated and that the process will not be as straightforward as it should be. If that happens, who will pick up the tab for the cost? It will not be us here or the good people at HMRC; it will be the business owners, the employers and the wealth creators of the economy. I cannot remember what my hon. Friend Oliver Dowden called small businesses, but I call them the engine room of the economy. I worry that if we are not careful, we might seize that engine up.
I apologise again for the fact that I probably will not be here for the Minister’s closing remarks, but I promise to read them avidly in Hansard in the morning. If my small business owners do not sell, they do not eat. If they do not make a profit, they put in jeopardy not only their own future, but that of their staff. All I ask of the Minister is that he assures them that the proposal will not be a big stick that HMRC will wield over them and smack them over the head with when they are already working incredibly hard to make a living for themselves, their employees and my constituents.
Unlike some hon. Members who have spoken, I have difficulties with the concept of digitising tax returns. I have some experience from when Northern Ireland introduced digitisation and a need for internet access for planning applications and a whole range of civil service functions. Anyone who looks at the Government’s record, regardless of which Department is involved, will see that none of this ever goes smoothly and that the initial costs never turn out to be as low as predicted. The process of moving towards the objective is never smooth and, inevitably, many of those affected find it hugely frustrating. Sometimes the ironing-out period is short, but it can often last for a long time.
As hon. Members have pointed out, the issue of tax returns is not just a cause of frustration as, in some instances, it can be a matter of whether a business survives. Although the Minister has outlined some of the benefits and the reductions in administrative costs, we therefore have to ask ourselves whether we are sure that the transition period will not be so disruptive that it has an impact on many of the businesses in the United Kingdom that the Government are keen to expand.
One of the fastest growing sectors of the economy in my constituency is people moving into self-employment—they are encouraged to do so. However, it would be detrimental to push those people into a situation in which it is difficult for them to do business because the Government have made it hard for them to carry out one of the most basic things—their tax transactions. The Government will undertake a consultation, and they have the 2020 deadline and so on, but we underestimate the trauma that some people might experience along the way because these things never work out easily.
I have read through the missive that the Minister has sent us all to sell this wonderful idea and, like others, I am still not clear what the Government are trying to achieve. The document cites headline figures, and says that the change will cut administrative costs and make things easier, and that people
“will be required to keep track of their tax affairs digitally”— that is the kind of language that is used. It says that people will not have to
“wait until the end of the year, or even longer, before knowing where they stand with their taxes” and that
“updates will be generated from existing digital business records”.
As some Members have asked, what does that actually mean for a business? Will a business know exactly how much tax it is due to pay every quarter? Will it pay that tax every quarter? Will the digitised records simply be a reflection of the information that is already gathered?
Will they need to reflect the information that would be required at the end of the year? If so, that is radically different from simply saying, “Give us a lot of data about your business.”
There is significant work involved in getting some end-of-year records that businesses submit in their annual tax return. Those records might cover stock taking, work in progress, accruals, bad debts and one-off payments. Will all those things be required for every quarterly return? Is that what is meant by
“updates will be generated from existing digital business records”?
If that is the case, there is absolutely no way that the Government can argue that generating the accounts will not involve substantial extra work for businesses. If there is a quarterly requirement to pay tax, will businesses find themselves overpaying tax at the beginning of the year and then having to get a rebate at the end if end-of-year adjustments have reduced the tax burden? What does that do to a business’s cash flow? What do the Government intend?
Once the records go in, presumably the data will be looked at. If that is the case, will queries be raised, or will the data simply be ignored? If we are going to ignore the data, why provide them? If we are not going to ignore the data, will there be queries from HMRC not at the end of the year, when one tax return would have gone in, but on a quarterly basis? That would, of course, create additional work for businesses. The change will play an important part in how businesses generate the information. If it is simply a case of passing on digitally-generated information, will the process involve more or less information than a business would usually gather during the year?
Does the hon. Gentleman agree that the transition will be complicated for businesses that are paid in cash and with cheques, as well as online? I am thinking of a self-employed hairdresser, for example.
That is exactly the kind of question that any reasonable business would want answered when deciding whether the change is good or bad. It is easy to hide everything behind a term such as “quarterly, digitally-gathered business records” but the detail, as the hon. Lady says, is significant for businesses.
If the information is to be looked at in detail, that will affect how businesses go about collecting and verifying it. Most businesses do not want to make mistakes. They are not all treated—unfortunately, Minister—like the Googles of this world. Many businesses fear HMRC—they fear the taxman. They are afraid of making a mistake and of that being interpreted as them somehow trying to pull the wool over people’s eyes. Inevitably, instead of one visit to the accountant or auditor, there will be three or four visits. I do not think that this is just speculation, because one only has to look at what happened when VAT filing started. That was sold on the same kind of basis, because we were told, “You just fill in all the stuff,” but that was not what happened. People started going to accountants to get them to verify that they were sending in the proper information.
Will more queries be raised with businesses and will more time be tied up dealing with those queries? As businesses see the quarterly returns as something of great significance that have an impact on the tax they pay and how that might be scrutinised, will they face more compliance costs due to their asking professionals to do their returns? Alternatively, as some Members have described it, is it simply that they will have all the information on one spreadsheet, and that they can click a button to send it to HMRC, with that being the end of it? I doubt very much that that is how businesses will regard this, and HMRC has already accepted that there will be set-up and hardware costs.
Does the hon. Gentleman agree that the best way to sort out such hardware and software costs will probably be to look at examples elsewhere? The Estonian Government, for instance, do not use paper at all; everything is done online. We have imported the car tax system from Estonia, and perhaps it would be good to look at how other countries manage similar taxation programmes.
If we have long enough consultation and lead-in periods, there will be opportunities to find out where similar changes have been made and what lessons can be learned from them. I hope that that elementary step is taken so that we iron out some of those things. If the software is free, it does not mean that there will be no disruption to businesses because they will have to adapt to a universal form of data collection, which might be different from what they use at present. Of course, that requires training and changes to how things are done.
