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The House of Lords’ Economic Affairs Committee has called for HM Revenue & Customs (HMRC) to halt the deployment of its Making Tax Digital for VAT programme.
The programme, which mandates Making Tax Digital for VAT for all businesses with a taxable turnover of more than £85,000 and is due to be launched in April 2019, should be delayed for at least a year, the committee said.
A report by the committee found that small businesses, in particular, are unlikely to be ready by April 2019, and said HMRC must begin to listen.
“As much as 40% of affected businesses have not heard of Making Tax Digital, let alone have started to prepare for a substantial change to their accounting processes,” the report said.
“HMRC is alone in its confidence that all one million businesses will be ready for Making Tax Digital for VAT in April 2019. They have underestimated the time for research, planning, training and system changes that some businesses will need.”
Over the next few weeks, HMRC will expand its pilot on the programme, but the committee said there is “too little time before 1 April 2019 to make up lost ground and respond to implementation issues identified by taxpayers”.
The Making Tax Digital for VAT programme is part of the government’s wider digital tax project for businesses. Last year, the programme was strongly criticised by the Lords Economic Affairs Committee and the Commons Treasury Committee, which called for the government to delay the project.
In response to the criticism, HMRC announced in July 2017 that it would delay the wider Making Tax Digital for Business programme until 2020, but would introduce changes, mandating businesses with a turnover above the VAT threshold to keep digital records for VAT purposes.
However, many public sector organisations, including NHS trusts and local councils, will be given a six-month deferral because of their more complex VAT arrangements.
The Economic Affairs Committee said in its report that HMRC must treat small businesses fairly, and that rolling the programme out in April 2019 could lead to “unjustifiable risks” for businesses.
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The committee also highlighted concerns about the software required by businesses to comply with the programme and said it had yet to see evidence that any “free software products will be required”.
“We question the logic of requiring taxpayers to spend additional money to pay their tax,” the report said. “Since a free option has not emerged from the software industry, the government should consider again the case for providing a basic, free software option.
“The emerging software market appears difficult to navigate. It is unfair to expect businesses to make choices about their accounting software without a better understanding of the future Making Tax Digital regime.”
Committee chairman Lord Forsyth said HMRC had “neglected its responsibility to support small businesses” by implementing the programme.
“HMRC are not listening to small businesses, while offering a six-month deferral to many in the public sector,” he said. “Small businesses will not be ready for this significant change to their practices if it is introduced on 1 April, particularly with Brexit taking place three days earlier. The government must delay its introduction.
“The government has failed to listen to the warnings in our previous report. It must slow down its Making Tax Digital programme and listen carefully to the concerns raised by this committee, small businesses and accountants.”
Instead of mandating the programme from April, the committee recommends that HMRC begins by allowing businesses to join on a voluntary basis for at least a year, both to ensure they are ready and to allow the software market to develop and ensure that the department’s systems are “fully and appropriately tested”.
“It is not evident to us that there has been any attempt to calculate the impact of Making Tax Digital for VAT on the smallest businesses,” the report said. “HMRC has also assumed that the programme will result in no additional accountancy fees, either during or after transition. This conflicts with the weight of evidence we have received.
“Making Tax Digital for VAT will make life even more difficult for small businesses, given their scarce resources to devote to preparing for the change. If HMRC insists on mandating Making Tax Digital for VAT, it has a duty to support small businesses with its implementation. So far, HMRC appears to have neglected this duty.”