Host

Philippa Lamb

Reporter

Mark Rowland

Guests

• Stephen Relf, Technical Manager, Tax, ICAEW
• Catherine Hardinge, Partner, Technical, Price Bailey LLP
• James Murray, Exchequer Secretary to the Treasury and Chair of HMRC Board
• Lord O’Donnell, former Permanent Secretary to the Treasury
• Heather Self, Consultant, Blick Rothenberg
• Paul Aplin, Vice-President, Chartered Institute of Taxation
• David Gauke, former Treasury minister
• Amanda Tickel, Head of Tax and Trade Policy, Deloitte

Transcript

Philippa Lamb: Hello and welcome to Accountancy Insights. I’m Philippa Lamb with your regular monthly round-up of news for the accountancy profession. This time, I’ll be discussing the key tax changes taking effect in April with Technical Manager Stephen Relf, and Price Bailey partner Catherine Harding will be joining us to investigate the Financial Reporting Council’s fresh interest in SME audit. But first, here’s reporter Mark Rowland with a report from the ‘20 years of HMRC’ event, which took place at Chartered Accountants’ Hall on March 11.

Mark Rowland: A tax and customs system of the future – that was the vision James Murray MP laid out in his speech to ICAEW and Chartered Institute of Taxation members at the 20th anniversary of HMRC event at Chartered Accountants’ Hall. I’m here to get a feel for HMRC’s impact across its first 20 years and, crucially, where it could go in the future.

James Murray: I’m James Murray. I’m the Exchequer Secretary to the Treasury and the chair of HMRC board.

MR: So you announced quite a few measures in your speech today with the clear theme of modernisation. What would you say are the kind of key takeaways that they need to know about?

JM: I want to make sure that everyone who listened to that speech or reads it later online understands how serious we are about going further and faster to modernise HMRC. We want to improve value for money. We want to make sure that customer service is as good as possible, and we want to make sure that we close the tax gap. But most of all, we want to make sure that the tax system supports businesses to grow. Because we know that we want businesses to spend less time on tax administration and more time growing their business. And part of that is getting the modern, digitalised tax and customs system that we need.

MR: The pace of technological change, it’s phenomenal at the moment. So how are you going to make sure that HMRC is sort of future proof, that it’s going to be fit for purpose no matter what change occurs?

JM: I think part of the change that I’m seeking to make is actually changing the way we do change. And what I mean by that is, rather than change taking a long time and things having to be thought of for many, many years in advance before you see any steps forward, I want to make sure that HMRC has a test-and-learn approach to new ideas. So, for instance, I took teams of HMRC officials to meet some of the best British businesses – Octopus Energy, NatWest, Barclays and so on – and we spoke to them about some of the ways that they approach innovation and customer service. Since we’ve met them, HMRC has started testing some of those ideas that we learned in sandboxes within HMRC to see how they work. And that’s the kind of iterative, agile, innovative approach that I want, rather than having change that just takes too long, because we need to move fast to keep up with where the world is and where the public expects us to be.

MR: You also talked about the government’s growth agenda. What’s the role of taxation in that? And what sort of levers are you looking at?

JM: We want HMRC to play a key role in enabling the government’s plan for change and helping to kick start economic growth, put more money in people’s pockets. And what businesses tell me all the time is that they want a tax system which is stable, a tax administration system which is simple, and actually for tax administration to be less burdensome. And that’s really what we’re trying to achieve here, to make sure that we stop unnecessary regulations taking hold, that we remove restrictions and barriers to growth, and that we make the system more efficient, modern, digitalised, so that actually people spend less time on their tax affairs and more time growing their business.

MR: I mean, I think you’ve touched a lot on this already, but final question, think sort of 20 years in the future, we’re doing this again, like it’s 40 years of HMRC. What do you hope the service looks like then?

JM: I think the speed of technological change means imagining where we are 20 years from now is almost impossible to visualise. I think where do we want to be in five years? Where do we want to be by the end of this parliament? And our ambition is to make HMRC a digital-first organisation. And we know that people are hungry for that change to happen quickly, which is partly why I said we need to change how we do change. We need to change more quickly, in a more agile way. I want to make sure that this parliament sees us take those big steps towards being a digital-first organisation, one where more things can be done more quickly online, one that saves taxpayers money by having a more efficient service, and one, crucially, that supports businesses to grow, because that’s how we can grow the economy and put more money in people’s pockets.

MR: I also caught up with Lord Gus O’Donnell, former Permanent Secretary to the Treasury. He was instrumental in setting up HMRC.