Many people in my constituency who have set up small businesses or become self-employed did so because they are good plumbers, carpenters, builders, mechanics or whatever, but they are not into the administrative stuff. Even if there is help and this standard software is provided free of charge, they will pay somebody to carry out the process, and if they have to pay that person four times a year, it will add to their costs.
As several hon. Members have said, while we talk about all this information being supplied online, that is not an option for many businesses throughout the United Kingdom. A report that was published on Friday by a group of hon. Members stated that it was accepted that the internet programme has not been rolled out as well as the Government had hoped. The report made substantial recommendations and asked whether we could implement them without breaking up BT’s monopoly.
One thing we know is that HMRC has accepted that 19% of businesses have no digital contact, and that 42% can will need assistance, so a substantial number of businesses will not find the transition easy. Connections in this part of the United Kingdom are much better than those in Scotland, Northern Ireland or other areas of England and Wales where the population is perhaps more dispersed, so the burden of not being able to comply with digital returns will be felt much more heavily in some constituencies than others, and that needs to be taken into consideration. I do not want to make a point that others have made, but if the system needs to involve other ways for people to contact HMRC, we already know that there will be difficulties. I do not want to go through all the statistics about phone calls not being answered—
I am sure that the shadow Minister will make that point very effectively. We already know that there is a problem with communications other than those involving computers, so that is an important consideration when introducing a system in which people have to make contact four times a years.
Sitting suspended for Divisions in the House.
I have three points to make in conclusion. First, although more than 100,000 people have signed the petition, I believe, despite what the Government have said, that that is probably an indication that many businesses are not even aware of the changes. If the policy announcement has not percolated down to those who will be affected, how can we be sure that they will be fully aware of the substantive changes to come until they are hit by them? There is a lesson to be learned about just how effective the announcement and the consultation have been. Secondly, although the Government argue that they want to reduce the regulatory burden on businesses, I cannot for the life of me, for the reasons I have given, understand how the approach will reduce that regulatory burden.
My third point is about political perception, but it is important, and I would have thought that the Minister’s party would have been particularly concerned about this. There is increasing cynicism that somehow big business gets away with things that small business does not. The measure will apply to small businesses but not to large ones, yet all the time the headline news is about how the latter—whether it is the Googles or the Starbucks —seem to walk away from their tax responsibilities. People will find it difficult to understand why there should be a greater onus on small businesses to declare their earnings and business details when some of the larger ones can get away without paying tax for 10 years and then get a slap on the wrist. As we discussed earlier in the main Chamber, they seem to get away with paying very little.
I would like the hon. Gentleman to try to look at the matter this way: self-employment is the largest growing sector in the country, and that has to be taken into account when considering how taxation should be simplified. As my hon. Friend Andrew Bingham said, the sector is the powerhouse—the engine room—of our economy. I hope that the hon. Gentleman agrees that two different styles and sorts of businesses are being discussed in parallel. Our earlier proceedings in the Chamber were about the Googles of this world, and this debate is about the self-employed and small and up-to-medium-sized enterprises.
I take the hon. Gentleman’s point, but I think that I made it clear that a lot of this is about perception. Businesses that are struggling and already feel a heavy regulatory burden sense that further requirements are being imposed on them. It may well be that we are talking about different kinds of business, but we all know that perception is important in politics. There is cynicism and scepticism, and people take the view that somehow the big players get away with things that the small players do not.
The Government ought to be concerned that we are not seen to be imposing further regulation on the small, usually labour-intensive businesses that generate a lot of employment across the United Kingdom. Many of the responses to the consultation have been from organisations that represent small businesses, and they have been negative. As several hon. Members have said, those organisations do not know what the Government hope to achieve, or what businesses will have to do, what information they will have to give and what the impact on them will be. Those points need to be cleared up, and that is one of the reasons why today’s debate has been good. The Minister’s response will be noted by hon. Members who have participated, and during the ongoing consultation and the roll-out of the policy, we need to bear in mind all the points that have been raised today.
It is a pleasure to serve under your chairmanship, Mr Hanson. I hope that hon. Members agree that we have seen a coming together across the political divides on a number of issues today. There are many shared views about the concerns that are out there.
I pay tribute to Paul Johnson, who created the petition, which, when I last looked before leaving the office today, had nearly 110,000 signatures. That is a sign of the strength of feeling to which hon. Members have referred. It is also important to pay tribute to the work of the Petitions Committee in ensuring that there are opportunities for the public to respond to and feed into Government policy. Oliver Dowden mentioned the engagement on Twitter; the more we can open up our politics the better.
It will not have escaped anyone’s notice that it is Burns night tonight and, for those hon. Members who did not know, Robert Burns worked in the Excise—
Yes. What we have heard today is a call for the Government to reflect on the plans and on the pace of development. I am able to find a Robert Burns quote for every situation, and he once said:
“Dare to be honest and fear no labour.”
I commend those comments to the Government.
The contributions to the debate, across all political parties, have been insightful and thought-provoking, but while the Scottish National party supports digital transformation and recognise that it is absolutely key in all aspects of our society, we believe that it must be done in parallel with a simplification of tax policy. We feel that the Government’s lack of consideration about how the changes will work in practice flies in the face of the commitments they have made to simplify tax for small businesses. I believe that the Chancellor said that his “dream” was
“that people might actually understand the tax laws which they were being asked to comply with.”
Some time ago, the Government also said:
“We need to reduce the complexities in our tax system and the coalition is committed to delivering that goal.”
I hope, and assume, that the Government are still committed to that goal, but I think we have heard from hon. Members across the House today that people are not convinced about that.
I highlight again that a key concern across rural parts of Scotland and, I am sure, the rest of the UK, is weak digital infrastructure and connectivity. We appreciate that there has been significant investment by the UK Government, and we commend them for that. In Scotland we have also made a significant investment—£115 million, to be spent in the next year—against a challenging financial backdrop. The overarching issue for us is that we want small and medium-sized businesses to thrive and develop in rural parts of Scotland, but connectivity and infrastructure are not developing apace with that potential and with the proposed changes. Along with people from across the political divides, I urge the Minister and the Government to include that issue in the consultation and map out the weak areas of connectivity.
