David Gauke on making tax digital
Speech by the Financial Secretary to the Treasury David Gauke at the Armstrong Watson event: 'Essentials of pensions, tax and payroll in 2016'.
Good afternoon – it’s very good to be up here in Carlisle with you.
I am very grateful to Karen Thomson for inviting me to this event. Karen has been an influential voice on payroll matters for many years: a real expert, and one who I know is highly respected and widely listened to in the industry and beyond.
I’d also like to thank John Stevenson for hosting me in Carlisle. John has been a highly effective voice for Carlisle, particularly for small businesses, highlighted by the excellent work he has done for the community following the recent floods. And later on today, I’m looking forward to meeting some of Carlisle’s small businesses and residents.
This is now my 6th year as minister responsible for tax. It’s been quite a ride!
I occasionally cast my eye back to 2010 – when the economy really was in a bad way, when the global markets were beginning to doubt us, and when we were spending too much and earning too little.
It’s been a long journey back from the brink. Plenty of tough decisions along the way. And plenty of real achievements too.
Every decision we have made in the Treasury has had one goal: to secure the UK’s long term economic prosperity.
That means finding efficiencies in what we spend; modernising how we run the country; helping the private sector create jobs and deliver economic growth, all over the country; opening ourselves up to the world’s fastest-expanding economies, and making sure that we are as internationally competitive as we can be.
Tax lies at the heart of that.
There are a lot of ways in which the tax system can help support growth – and a lot of ways in which, applied in the wrong way, it can do enormous damage to a nation’s economy.
And I could talk at quite some length about what we have done since 2010 – our cuts to the corporation tax rate, for instance, or our increases to the investment allowance, or the work we’ve put in to make the international tax system fit for the 21st century. I’m of course very happy to answer questions on those topics!
But today, I’d like to focus on an aspect of tax which is perhaps closer to home: about how we are modernising the system by which taxes are paid.
I’m sure that the memory of filling in this January’s tax return will be fresh in your minds. You’ve almost certainly had more pleasurable experiences! Nobody enjoys paying tax; that’s one of the things I don’t think any government can change.
But what we can do is make it easier.
The system now has, quite simply, not kept up with the march of technology.
You have taxpayers taking out 18-month old records, staring at them for a while as they try to figure out what they were doing back then, and then tentatively use them to fill in a lengthy HMRC form.
Or they can go to their accountants, drop a large carrier bag of records on their desks, and get them to work it all out. Then they pay their final tax bill on money made up to 21 months previously.
It’s a system designed for a world of paper, ledgers: book-keeping in a literal sense.
Now compare that to the way we carry out other activities.
Shopping for groceries online … making a GP appointment online … sorting out your road tax from the DVLA website in just minutes … paying your invoices off a smartphone at 4am if you want to!
Business are harnessing the opportunities of the digital age too, fundamentally transforming their operations and the services they provide. It’s the customers that reap the benefits.
That is the context of our reforms to HMRC.
It is only right that the government keeps 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 these plans.
At the Spending Review, the Chancellor announced a £1.3 billion investment in HMRC to make this vision a reality. This will see the end of the annual tax return, and, in its place, will introduce simple, secure and personalised digital tax accounts for businesses and individuals.
Importantly, these changes deliver what businesses and individuals have told us they need.
In particular, many businesses have said they want more certainty over their tax bill, and don’t want to wait until the end of the year, often longer, to find out how much they have to pay.
Businesses have also said they want tax 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 this desired integration.
Importantly, taxpayers would have 24/7 access to digital accounts, as well as having a complete view of all their tax liabilities and entitlements, allowing them to send HMRC information and payments simply and efficiently.
Businesses will be able to see in their digital account what each update means for their tax position as the year goes by.
This will also make it easier for business to understand how much tax they owe, giving them far more certainty over their tax position, helping them budget, invest and grow.
Unnecessarily bureaucratic form-filling will be eradicated – taxpayers will not have to tell HMRC information it already knows.
And unnecessary time delays will also be eliminated, because the tax system will be operating much more closely to ‘real time’. This will keep everyone up to date, removing the risk of missed deadlines, unnecessary penalties, debts arising and errors in the tax system being carried forward from one year to the next.
