HMRC computer says no to dividend changes

What a dastardly week for dividends and HMRC. Not only has the current chancellor’s cut to the dividend allowance been shelved, but the Revenue’s systems to input the previous chancellor’s creation of that allowance has come back with ‘computer says no,’ writes Helen Christopher, operations director at Orange Genie.

Unlike the seemingly far-off question of the cut to the allowance (will it or won’t it be reintroduced in a post-election Finance Bill?), the computer issue is here today. So it could be set to affect you, if you’re a contractor who works through a Personal Service Company and submits an online tax return.

Not that HMRC is putting it in quite those terms. It has been claiming that the problem “only affects a very small percentage of taxpayers.” That doesn’t bode well for a quick fix to the problem. In fact, their latest comments on the ‘issue’ indicate they are planning a fix for 2017/18, but not before. So what precisely, is the problem?

'Cannot compute'

Well, HMRC’s software that’s bolted on to its online tax returns system simply cannot compute how the dividend tax allowance interacts with other tax allowances. That means this problem affects not just PSCs. It affects absolutely anyone with dividend income who wishes to self-assess online. Hence one industry estimate that upwards of 525,000 taxpayers (including PSCs) are impacted.

With nine months to go before the deadline to submit your online tax return if you’re a PSC, it’s all rather worrying -- and unbelievable. In this technological age of 2017, HMRC has been unable to update their own systems for rules they themselves introduced back in 2016. And note, all the commercial software houses we know have managed to update their systems to deal with the change. These providers have made sure, unlike HMRC, that their software can compute with how the £5,000 dividend allowance interacts with the Revenue’s existing raft of allowances.

It’s all even more bewildering when you consider that in December 2015, HMRC launched their vision for a brave new world, Making Tax Digital (MTD). Hailed at the time as part of nothing less than a “digital revolution,” the HMRC project promised the end of “bureaucratic form filling” and a system “more effective, more efficient and easier for taxpayers”.

'The Revolution Will Not Be Legislated'

How ironic then, that in April 2017, it is now the case that any taxpayer reporting dividend income via self-assessment for 2016/17 will have to file a paper return. Oh, and MTD, that ‘revolution,’ has been quietly dropped. The revolution didn’t make it this week into the government’s legislative programme.

We’re seriously starting to ask -- is HMRC’s failing due to a lack of resource? Has their software meltdown been indirectly caused by their recently announced changes to IR35 in the public sector? Perhaps the contractors they needed are unwilling to work inside IR35 and this has left them bereft of skills needed to get their own house in order? We know that the IT team behind HMRC’s new digital widget to test IR35 status walked out and quit because of fears about their very own status. You really couldn’t make it up.

Practically for self-assessing PSC, the way forward is analogue. We think HMRC should be telling the “very small percentage of taxpayers” -- thousands of contractors and freelancers, itself, that for the next few months, it’s long-winded paper based activity to self-assess. For everyone involved, accountants and taxpayers, this is going to mean extra time and costs which HMRC will certainly not be picking up. It’s a gigantic, expensive, leap backwards into the dark ages of paper filing.

'Logic'

One positive is that HMRC has extended the deadline for paper returns to January 2018. But keen to rub salt into the wound, the department is requesting a “reasonable excuse claim” with each return that is sent in on paper. So that’s further administrative burden, cost and time spent preparing a claim to ask HMRC to accept a late filed tax return, for a reason that was caused by HMRC themselves. Sorry, but this really does defy all logic.

And what of the returns when they are filed? Will HMRC have additional resource to process all those returns and reasonable excuse claims? If the system can’t check the numbers, will staff be trained to check the calculations? How many keying errors will there be, with manual input? If you are due a refund, don’t plan on spending it anytime soon -- the processing time will likely be long. If this is the best HMRC can do, we fear for the future of the MTD project and any other ‘big bang’ implementation at the Revenue. Future chancellors would be wise to be wary too, particularly when it comes to dividends.