My hon. Friend Ian Blackford, who is not here today, recently highlighted a grave concern in his constituency. Thousands of houses and premises there lost connectivity over Christmas, which affected their businesses. If that were to happen regularly, one can only imagine how the changes might affect people. To give an example, a good friend of mine owns a bed and breakfast in the port town and fishing village of Mallaig. For some time he had a satellite on the side of his house—I do not know whether he still does—which provided mobile coverage to Rum, which is one of the Small Isles. There happened to be a storm one winter, and the satellite was knocked off. The whole island lost connectivity for a number of weeks. That is a small but important example of how connectivity is delivered in some of the rural parts of our United Kingdom and across the isles.
Many businesses and groups have argued that the proposals for digital accounts and quarterly reporting will make the requirements on small businesses more complex. The Federation of Small Businesses has condemned the UK Government’s failure to publish initial options for the form that the quarterly return will take, which has not been defined. A number of Members have mentioned that. The FSB has said:
“As such, the announcement runs completely contrary to evidence-based policy making, which only serves to undermine businesses’ confidence that Government is determined to tackle the administrative burdens of small business.”
Additional research has shown that on average, businesses pay £3,600 a year to comply with tax arrangements. The additional burden could have a significant impact.
The FSB has provided us with comments that its members made between 15 and
“HMRC should be pursuing the large businesses that do so very well out of not paying the taxes they are due!”
That is particularly resonant given the urgent question earlier today. Another member said:
“This is my worst nightmare come true. I am going to be spending more time filling out tax returns than actually running the business. I fear it may be the straw that breaks the camel’s back.”
An accountant said:
“I totally disagree with your comment that ‘it’s good for accountants’. As a professional accountant nagging those late clients to bring in their records and other information to beat the January deadline, having to do this now 4 times a year would be our worst nightmare come true. It would be January four times a year with no doubt penalties and interest for those that are late in filing the quarterly returns.”
I hope the Minister will take those comments on board and think carefully about them.
Many bodies have echoed the concern about the additional workload that the new reporting requirements will place on businesses. Chris Jones, the president of the Chartered Institute of Taxation, said of the quarterly reporting requirement that he was
“struggling to reconcile this with the announcement by the Chancellor…that the annual cost to business of tax administration will be reduced by £400m”.
Similarly, Anthony Thomas, chairman of the Low Incomes Tax Reform Group, has said:
“We gave a cautious welcome to the new digital tax accounts on the basis they might simplify matters for some low income taxpayers, although we remained very concerned that a significant proportion of the population, often the most vulnerable, remain digitally excluded.”
That applies for a number of reasons. People on lower incomes who start businesses, particularly women, may well be excluded and unable to navigate the new system. A number of Members have referred to the roll-out and cost of training and development. I hope the Minister will refer to how that will be done and assessed, because that is important.
Business for Scotland surveyed 278 of its members, and 92% of them felt that the changes would cost them significantly more and said that they already had enough to deal with. The majority are concerned about increased stress and fear that accountancy fees will be increased and that they will be constantly preparing for the next tax return. I appreciate that some of those fears may be allayed, but there is an issue of public perception, as we have heard today. It is about how the Government communicate and consult with business, which is key.
The SNP has significant concerns about HMRC’s ability to implement the changes in light of budget cuts and the closure of HMRC offices. It is predicted that many small businesses will need to seek advice on how to meet the extra requirements of quarterly reporting. James Hoare of PricewaterhouseCoopers has said:
“Digitising the relationship between business and HMRC is desirable and inevitable, but the scope and timescale of the proposed changes raise important questions, such as whether training and support will be provided for those less familiar with digital reporting.”
HMRC has had its budget cut. Its departmental expenditure limit will fall from £3.8 billion in 2016-17 to £3.1 billion in 2019-20, which is a cut of more than £700 million across three financial years.
We are all aware of the proposed closures and the devastating impact that they will have, particularly in Scotland, where offices are going to be centralised to the central belt in Edinburgh and Glasgow. Much has been said about how that will be a positive move, and it has been said that minimal numbers of jobs will be lost, but that is not what we are hearing on the ground, where there is a real fear that we will lose much of the expertise of offices and their staff, and that there will be an inability to collect tax efficiently.
The centralisation of offices has led to other issues being raised, include travel, particularly in my constituency of Livingston. One of the offices there was purpose-built for HMRC. It is not old or dilapidated in any way, and the local workforce have impressed on me the number of areas of expertise that they feel will be lost, and the real-terms cut in salary that will result from increased travel costs. Livingston, as most Members will know, is placed right between Edinburgh and Glasgow, and connectivity is very good. I cannot imagine what things will be like for those who are considered to within one hour’s travel.
The key themes are public and business confidence, and the development of broadband infrastructure and connectivity at pace. The burden must not fall largely on small businesses, because, as a number of Members have said, entrepreneurship and the people’s desire to start their own business may be reduced if the administrative burden is put on them. As we have heard, HMRC is already struggling to answer calls and deal with the current workload, so we need to understand the effect of the various changes and cuts coming down the line. In some respects, it seems like a perfect storm of service closures, reduced budgets and a greater burden on the service.
I hope the Minister and the Government will think carefully about all the issues that have been raised, and that they will extend the time for consultation and roll-out, as Members from all parties have asked for. Otherwise, there is significant fear, not only in the House but in small businesses across the country, that the burden will be greater for small businesses and damage could be done to them.
It is a pleasure to appear before you again, Mr Hanson. I give my thanks to the Chartered Institute of Taxation and the Federation of Small Businesses in particular. I also thank the petitioners and those who tweeted in response to the petition.
Broadly, Labour welcomes greater digitalisation, but I think that the Minister—he is an honourable and painstaking Minister—has been a victim of some wooliness in this whole saga. Fears have been expressed that the Government are about to do things that the Government say that they are not in fact about to do. That is always a difficult thing for politicians, and we face that whatever our political party. We are well able to defend our views and those of our party, but it is more difficult to deal with people misunderstanding our views and then attacking those misunderstood positions. We have to go through a double process with them: first, we have to sort out what our position is and then we have to justify it.
