Digital revolution hits tax: how do you measure the benefits?

16 August 2016

Andrew Hubbard

Much of the early 'Making Tax Digital' commentary has focussed on the removal of a whole raft of micro businesses from the scope of digital reporting and the deferment by one year of the introduction of mandatory digital reporting for a group (still undefined) of slightly larger businesses. These are important issues and we will be returning to them in future briefings as we track the progress of the digital programme, but today I want to concentrate on the cost-benefit analysis.

All governments want to reduce the administrative burdens on businesses. I have no doubt, based on many years working with HMRC on some major projects, that this is a genuine desire and not just spin.  But I also know that in practice it is extremely difficult to actually achieve savings. One of three things tends to happen. One is a simple displacement of cost from one tax to another – perhaps a VAT regulation measure creates an additional income tax problem.The second is where a genuine saving is made but is immediately cancelled out by another policy initiative elsewhere. The third is where savings are made in HMRC costs simply by transferring those costs onto taxpayers themselves, so there is no overall reduction in burden. None of these three achieves the objective of driving down the real costs of the system.

So how has HMRC approached measuring the costs and savings which will come of this initiative?

To start with, we should acknowledge that there is a serious attempt to get to grips with the figures and I welcome this. In the past, the approach to evaluating costs and savings has been extremely poor (RTI is a classic example) or non-existent. Here there is open discussion about the ways in which savings might be achieved, together with an acknowledgement that there will be associated costs, not least in investing in new software and hardware and in down time in learning about new systems. (There are suggestions in the consultation document that the government may help with the funding of this, though no details have been published.)  The consultation suggests that the annual cost reduction for business might be between £85m and £250m. These figures are derived from what is called the “standard cost model” which, in very simplistic terms, attempts to put a time value and/or cost on each and every process in the tax return cycle. I’ve never been very comfortable with this model because it can overestimate the effect of very small savings over a very large population. Let me explain what I mean with a simple example.

There are about two million VAT-registered businesses in the UK. On average they complete four VAT returns a year (some do more, some due less but let’s not get hung up in detail). Let’s assume that a change is made which reduces the time taken to complete a VAT return by 15 minutes. That is one hour per year. So that is two million hours a year less on VAT returns.  Let’s put a cost per hour on that time of say £20. That results, under the standard cost model, of a total reduction in administrative burden of £40m. That sounds impressive, but the reality is that almost nobody has saved anything. That additional 15 minutes per quarter simply disappears into the 101 things that a business has to deal with every day of the week.

The self-employed population is 3.3 million. Even at the upper estimate of £250m of savings that is £75 per self-employed person per year. There may be some cash costs in this figure but most of it is likely to be time costs. So perhaps sole traders may be able to have a few more minutes each week to spend with the family: though not, of course, until they have spent the time getting to grips with new software.

Make no mistake – I support the digital strategy and I do think that over time it will evolve into a more efficient means to manage business taxes.  The ability of a business to manage its tax affairs in real time and to integrate tax into its normal business processes will in time be a huge benefit. I’m not sure however that this will reflect in absolute costs savings, particularly when the transitional costs are taken into account. 

We need to have an intelligent debate about what the true benefits will be.  Absolute cost saving is part of this – and the figures will need regular scrutiny as the project develops – but this is about more than pound notes.

The other side of the equation is the impact on HMRC costs and tax receipts.  We will look at this next week.

If you would like any more information on this issue please get in touch with Andrew Hubbard or your usual RSM contact.