Lord O’Donnell: Well, you have to remember, this was a very radical time. Gordon Brown, as Chancellor, had created an independent central bank. Tony Blair was reforming public services. So there was a desire for radical change, and people had been talking about Revenue and Customs and the overlaps and the inefficiencies as a result of having two institutions for over a century, right? This goes back, first review 1862 I think, so basically, there was a strong desire to see if things could be improved. And a big desire from Gordon Brown and Dawn Primarolo in the treasury, the ministers, to see if we could do things which improved efficiency because money was tight, surprise, surprise, that hasn’t changed, and to give businesses and individuals a better experience with HMRC, and hopefully to reduce the tax gap, ie, that gap between what we should be collecting and what we actually collected.

MR: That merger, you said, it’s been 100 years. Why did it work this time?

LO’D: Well, I think there was big political backing, and that political backing was cross-party. The two institutions had tried what they call closer working for many, many years, and nothing much had changed. I think they all felt that, actually, companies, we have to do all of this for VAT with customs and then go to Inland Revenue and tell them all the same thing for corporation tax and it just didn’t make any sense. Debt collection, two separate agencies going in there for the same kind of problems, because most people didn’t pay tax on both if they were in real trouble. So, yeah, there were obvious efficiencies. It’s just one of those things where changing the status quo is always difficult.

MR: And it’s still obviously, they were both big, long-running institutions. So what were the, kind of, the challenges in making it work? How did you make sure that the merger went smoothly?

LO’D: There were two aspects to it, really. One was the merger, which people focus on, and that was about understanding how to deliver better, how to make a large organisation more efficient. And we had people like Peter Gershon and the first head of HMRC, David Varney, bringing in a lot of private-sector experience to help us do that. The other side of it, much less talked about, was the revolution in the Treasury, which meant 150 people going into the Treasury to improve its ability to give advice to ministers on tax policy. And that was really important as well, and that was actually more important to Gordon Brown than the whole delivery aspect.

MR: What do you think HMRC has done well since its inception? What do you think it could do better?

LO’D: There’s certainly been efficiencies, you know, big gains in terms of more productivity measured by any of the measures, the tax gap’s gone down. And I think businesses have, in general, been quite welcoming of the change. No one that I’ve heard of has ever suggested we undo it. So that is a good sign of a merger that works, and there is a lot to be done. I mean, when we did it, we looked at the two organisations and looked particularly at the tax side of things. There are other peripheral parts within HMRC that one might think about moving; there are aspects of HMRC which aren’t perfect. When I looked at some work I’ve been doing with the Blavatnik School at Oxford in measuring the quality of civil services around the world, on tax administration, we’re middle of the pack for high-income countries. So yeah, still, still more to be done.

MR: Imagine we’re talking another 20 years from now. What do you hope HMRC looks like then?

LO’D: They will have embraced artificial intelligence, which is a game changer on so many of these areas. We’ll probably be talking to an AI avatar, rather than a person. But a lot of what that will free up, and I do believe that AI is a complementary technology, it will allow individuals have much better, more interesting jobs. It’ll free up people to do much more interesting work, and it will make sure that whatever tax system we’ve got, companies and individuals understand it much better and know what they should be doing and what they shouldn’t be doing, and so whatever decisions ministers make about the use of the system – for generating revenue, for incentives, dissuading people from doing bad things – that those will work much better and more efficiently.

JM (excerpt from speech): We remain dedicated to raising the revenue public finances need, while minimising the administrative burdens the tax and custom system puts on you for a modern, digitised service, which is fit for the years ahead. I’d like to thank you all for being part of what we’re seeking to achieve.

MR: So there was a very positive response from the audience to the minister’s announcements. But what do delegates think the future of HMRC should look like?

Heather Self: I’m Heather Self. I’m a consultant with Blick Rothenberg, and I’m speaking on one of the panels today about HMRC over the last 20 years. I think if we look back 20 years, none of us could have imagined what Google and AI would be like now, I think it’s almost impossible to look 20 years into the future, but my expectation is a lot more being done automatically, but still a need for real expertise.

Paul Aplin: I’m Paul Aplin. I’m Vice-President of the Chartered Institute of Taxation. I want HMRC to be the most advanced tax authority in the world digitally, and I want us still to have a culture of voluntary compliance, and I think digitalisation gives us a huge opportunity to do both of those things.

David Gauke: I’m David Gauke, former Treasury minister. The big issue here is likely to be about technology, and how does HMRC use that technology to provide a better service. Back when I was a minister, I was always keen to advocate a sense of a kind of personal government account, so that we’re not just looking at, ultimately, the tax system, but provision of public services and so on, so that people have got access to their own data and so on. And there are others who also advocate something similar to that these days. So I suspect that will be the direction, about providing a very good, seamless service that isn’t just about tax, but combining with other parts of government to make it easier for the individual citizen.