The change is a question of timing, software and the assistance that will or will not be available. As I understand it—the Minister will be able to confirm this or say I have got it wrong—a lot of HMRC stuff is already done online: VAT is online; there is real-time information for PAYE returns; and company accounts are being submitted in what is called iXBRL. No doubt, the Minister will know what that stands for; I do not. There is also the digital tax account and the agent online self-service, which is not to be confused with the agent secret service and which is for such people as accountants to deal with HMRC regarding the tax affairs of their clients.
What the Government are doing—it is very understandable; it is happening all over society—is an attempt to externalise costs. That is what it is in economic terms. We see it all over the internet with the use of online services. Many Members will be familiar with this, but years ago people would go to a travel agent, and the travel agent bore the overheads. Now, people go online and book with an airline or a travel company, and they are bearing the overheads, because they are paying for their computer, the heating and lighting in their home and so on.
HMRC is externalising its own costs, which is understandable because HMRC is not a profit-making centre. If its costs of operation are lower, taxpayers benefit. However, we know from other examples that externalising costs does not always go smoothly. I will quote from paragraph 1.5 of the Chartered Institute of Taxation’s very helpful briefing:
“Making Tax Digital is a huge project that is going to bring in fundamental changes to the tax system and how both taxpayers and their agents interact with it. It has the potential to create a simpler, more workable tax system if it is developed and implemented in the right way but it must be managed carefully and in consultation with taxpayers, tax professionals and software developers alike.”
That sets the scene quite well in terms of what one ought to aim for in government, whatever one’s party: to have an inclusive process that runs smoothly and not too quickly. It is not clear that the other online initiatives in HMRC have gone so well. The CIOT states:
“There is evidence that past changes in reporting obligations have led to an increase in compliance costs for businesses, and that HMRC tend to under-estimate these costs.”
In the spending review, HMRC tells us that the measure will save businesses £400 million a year, which would be very welcome, particularly for small businesses. I hope the Minister will clarify that, because I keep hearing about the effects on small businesses. We absolutely focus on that, about which more later, but I am not sure whether there is a de minimis or upper threshold. Perhaps the Minister will elucidate, because I keep reading, “This is an attack on small business; big business does not have to do this, and therefore it is unfair.” That might be the case, but at the moment it is not clear to me that, if the measure were brought in, it would not apply to big businesses; or, to get rid of the double negative, when this comes in, it will apply to big businesses. So we need to know who the policy will apply to.
We all know from the debate today that there is a big risk of increased costs for businesses, and that those increased costs are likely to fall to a greater extent on small and medium-sized enterprises, which do not have accounts departments. So, proportionately, the hit taken by smaller businesses, if this were to go wrong, would be much bigger because of the initial set-up costs. Even if there is free software from HMRC, it has to be installed on a computer, if the small business has one. There is increased staff time in preparing and checking all the records four times a year and a potential increase in the fees of agents, particularly accountants. Some small businesses might need to engage an accountant, whereas previously they might not have done so.
All that costs money, and if HMRC were to raise queries four times a year, in contradistinction to once a year, the likelihood is that those queries would not be a quarter as many or a quarter as complex and that, when a whole year’s worth of quarterly queries is added up, it would take more staff time and cost more for businesses, particularly, but not exclusively, for small businesses.
There is a question of timing. I understand there will be consultation this spring, so the hares are now running. We have a petition of 110,000 signatures. Organisations have considerable concerns, many of them expressed today, particularly on two aspects that are linked. There is the sanctions aspect and whether sanctions would be applied for failing to do a quarterly update. My hon. Friend Chris Leslie was right: we could use a multitude of words for this measure, but we must not use the word “return”. Returns are for taxing, winning elections and birthdays when we get happy ones. Generally, we do not say, “Happy tax returns.”
I hope the Minister can elucidate whether the software will be free, as has been indicated in some of the material I have read. If it is to be free, or paid for by the individual, when will it be available? Perhaps it is available now; there is no sense in having the system and no software to deal with it.
Perhaps the Minister will correct me if I am wrong, but I understand there has as yet been no impact assessment, which seems to be a rather large lacuna in what hon. Members and outside organisations engaged in this matter agree—it does not mean it is right if we all agree, but the tendency increases—is a pretty big change and may presage bigger changes on a more widespread basis.
It would be helpful for business if HMRC went about saving money—externalising costs, being more efficient, whatever we want to call it—before cutting staff so much. To cut staff and introduce this new measure is a triumph of hope over experience when it comes to computerisation programmes, whether in government or in the private sector.
I have another question for the Minister on the vexed question—in spite of the agent online self-serve system—whether there will be synchronicity by April 2017. At that point, quarterly updates will have to filed by businesses and agents will have access to all the information online—not just the information of their clients, but HMRC’s—and will interact with HMRC digitally, because otherwise there is a risk that businesses will file updates four times a year, but their agents will not be fully engaged in that process that has happened before, and that is a concern.
As for staffing, there are lots of different ways to count staff. When I have probed this, there has been a difference of opinion between HMRC and the Office for National Statistics. However, if we look at the broad trend, the ONS and HMRC agree that since April 2010, when the Conservative-led Government started, there was a cut of almost 20% in HMRC’s staff by April 2015, and there are more cuts in staff to come. On the centralisation of offices, for example, which has been adverted to, only 90% of staff will transfer to the centralised regional offices, according to HMRC’s own figures. So a greater loss of staff is likely. Loss of staff per se is not a bad thing if an organisation is running more efficiently, but it seems to me to put the cart before the horse to say we will lose staff at the same time or even before we bring in this online stuff. Again, it is a triumph of hope over experience.
Will the Minister tell us about the practicalities and exactly what data will be submitted? My hon. Friend the Member for Nottingham East referred to this key question. The Government are saying to businesses, “We want you to provide some information four times a year,” to put it at its most neutral. What information will be required four times a year? The likelihood is that businesses will no longer have a choice about how to keep their records, because, although they may retain that choice in theory, for practical purposes, they will have to keep that information in a way that is compatible with the HMRC model. That may be a good thing, but uniform models in business are always a little suspect, because they can crowd out innovation. So there is a question mark there in terms of that forced uniformity, unless HMRC, for example, comes out with two or three different sets of free software, which I doubt, but perhaps the Minister can tell us more about that.
