Last week, HMRC released two consultation documents that made it clear it’s serious about cracking down on tax evasion and improving compliance – and revealed its next two targets.
While one focuses on big businesses that fail to work with the HMRC in ‘an open and collaborative manner,’ the other will introduce measures affecting ‘noncompliant SMEs and sole traders that are not declaring their full income or are trading in the hidden economy.’ So let’s take a closer look.
The Hidden Economy
HMRC’s ‘hidden economy’ refers to ‘businesses who fail to register for tax, and individuals who fail to declare a source of income’ and accounts for around 17% of the total tax gap (around £5.9bn of missing tax).
HMRC’s ‘Tackling the Hidden Economy: Extension of Data Gathering’ document describes plans to capture transactional data from ‘business intermediaries and electronic payment providers’ and says these measures will directly affect these businesses – and may affect those who trade through them.
HMRC says: ‘The majority of businesses affected by this measure will be noncompliant SMEs and sole traders that are not declaring their full income or are trading in the hidden economy. These entities will face greater scrutiny as a result of these changes.’
Greater Data-Gathering Powers
The data gathered will be restricted to ‘information on the receiving party, rather than the payer,’ and may include ‘names and addresses of sellers/advertisers/app developers, goods and/or service providers, and any relevant tax identification numbers; and gross values of transactions and volumes of contact visits facilitated by the provider.’ Obviously this information can only be gathered if it’s held by these businesses in the first place.
So how will gathering this extra data help? HMRC says that data from third parties who facilitate trade, either business to business or between businesses and consumers, is useful because:
It can provide information in bulk about the activity of large numbers of traders
Third party data is ‘less likely to be subject to accidental misuse or deliberate manipulation.’
Third party data can be used as an independent check against data that HMRC receives from taxpayers themselves.
The burden on businesses will be minimised, as data can be obtained in bulk from a few sources.
It will help HMRC’s aim of presenting customers ‘with data to check rather than forms and tax returns to complete,’ helping to reduce errors and improve compliance.
It will help to identify sellers that have not registered with HMRC or who have not declared the full value of their sales.
HMRC definitions of its target groups are as follows:
Electronic payment providers – ‘businesses that perform a similar function to merchant acquirers by handling monetary transactions, but not necessarily in relation to credit and debit cards (increasingly these transactions are online and take different digital forms)’
Business intermediaries – ‘these businesses can take many forms, for example allowing customers to make orders, purchases or reservations, relating to goods, services or digital content. Again, these businesses increasingly operate on digital platforms.’ HMRC’s examples are advertising boards or platforms, app stores that provide a platform to advertise applications and reservation intermediaries that facilitate bookings or reservations for goods or services.
An Economy Revealed: More Revenue for the HMRC
HMRC estimates that these measures will have an increasingly powerful impact. Although they only expect to claw back around £15m in 2016-2017, by 2020-21 they expect this figure to have risen to £285m, and to have recouped a total of around £860m.
So good news for the HMRC – but is it good news for small businesses and sole traders? That depends. As the HMRC reminds us at the tail end of the document: ‘Those who are tax compliant should see little or no impact.’
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