Amanda Tickel: Hello, I’m Amanda Tickel. I’m Head of Tax and Trade Policy at Deloitte. Twenty years! I can’t even imagine it, but I think there’s going to be such a big change. I think HMRC is going to be using AI. I think it will be highly digitalised. I really think this ambition, that tax just happens, will really be happening here, loads of pre-population. I think that there will be a big enabler, actually, of growth in the tax system by sort of making all the tax levers work, not just collecting tax, but encouraging innovation and investment in the country. And that’s what I think it will evolve to.

JM (excerpt from speech): And I should, of course, end by wishing HMRC a very happy 20th birthday. Thank you. (applause)

PL: Thanks to Mark and all his guests, too. Now I’m joined remotely by ICAEW’s Technical Manager Stephen Relf to talk through those tax changes coming into effect this April. Hi Stephen.

Stephen Relf: Hi Philippa.

PL: So the one we’ve all been talking about since the budget last year is the increase in employers National Insurance contributions. Can you just remind us exactly what’s happening there?

SR: So employers pay national insurance, NI, on wages in excess of the secondary threshold. Now currently, that threshold is set at £9,100 per year per employee, and the rate at which employers pay NI is set at 13.8%. As announced back in the Budget in autumn, the threshold will be lowered to £5,000, and the rate will be increased to 15%. Now that is likely to have a significant effect on the employer’s NI liabilities, depending on their circumstances.

PL: Yeah, we can put some numbers on that in a bit, but it’s fair to say, it has been contentious, hasn’t it? Since it was announced, as you say, in the Budget last year, a lot of dire warnings about possible fallout. What do you see as the most likely consequences?

SR: Yeah, as you say, there has been an awful lot of speculation in the press since that announcement, an awful lot of people discussing how employers may deal with it. Now that could mean price rises, it could mean recruitment freezes or perhaps lower pay awards. And aside from the impact on the economy, there may be other consequences, too. So, for example, it could increase the incentive for workers to be treated as not employed.

PL: Now, moving on, the maximum amount of the national insurance contribution employment allowance, that is going up, isn’t it?

SR: It is. So the employment allowance is a credit which can be claimed against the employer’s NI bill. Currently, it’s worth £5,000 per year, and it will increase to £10,500 in April. Now also, importantly, a restriction that prevented larger employees from accessing the allowance is being removed. So currently, to claim the allowance, the employer must have a prior tax year NI liability of £100,000 or less. That restriction is removed from April.

PL: So what’s the thinking there?

SR: So this is intended to soften the blow of the NI rate increase, particularly for smaller employers, where it may well cancel out the effects of the rate increase.

PL: But we have restrictions remaining, don’t we?

SR: Yeah, we do. Working out if you’re eligible to claim the employment allowance isn’t always straightforward, and that’s because there are a number of restrictions to grapple with, and many of those will continue to apply. So, for example, one restriction, where you have a company with only one person paid above the secondary threshold, and that person is a director, then that company cannot claim the allowance.

PL: So this is significant, isn’t it? In reality, then, how many businesses are you estimating are going to be affected by this?

SR: Well, if we take all of the NI measures together, so that’s the rate increase, the employment allowance, then the government estimates that 250,000 employers will actually be better off, but 940,000 employers will be worse off.

PL: Finally, there are changes to double cab pick-ups. Before we get into this, what exactly are they?

SR: This is a vehicle which at the front has two rows of enclosed seating and four doors, and at the back it has an uncovered load area. Now that’s me speaking as a tax person about the tax definition, rather than as a car person, so I probably haven’t done the vehicle justice, but hopefully you can picture it from that.

PL: So they have different tax treatments, don’t they? What is changing?

SR: HMRC is going to change its approach to these vehicles for direct tax purposes. So that’s employment and business income taxes, importantly, not VAT. Now, currently, HMRC treats double cab pick-ups with a payload of one tonne or more as goods vehicles or vans, and from April, subject to transitional arrangements, HMRC will instead consider a vehicle’s primary suitability at the time it was made. Now this is likely to mean that most double cab pick-ups will be treated as cars, not vans, going forward.

PL: Okay, because owners have been known to physically convert their vehicles, haven’t they, to sit on the side of the line that work best for them?

SR: Yeah, as you would expect in tax, where you have the possibility of getting into a significant tax incentive, people will try to do that.

PL: So what are the tax implications then?

SR: Well, as we’ve implied, in general, vans are treated much more favourably for tax purposes compared to cars. So this is likely to increase tax liabilities, and the impact may be significant in some cases, particularly when it comes to benefits in kind for employees. But, as I mentioned, there are transitional rules, which will help with arrangements that are currently in place.

PL: And no changes on the VAT treatment.

SR: No, that’s very important to note. VAT treatment stays the same.

PL: I mean,I have to say this one does sound a little bit thorny. You’ve produced an explainer, haven’t you on the website?

SR: Yeah, we do. We have an article which looks at the rules in detail, the changes in detail. It also includes a quite useful example as well to kind of put it into context. And you can get that from ICAEW’s website.