If, as has been suggested in some of the material—again, perhaps the Minister will clarify—this is a system whereby we press a send button and all the information squirts out the computer, down the broadband, if we have broadband, to the HMRC server, that will leave HMRC with a whole lot more information, and Sammy Wilson quite reasonably asked what HMRC will do with that information. He has been around for even longer than I have—he is pulling a face, but I do not mean his age; as an hon. Member of this institution, he has been here longer than I have. So, as he knows, the likelihood is that with any splurge of data from businesses hitting the send button, because they have it in the format provided in the software or whatever, a lot of the information will never be looked at. Businesses will supply all that information, but it will not be looked at; it will only clog up HMRC and potentially the system. That might lead to a lower rate of compliance, and none of us wants that.
Furthermore, experience tells us that if people are submitting information four times a year, the likelihood—not the certainty—of errors creeping in goes up about fourfold. Again, that is not necessarily the case, because the system might be a simple one, understood by businesspeople who are simply running a business and not having to be an accountant on the side, so they might be clearer about what they are supplying and therefore less likely to make errors. To expect that, however, would again be a triumph of hope over experience. The greater likelihood is that, with quarterly updates, there will be a considerable increase in errors—if not fourfold, threefold.
I understand the point that the hon. Gentleman is making, but although there might be an error in the input of records, surely if everything is done electronically, there will be fewer calculation errors at least, or so one would hope.
I agree with the hon. Lady that that is the theory, but the fact is that input errors are likely to increase in number if more information is being inputted—not necessarily, but likely. She is absolutely right that that is the point at which errors, if there are any, will creep in—garbage in, garbage out, as the saying goes.
Another practicality mentioned today relates to remote areas. I hope that the Minister will say something about that, because I have seen some suggestion that things could be done on a smartphone. I am no techie, but the only ways in which I can see that being possible are on a phablet with a screen of about 7 inches in size, and there are not many of those around, or by people using their smartphone as a modem and submitting information over the mobile telephone network, rather than broadband cables. However, many remote areas do not have 4G, so in theory someone could be dumping the information through the smartphone, which is being used as a tether modem, although that seems unlikely because the speed will not be that great, so there is a problem.
Nevertheless, I support the general idea of getting stuff online to achieve greater efficiencies. We have to be careful about those who are unable to cope with the online stuff, for reasons of disability and so on, but contrary to what some Members have been saying, the Government—whether now, or in four years’ time when we in the Labour party are in government—must be careful about going along with everyone who will not engage online. Some people will not engage online even when they can, although it would be more efficient for them to do so and it is more expensive for the rest of us that they do not.
The way business is going—not every business, but an awful lot of them—if a small business does not engage online, the likelihood of it being successful decreases year by year, because of the digitalisation of the world. If an HMRC initiative encourages some small businesses to have more digitalisation than they would have done had the system not come in, that could be a good thing not only for them and how they run their businesses, but for how they interact with HMRC.
Seema Kennedy mentioned a hairdresser. A peripatetic hairdresser, for example, with his or her own car does not necessarily have to be online to run a successful hairdressing business. The way the world is going, however, that lack of a digital presence is likely to tell us against the hairdresser. Some hairdressers will now have an automated system to send a text message to tell the client, “Don’t forget, I’m coming round to give you a wash and shampoo tomorrow afternoon at 2.30.” That is fairly basic stuff, but it is using the digital to enhance business with fewer missed appointments and so on. That is how the world is going, so a nudge—to use one of the Government’s favourite words—from HMRC is not at all a bad thing, although we have to be sensitive about those who are unable to get online, for whatever reason, whether in terms of disability or their geographic presence, such as in a remote area.
We have all had our sob stories about running a small business. Years ago, I helped to run a small family business with a few employees, and later I worked for a large and successful firm with a 1,000 employees. Before I first came to this place, I spent most of my working life in the private sector. The nudge then was to get computerised. In 1995, although I am not a techie, I was the first partner in my law firm to have a computer on my desk, because I kept saying, “The world’s getting more and more digital.” Now, 20 years later, except perhaps for reasons of disability, no lawyer in the land can be found without a computer on their desk. Any lawyer who did not have one 10 years ago probably went bust, because otherwise the job could not be done. Sometimes, we have to nudge things, and I nudged my partners on that.
Nevertheless, I suggest to the Government that any such nudge must be accompanied by simplification, as most recently referred to by Hannah Bardell. The Federation of Small Businesses states that, while it is “fully supportive” of HMRC’s “digital transformation”, it believes that that should be made “in parallel” with the simplification of tax policy. That is very important.
The Government, in their formal response to the petition, stated:
“Many taxpayers have told HMRC that they want more certainty over their tax bill”.
I can see that, although I am not sure that quarterly reporting will do it, because what bedevils business, small businesses in particular, is the complexity of the tax system.
The Minister and I have been talking about this on and off for about 10 years, so I appreciate that simplification is the holy grail. When the Chancellor was a shadow Treasury Minister, he used to bemoan the fact that under a Labour Government “Tolley’s Tax Guide” had gone up to 1,000 pages—but it is now in round terms 1,500 pages. As I have said before, however, I do not blame the Government or their predecessor coalition Government for that. Tax affairs are complex, because we have a lot of smart people in this country, who are innovative in financial services, and they find loopholes. Then the Government have to write a whole bunch of legislation to plug those loopholes, but that only keeps putting sticking plaster on sticking plaster.
For all the commendable efforts of John Whiting and the Office of Tax Simplification, the Government—true under Labour as well—have not engaged fully in tax simplification; it would be rough and ready and there would be less discretion and more apparent injustices, but there would be much more certainty, which the Government recognise all taxpayers, particularly small businesses, want.