Beyond helping businesses get their taxes right, making tax digital will also help them 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 – one 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 to the Exchequer in additional revenue by 2020, then £600 million a year thereafter.
This is good news for businesses – and good news for the Exchequer too.
But with big changes come challenges and concerns. So I would like to take this opportunity to address some of these concerns; because I do not underestimate the scale of these changes, and it is important that we get this change right.
First of all, this transformation does not – repeat, not – mean four tax returns a year.
What it means is that by 2020, most businesses will be keeping track of their tax affairs digitally, updating HMRC at least quarterly via their digital tax account.
Importantly, these quarterly updates will not involve the complexity of a full tax return, where the business, or their agent, has to gather together and manually input data onto 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.
Second, I make no apologies for the scale of our digital ambition.
With the government and local authorities investing £1.7 billion to bring superfast broadband to over 95% of the UK by 2017, this is possible.
And 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.
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.
And whilst there has been plenty of debate on the challenges – a lot of that online – 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 their VAT.
We’ve also seen the rise of companies providing digital accounting services, using exactly the sort of technology and processes that will be needed when we make tax fully digital.
Just last week, I met FreeAgent, one such company, whose software is already being used by 45,000 customers. And we are working with other innovative firms, such as Intuit and Xero. That is where the market is heading.
HMRC, too, stands ready to deliver the digital agenda.
The HMRC performance figures for this year bear repeating.
This year saw a reduction of almost a quarter in the number of people submitting a paper tax return – that’s over 340,000 fewer people doing things the old way.
Meanwhile, the percentage of people using online filing has increased once more – from 85% to 89%.
More than 825,000 customers accessed their Personal Tax Account as they completed their tax returns.
Over a quarter of a million customers used HMRC’s virtual assistant in the last 3 weeks of January.
Over that period, HMRC staff assisted in more than 114,000 webchats.
And because of these digital advances, the number of phone calls to HMRC in January from people seeking assistance to complete a Self-Assessment return has fallen by over 50% in the last two years.
As our society increasingly looks for new, more convenient, ways of doing things, HMRC is well placed to meet – and to manage – these demands.
Third, I acknowledge the concerns raised about the pace of these reforms. There were similar concerns around 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 this success.
Fourth, I have heard concerns about these reforms being mandatory, rather than on a voluntary basis.
We examined this proposal very carefully at the start of the process.
We concluded that 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 couldn’t have provided the £1.3 billion investment required to transform services for all taxpayers.
Fifth, there have also been concerns raised about the fact that we risk leaving some customers behind.
So let me be clear. It is vital that support is there for those who need it, and that is what we have committed to do.
For instance, we have already said we will ensure that free software products will be available to businesses with the most straightforward tax affairs.
We accept that 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 absolutely no question of forcing those who cannot go digital to do so.
We will consult business and representative bodies to fully understand who cannot get online and what support they need; and we will ensure we provide alternatives – over the phone, through face-to-face visits or through partners in the voluntary and community sector.
Implementation will, of course, be vital. It is important we get this right – so that, as well as transforming the way millions of people pay tax, these reforms can provide the maximum benefit for business and the UK.
We are already talking to a wide range of business, agents, software developers and professional bodies.
There will be a wide-ranging consultation exercise starting in the spring, in which I would urge you all to get involved.
We are introducing these reforms gradually – not phasing them in fully until 2020, because we know how important it will be to give taxpayers time to adapt.
We are using volunteers to stress-test new services, so we can be confident these new services work before we roll them out.
Because the benefits – if we get this right – are considerable. We will reduce burdens on business, reduce the tax gap, and bringing tax administration well and truly into the digital age.
These reforms are an important part of our wider tax policy:
Taxes which are internationally competitive, so that our country continues to attract the brightest and the best;
Taxes which are paid in full and on time, helping provide the public services we all depend on;
And taxes which are simple to pay and manage. Because the less time businesses spend working out what to pay, the more time they have to do what it is they do so well:
Innovate … expand … create jobs … create growth … create profits … and contribute to Britain’s economic recovery.
That’s the system that, with your help, we are creating.
Thank you – and I’ll be delighted to take some questions.