PL: Thanks, Stephen. We will link to that in the show notes. Thanks very much.

SR: Thank you.

PL: On to the Financial Reporting Council’s interest in SME audit now. Catherine Hardinge of Price Bailey is here in the studio. Hi Catherine.

Catherine Hardinge: Hi Philippa.

PL: So the FRC has launched a new market study.

CH: Yes, it’s examining whether the audit market best serves SMEs and opportunities to report their regulatory burden.

PL: Okay? And what’s behind this?

CH: Well, the FRC is concerned about the availability and cost of audit services for these types of businesses and how auditing standards are being applied to SMEs. The FRC acknowledges that its main focus in the past has been on larger businesses, but flagged actually the scale of UK SMEs when announcing the study – they make up 52% of total businesses’ turnover and employ over 16.6 million workers.

PL: Now you’re an audit professional. What’s your take on this? What is not working for SMEs and their auditors right now?

CH: Audit is extremely valuable for SME businesses. At the moment, usually companies can find auditors, and it has eased slightly recently, but this is going to be more challenging as more firms decide, especially at the smaller end, that they no longer want to carry out audits. Costs have increased significantly due to the increase in regulation as well as increasing staff costs.

PL: Okay.

CH: The problem with audit regulation is that the standards are being written with complex, large public entities in mind, which makes it so difficult to apply those same standards effectively to small and medium-sized businesses.

PL: Right.

CH: So although the audit thresholds have increased and are about to increase further, there are a number of small entities which still require an audit.

PL: So what would you like to see?

CH: Personally, I don’t think continuing to raise the audit threshold is the right answer, because there is a huge amount of benefit to those entities to have that external scrutiny. But we do need to look at the auditing standards. They are often too complex, and there are too many requirements for these to be able to be applied effectively to these types of businesses.

PL: So essentially, I think, auditors are getting frustrated, aren’t they? Spending time ticking boxes that don’t really add any value to the process?

CH: Yes. So the auditing standards are very difficult to be scalable because the same requirements apply to all the different types of audits. There’s been a lot of changes to auditing standards recently. In particular, if you look at ISA 315, which was looking at risk assessment, it went from just seven pages of the main standard and then 50 pages, including the application guidance, to 13 pages, so almost doubling the main standard, and 181 pages, including the guidance.

PL: Right. I see what you’re saying.

CH: That’s just one example. There’s been a lot of changes to auditing standards. I mean, the problem is, what they’re trying to do is change the auditing standards where there’s been a disorderly, large-scale corporate failure of some of the larger standards, where there’s been an audit problem, and then they apply that to all the auditing standards, which then apply to all entities.

PL: And internationally? What’s happening there?

CH: The IAASB were aware of the issue, and they actually issued a new standard called Less Complex Entities, and that can be applied to certain small and medium-sized, less complex audits.

PL: Okay, so that sounds positive?

CH: It is. Unfortunately, the FRC have decided that it’s not suitable for the UK. Personally, I think they do need to actually consult on this publicly, and I know the Institute also have been talking to them about that.

PL: Now you are part of the FRC working groups looking at these issues. What are you hoping will ultimately come out of all this work?

CH: So the working group that I’m part of at the moment is focusing on the practice notes, so we’re looking at application of these standards to less complex and small and medium-sized entities. Looking at some of the more complex standards and looking at what guidance can be provided, and see how they can be applied more proportionately to these type of entities.

PL: So if listeners are thinking they actually want to get involved in this, because obviously it’s going to be significant going forward, how do they do that?

CH: Anybody that is interested can submit comments and evidence before the 25 April deadline. And I’d encourage people to really get involved in this. It’s really important the FRC get lots of feedback.

PL: It’s worth adding the market study. It’s part of a wider campaign, isn’t it?

CH: Yes, so the FRC have launched a year-long campaign back in January to help SMEs improve their access to capital and growth.

PL: What else does it cover?

CH: There’s a consultation on the proportional audit of SMEs that will launch in spring this year, with hopefully the publication of the practice note expected to be before the year is up. And throughout the year, the FRC has promised to publish material to help SME owners better understand auditing requirements as well as engage in audit tendering.

PL: So it sounds like there’s going to be plenty of opportunities for listeners to at least share their views.

CH: Yes, the FRC have promised extensive and open engagement with interested parties throughout.

PL: Okay, so that sounds encouraging. Thanks very much, Catherine. We’ll link to everything you mentioned in the show notes. That is it for today. We’ll be back in early March. Meantime, listen out for the next episode of Behind the Numbers. If you haven’t heard it yet, every month, we take a deep dive into one big issue of interest, not just to accountants, but the wider business and economics community as well. You can find it right where you find this podcast under the Accountancy Insights label on any app, where you can also subscribe to both series so that you never miss an episode. Thanks for being with us