The hon. Member for East Antrim referred to problems with computerisation. They are legion and there have been problems with the ancient online self-service system. Something that happened under the previous Labour Government and, incredibly, was made worse by the coalition Government was the single farm payment scheme for farmers. It was a disgrace under a Labour Government and that disgrace got worse under the coalition Government. Farmers were supposed to file their claims online for the single farm payment—its name has changed now, which is what all Governments do when they get into difficulties—in a so-called simplified system. What happened? The system collapsed for those who could not get into it. Farmers, because of the nature of their business—I think Andrew Bingham referred to this—often live in remote places. They, too, might not even be able to use a phone as a tether modem because they do not have 4G.
The Opposition’s plea to the Minister is not to put the cart before the horse. The Government should get the system up and running before they start cutting back on the available assistance. I am not going into all the problems at HMRC, but they are legion, known about and much discussed. The Government are taking them on board and there has been a little improvement in recent months. That is long overdue, but it is good. The Minister should keep it up.
It is no secret that there are big problems in HMRC and the Government accept that, which is why HMRC is moving 3,000 more people to answer telephones and so on, but if the new system is not to involve quarterly tax returns—the Minister was commendably clear about that ex post facto, after hares started running and people started getting worried—there is a twofold problem. First—this was referred to by my hon. Friend the Member for Nottingham East—will quarterly updates be a precursor to quarterly tax returns and a kind of PAYE for the self-employed and small businesses? Secondly, will there be short-termism, which affects very large companies now and bedevils British manufacturing? Footsie companies have to make quarterly reports and so on to the stock exchange, but if this system comes in, it has the potential to drive SMEs towards short-termism, and generally there has been cross-party consensus that that has not been good for our economy. It might have been good for a few arbitrageurs and people like that, but it is not good overall.
To finish, I ask the Minister where he thinks we are going beyond quarterly updates, if at all. What the Government said in their response to the petition was either contradictory or a harbinger of where they want to take this:
“At the March 2015 Budget the government committed to transform the tax system by introducing simple, secure and personalised digital tax accounts, removing the need for annual tax returns.”
So that we are all clear, I will repeat that last bit again:
“removing the need for annual tax returns.”
If that is what the Government are talking about in secure and personalised digital tax accounts, is that what they have in mind for businesses—to remove the need for annual tax returns? That may be a coherent policy, but I am not aware that they have announced it and it would be the kind of very big change to which my hon. Friend the Member for Nottingham East referred. Will the Minister therefore say a little more about where he thinks the Government are, or are not, going with digitalisation?
It is a great pleasure to serve under your chairmanship, Mr Hanson. I thank all Members who participated in the debate. I was struck by its measured tone and the many sensible inquiries made. I hope to respond to as many of them as possible.
Before I do that, may I add to those words said by my hon. Friend Oliver Dowden my own words of tribute to Lord Parkinson and of condolence to his family, following the announcement of his death today? I was fortunate enough to meet Cecil Parkinson a number of times in my years as a Member of Parliament and I was struck by his warmth and generosity of spirit. He will be greatly missed by both Houses of Parliament.
We have had a useful and helpful debate in which many points were raised. I am grateful for the opportunity to dispel some of the myths that I think exist with regard to the policy and to provide greater clarity where I can. This is an important policy and it is important that we get it right for small businesses. I would particularly like to thank the Minister for Small Business, Industry and Enterprise, my right hon. Friend Anna Soubry, who was present for much of the debate.
I would also like to thank all those who took the time to respond to the petition. I hope that as many people engage in the consultations on the reforms that HMRC will launch later this year. The Government have always been on the side of businesses that help to create long-term, sustainable economic growth. That is why we have lowered the rate of corporation tax, increased the investment allowance and helped our companies expand into new markets. We believe in competitive tax, simple tax, and tax that is paid.
Before I say a few words about what is changing and why, I would like to make clear what “Making tax digital” is not and address some of the concerns raised by businesses. First, to respond to the point made by my hon. Friend the Member for Hertsmere at the beginning of the debate some hours ago, this transformation does not—I repeat “not”—mean four tax returns a year, but, by 2020, most businesses will be keeping track of their tax affairs digitally, updating HMRC at least quarterly via their digital tax account.
Quarterly updates will not involve the complexity of a full tax return, where the business, or its agent, has to gather together and manually input data on to an electronic or paper form and then perform various calculations. Instead, updates will be generated from digital records and, in most cases, little or no further entry of information will be needed. It will be much quicker, easier and far less burdensome than the current process. The agony of the annual tax return will be a thing of the past.
If the information required will not be the detail required in the end-of-year tax return, what value will there be in the calculations made? If the aim is to give certainty to taxpayers about what they are likely to owe but the information is not substantial enough to work that out, what value does it have? How will that enable people to keep account of their tax affairs, as the Minister described it?
That is a fair question. The hon. Gentleman raised that point in his remarks and there is a distinction between the nature of the information provided. Whereas a full return can be complex, the update will be based on business records that are already being recorded.
There will be one process for both business and tax purposes, which will involve a summary of income and expenses.
The hon. Gentleman asks what is the use of the data and how will they be helpful. First, keeping records digitally will reduce error, partly because that will be done on a more timely basis. Secondly, the data will allow HMRC to focus its attention on the small minority of small businesses that are evading their taxes, and not on those who are trying to get it right. One must also bear it in mind that the software will help taxpayers identify any errors in the information they provide. One of the key benefits permitted by a more digital approach is that errors can be spotted earlier by the taxpayers themselves.
I reassure the House that HMRC does not intend to increase interventions on the basis of quarterly updates. On the contrary: HMRC is seeking to reduce error at source and so reduce the need for interventions. It is the case that by keeping records in real time instead of processing paperwork at the year end, businesses are less likely to lose receipts or make basic accounting errors.
I confirm that the proposal applies to large businesses—it is not exclusively for smaller businesses. On whether the software will work, let me point out that there are already six free products on the market and we expect there to be more as small software firms innovate to meet business needs. Such firms are clearly keen to engage and produce new products and services—we see that in the growth of apps—and already 30,000 small businesses have downloaded free record-keeping apps suited to all varieties of devices, whether tablets or smartphones.
