A number of serious shortcomings in HMRC’s Making Tax Digital (MTD) initiative have been identified in a report by the Commons Treasury Select Committee.
MTD will mark a fundamental change in the way businesses interact with HMRC. The Government is proposing that, subject to a relatively small number of exceptions, all businesses will be required to keep their accounting records in a prescribed digital format and submit quarterly updates to HMRC. These updates will be followed by an end of year reconciliation to ensure that the entire year’s activities are properly recorded for tax.
It’s proposed that businesses will start this form of record keeping and reporting for income tax and National Insurance from 1 April 2018 or 1 April 2019, depending on their size, and for VAT from 1 April 2019. At least two and a half million businesses are likely to be affected, and possibly as many as five million.
The Government consulted on its proposals over the summer and early autumn of 2016 and it is proposing to respond to that consultation, and publish draft Finance Bill clauses to legislate for the necessary changes, in January 2017.
Commenting on the publication, Andrew Tyrie MP, Chairman of the Treasury Committee, said: “Carefully introduced, the digitisation of tax records and reporting can be an opportunity greatly to improve the administration of the tax system for the long term. Without sufficient care, MTD could be a disaster. Implemented carefully, with long transitional arrangements where necessary, and, having drawn on information from fully inclusive pilots, Making Tax Digital could be designed for the benefit both of the economy and of the tax yield. But with a rushed introduction, it will benefit neither.”
The Committee’s identified shortcomings are as follows:
Costs and administrative burdens: “First, there are the costs and administrative burdens for very small businesses – with the consequent risk that many may go out of business or move into the hidden economy,” said Tyrie. “This may undermine the extra revenue that the Government is expecting to raise from MTD, scored in the August consultation document at £625m, possibly larger now. Perhaps this is a realistic estimate; perhaps not. As the accountancy bodies have argued in evidence, and as the Committee concluded, it is plausible to suppose that, in so far as MTD results in fewer customer errors, those errors will have been as much in the exchequer’s favour (such as forgetting to record deductible expenses) as they have been in favour of the individual taxpayers.”
Engagement: “Second, there is the speed with which MTD is being implemented. So far, there has been insufficient engagement and consultation with the business community. At present, many of those on whom demands from MTD will be made – millions of small businesses up and down the country: the backbone of the economy – are ill equipped to handle the reporting requirements. There may be other concerns which neither the Committee, nor those providing evidence to it, have yet identified.”
Tyrie continued: “Taken together, these could undermine the Government’s objectives – for the yield and for the economy – and discredit the approach. The collateral damage could be large. If the Government gets it wrong, the culture of mutual trust and goodwill between HMRC and the vast majority of taxpayers – which still exists in the UK and which helps to keep the tax gap down – could be jeopardised.
“This is not a minor matter. These reforms will affect millions of taxpayers. Their co-operation and trust are both hard won and easily dissipated. Without them, more of the yield could be at risk than any putative extra revenue from MTD.
“So, the Government should change its current approach.”
Following on from its review, the Committee suggested that the Government should take the following new approach:
First, the Government needs to abandon its plans for an initial threshold of £10,000. The Committee has yet to see evidence strong enough to justify a threshold below the VAT threshold, £83,000. It may exist, but the Government needs to assemble and publish it.
Second, the Government’s proposed timetable for implementation in April 2018 looks unachievable. The Government should accept that there needs to be a delay of the start until at least 2019/20, possibly later.
Third, comprehensive pilots of the proposed system are essential, with full protection from anything that may go wrong for those required to participate. While HMRC has already undertaken a number of pilots, the businesses participating do so by invitation of HMRC. Clearly, those who might be worst affected by MTD are the most likely to decline the offer, greatly reducing the value of the information collected.
Fourth, the pilots need to be designed to gather information over the entire reporting cycle – four quarterly updates and an end of year reconciliation. These need to be evaluated before full implementation and Parliament needs to see the evidence that this has been done.
Fifth, a fully functioning market in appropriate software is essential. This will need to include adequate free software for smaller and less complex businesses. The Government has yet to set out how this may be accomplished.
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