One point that came up repeatedly and which was made by George Kerevan was that we are rushing this through. Let me reassure him and others that the Major Projects Authority has examined the plans and that it views them as deliverable. However, neither the Treasury nor HMRC are complacent, and we do understand that there are challenges, and I will pick up on some of them. However, it is worth noting that this is a five-year roll-out. We are engaging in substantial consultation this year. The piloting and testing of the technology and the various processes will then follow.
Phone calls were mentioned on a number of occasions. I said in the main Chamber earlier this afternoon that HMRC’s performance in January, which is traditionally a busy month, because of the self-assessment deadline, has been at a very high level. The last number I saw, which was for last week, suggested that 89% of calls were being answered and that the average waiting time is four minutes, which, it would be fair to say, is better than the historic norm for HMRC.
It is worth pointing out that the overall £1.3 billion package of investment for HMRC will allow more of its customers—not just businesses, but individuals—to go online, thus reducing calls. In addition, HMRC gets many calls about information that will in future appear in taxpayers’ digital accounts. For example, people call to find out their reference number or to chase a refund, and digital accounts will take out a large number of those calls. As I said, call centre performance is now also much improved.
My hon. Friend Seema Kennedy raised the issue of sanctions. We will consult on the sanctions that will be appropriate in a digital environment. Penalties and other sanctions will not be the same as those that apply now to end-of-year returns. We will want the new process to bed in before we turn on any sanctions. There is no plan to penalise those who try to comply. I point hon. Members to HMRC’s record on the introduction of real-time information. There was a careful and measured approach to penalising people, and only deliberate non-compliance resulted in sanctions while the system was being introduced.
A couple of hon. Members asked whether quarterly updates will be required to take account of accounting adjustments for stock and work in progress, which are currently made only once a year. Detailed issues such as the allocation of capital allowances and the counting of stock levels will be addressed through consultation. I stress that all allowances, deductions and reliefs that are currently annual will remain so. Of course, for the many businesses that use cash accounting, that is much less of an issue, but I recognise that it is an issue for some businesses. Again, for issues such as work in progress, we are not requiring information quarterly.
Concerns were raised about payment. No decision has yet been made about changing payment dates. In December, alongside the “Making tax digital” road map, we published a discussion paper on options to simplify the payment of taxes. An initial consultation will take place shortly, with a further, full consultation to take place later this year.
My hon. Friend David Morris, who does so much for the self-employed in the role he plays for the Government, raised the issue of payments following quarterly updates. Again, I stress that no decision has yet been made about changing payment dates.
Questions about how the changes will affect seasonal businesses will be addressed through this year’s consultation. Businesses trading seasonally may be due a tax refund in-year. If they update HMRC more frequently than they do now, that will allow HMRC to assess them for such a refund, so there may be a financial benefit for them. Let me also stress that the quarterly update will be based on actual information, not forecasts. I hope that that provides some reassurance.
In terms of implementation, I reassure hon. Members that we will carry out extensive testing. Roll-out to businesses will take place when the process and the design are known to work.
I touched on cash accounting earlier. About 2 million businesses operate on a cash basis and do not need to account for work in progress, stock and so on. For others, updates will provide an increasingly accurate picture through the year. However, direct taxes will remain annual taxes, so some adjustments will need to be made at the end of the year. That should, however, be less of a task than the traditional annual tax return, because much of the information will already have been pulled together.
I am trying to envisage what the Minister is discussing, because there is still quite a lot here that is open to consultation. Data on income and expenses would be supplied through these quarterly updates, but we might not necessarily be able to get rid of the annual return, which might still be necessary because of tax reliefs and so forth.
Yes, people could be doing these things five times a year—there would be one big final return and these updates along the way. Are we getting rid of the annual tax return or not?
The traditional annual tax return, we can get rid of. What I am saying is that, rather than starting largely from scratch and pulling all the information together, businesses that need to make adjustments at the end of the year will have already done much of that work. Now, as I say, the tax system remains an annual system, and one needs to be able to look at the year as a whole for things such as capital allowances. However, it is worth bearing it in mind that the capital expenditure of the vast majority—something like 98%—of businesses would fall within the annual investment allowance of £200,000, so that is not necessarily too much of an issue for them. However, I understand the point about work in progress.
The hon. Gentleman is absolutely right to make the point that there is still quite a lot to consult on. Sometimes, I fear that we are criticised both for rushing things, charging in and not listening and for things being a bit vague because we are still consulting on them, and there is a certain mutually exclusive element to those criticisms. However, the sense of direction is clear, and it is right that we consult on the details.
I think the information has always been out there, but we are where we are, and I am grateful to have an opportunity to set out where we are consulting. If the hon. Gentleman likes, I can set out some of the communication that has already been done. There are issues we are consulting on, but I believe that the direction is absolutely right.
Hannah Bardell asked about the cost of the proposal. Rob Marris asked about the cost to business and the publication of an impact assessment. As with any other tax measure, a detailed assessment of the impact on administrative burdens will be published alongside draft legislation, and that is expected to be in December 2016. That assessment will be informed by prior consultation of affected businesses. HMRC anticipates producing an initial draft impact assessment alongside the formal consultation process, which starts in the spring.
Perhaps it is this very point. The Minister has told us the kind of information that will be required in the quarterly returns and the calculations that will be done. Will that give taxpayers an indication at the end of each quarter of what tax HMRC expects from them, and will it have to be paid quarterly?
As I said a moment ago, we are looking at the issue of payments, which I appreciate is a potentially vexed one. We are not rushing into that. We are consulting on it, but it is not part of the proposal announced at the autumn statement. The new arrangement will provide more information. Indeed, one benefit is that it will give a better indication to businesses of what tax they owe when it is due. That will be an advantage to businesses, which I think they will appreciate. However, we have not made any decisions on payments.
Sammy Wilson and other hon. Members raised the subject of broadband. I will come back to the issue of people who cannot make use of digital, but I want to respond on broadband, as it is a key point. Through the Government’s £1.7 billion investment programme, we are on track to deliver superfast broadband to 95% of premises by 2017. The Prime Minister announced at the end of last year that we are looking to implement an updated broadband universal service obligation for those not covered by the superfast plans. Industry are also set to roll out 4G mobile connectivity to 98% of UK premises well ahead of the 2017 obligation, through Ofcom’s regulatory spectrum licensing conditions.
In every walk of life, people are embracing the digital revolution. From shopping for groceries to making a GP appointment online or paying invoices at any time of day or night, millions of us benefit from digital services daily. Businesses, too, are harnessing the opportunities of the digital age to transform fundamentally their operations and the services they provide, with customers reaping the benefits. It is only right that the Government keep pace with the world around us. That is why we are seeking to transform HMRC into one of the most digitally advanced tax administrations in the world. “Making tax digital” is at the heart of those plans. At the spending review, the Chancellor announced a £1.3 billion investment in HMRC to make that vision a reality. That will see the end of the annual tax return and, in its place, the introduction of simple, secure and personalised digital tax accounts for businesses and individuals.
Importantly, the changes will deliver what businesses and individuals have told us they need. In particular, many businesses have said they want more certainty about their tax bill and do not want to wait until the end of the year, or often longer, to find out how much they have to pay. Businesses have also said they want tax returns to be more integrated into the way they run their business, rather than something done separately and many months later. The use of digital tools—accounting software or smartphone apps—will, for the first time, create that desired integration.
Businesses will be able to see in their digital account what each update means for their tax position as the year goes by. That will also make it easier for businesses to understand how much tax they owe, giving them far more certainty about their tax position and helping them to budget, invest and grow. Beyond helping businesses to get their taxes right, making tax digital will also help them to improve and develop their business. Targeted guidance and alerts will make them aware of relevant entitlements and reliefs or wider Government services to support business growth.
Apart from the modernisation of business practices, there is another important prize that we cannot ignore. Each year, around £6.5 billion of tax goes unpaid because of mistakes made by small businesses when preparing and filling in their tax returns. These reforms will improve the quality of record keeping, reducing the likelihood of mistakes and contributing £920 million in additional revenue to the Exchequer by 2020, then £600 million a year thereafter. The alternative would be to stick to a system where taxpayers take out 18-month-old records, stare at them for a while as they try to figure out what they were doing then and tentatively use them to fill in a lengthy HMRC form, or drop on to their accountant’s desk a large carrier bag of records—
—or, indeed, a shoe box, and bear the expense of having the accountant do the job. The taxpayer then pays their final tax bill on money made up to 21 months previously. It is a system designed for a world of paper and bookkeeping, in the literal sense, and it is not tenable in the 21st century.
I do not, however, underestimate the scale of changes that making tax digital represents for businesses and their agents, in particular the transition to digital record keeping. I also make no apologies for the scale of our ambition. With the Government and local authorities investing £1.7 billion to bring superfast broadband to over 95% of the UK by 2017, these changes are possible. As I said, the Prime Minister has announced that we are looking to implement an updated broadband universal service obligation for those not covered by the superfast plans. Equally, I acknowledge the concerns raised about the pace of the reforms. Similar concerns were raised about online filing and real-time information. However, HMRC’s impressive track record in implementing those changes speaks for itself. Working with interested parties, we can match that success.
Some have suggested that the reforms should be introduced on a voluntary basis, rather than requiring businesses to make the change. A voluntary approach would cost the same but deliver only a fraction of the benefits for business and the Exchequer. In the current fiscal environment, without the additional revenue generated by closing the tax gap, we could not have provided the £1.3 billion investment required to transform services for all taxpayers.
Some have said that it is overly ambitious to rely on digital as the primary channel. The fact is that we are going with the grain of the way small businesses are already moving. The benefits of digitisation are readily accepted by the majority of small and medium-sized organisations. While there has been plenty of debate—a lot of it online—about the challenges, I am heartened see that many businesses and their agents are already forging ahead. Already, 2 million small and medium-sized businesses are using software for their payroll and VAT.
I am, however, equally focused on ensuring there is support for those who need it. The Government have already said they will ensure that free software products are available to businesses with the most straightforward tax affairs. Some—a very small minority—will be unable to adopt digital tools due to geography, personal disability or other circumstances. In those cases, help will be provided. There is no question of forcing those who genuinely cannot go digital to do so. We will consult with business and representative bodies to understand fully who cannot get online and what support they need, and we will ensure we provide alternatives, such as telephone filing.
We want the reforms to provide the maximum benefit for business and the UK. We are already talking to a wide range of businesses, agents, software developers and professional bodies, and a wide-ranging consultation exercise will start in the spring. We are introducing the reforms gradually and not phasing them in fully until 2020 because we know how important it is to give taxpayers time to adapt. We are using volunteers to stress-test new services, so that we can be confident the new services work before they are rolled out.
If we get this right, the benefits will be considerable. We will reduce burdens on business, reduce the tax gap and bring tax administration well and truly into the digital age. These important changes will boost economic growth, so I urge hon. Members to support our reforms to make tax digital.
Thank you for your chairmanship, Mr Hanson. I will wind up very briefly indeed. I was reminded by Scottish Members that it is Burns night, so I shall not detain people for much longer at all.
I thank all hon. Members for their contributions. We have particularly benefited from the experience of those who are involved in small business, including my hon. Friends the Members for South Ribble (Seema Kennedy), for Morecambe and Lunesdale (David Morris) and for High Peak (Andrew Bingham). I was particularly struck by what was said by Peter Kyle, who gave such a passionate defence of entrepreneurship. I think he managed to convince Chris Leslie, but I wish him good luck with the wider leadership of the Labour party; we will see how he gets on with that. I also thank Sammy Wilson for his very passionate speech.
Finally, I thank the Minister for his response. I had the pleasure of hearing him speak in the House this afternoon about Google’s tax affairs. He rushed straight to this debate and has distinguished himself in both. I am grateful to him for his explicit reassurance that the plans do not amount to quarterly tax returns, for his commitment to further consultation and for the fact that the Government are listening. Certainly, from my perspective, I will scrutinise the plans carefully as they continue to be rolled out, and I am sure that all Members will do so. We agree with the overall direction, but we are very keen to make sure that this is implemented properly.
Question put and agreed to.
That this House has considered e-petition 115895 relating to tax reporting for small businesses and the self-employed.