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HM Revenue & Customs (HMRC) should delay launching its Making Tax Digital for Business programme until 2020 because of “unjustifiable risks” in the current timetable, according to an influential House of Lords committee.
The recommendation follows similar criticisms in January 2017 by MPs on the House of Commons Treasury Committee, which said plans to mandate the use of digital tax records for businesses by April 2018 do not provide enough time for “such a fundamental change”.
In a report published today (17 March), the Lords’ Economic Affairs Committee called for further trials of the new scheme and questioned HMRC’s claims over how much the move to digital tax reporting will cost businesses.
“Many small businesses and landlords are simply unaware of or not ready to cope with the additional administrative and financial burdens that will be imposed by digital taxation,” said committee chairman Lord Hollick.
“A full pilot will ensure the software works and provide hard evidence of the additional financial and administrative burdens on businesses. It will also provide evidence in place of the widely disbelieved assessment of costs and benefits of the introduction of Making Tax Digital.”
HMRC is due to begin a pilot of the scheme next month, at the start of the new tax year. But the committee said the trial does not conform to government best practice guidelines and does not allow enough time to fully test software and processes.
The Lords also pointed out that HMRC has yet to finalise the technical details of its system requirements, which means accounting software providers do not have the specifications needed to ensure their products are fully compliant.
“The almost universal concern of witnesses is that the current timetable for mandating digital record keeping and quarterly reporting is too tight and entails unjustifiable risks for businesses, HMRC, tax practitioners and the software industry. It does not allow enough time for full end-to-end piloting and evaluation to avoid unnecessary risks for both HMRC and businesses,” said the committee report.
“We recommend that mandatory implementation of digital record keeping and quarterly reporting should be deferred until April 2020, after the extended pilot period.”
Cost to businesses
The Lords also raised further questions over HMRC’s claims for how much introducing digital tax reporting would cost businesses.
According to HMRC, the three-year transition from the current system to the Making Tax Digital (MTD) programme is expected to cost UK businesses £1bn – which works out as £280 per company, on average – before delivering savings of £100m per year from 2021.
In contrast, the Federation of Small Businesses (FSB) has said the true cost would be significantly higher – as much as £2,770 per business per year.
“The government’s estimates of both the initial and the ongoing costs of complying with MTD requirements do not fully reflect the costs likely to be borne by a very diverse range of businesses and the differences between them. This is particularly true of the smallest and least digitally engaged businesses, many of whom will have to purchase both new hardware and new software,” said the Lords’ report.
“Under HMRC’s own estimates of the costs and benefits accruing to businesses, it would take more than 10 years for businesses to recoup their aggregate initial outlay. We find it difficult to see the case, from a business viewpoint, for proceeding with the MTD proposals.”
Read more about HMRC Making Tax Digital
- HMRC sticks to 2018 deadline despite warnings from MPs, but three-year transition will cost firms £1bn before savings kick in.
- HMRC has gone live with online personal tax accounts and has published a detailed plan on how to make tax digital.
- HMRC has made tax data accessible online – but how should it cater for those unable (or unwilling) to use digital services?
The committee also called for the smallest businesses – those below the VAT threshold – to be exempted from proposals for mandatory digital record keeping and quarterly reporting.
The Treasury select committee has also questioned HMRC’s figures over the costs to business.
“If the FSB is right, the effects of Making Tax Digital would be crippling for many small businesses. If the government is right, businesses have something to gain in the longer term and one would expect them to be queuing up to join the pilot,” said committee chairman Andrew Tyrie last month, in a letter to Jane Ellison, financial secretary to the treasury.
In January, HMRC said it intended to go ahead with the planned launch in April 2018, but introduced measures to ease the move for businesses, including free software for small firms that might otherwise not be able to afford to buy new systems, and allowing companies 12 months to get used to the new process before enforcing penalties for late submission.
“We know that the majority of businesses want to get their tax right first time, but the latest tax gap figures show that too many find this hard, with more than £8bn a year lost in tax as a result of avoidable taxpayer error by small businesses. Making Tax Digital will help businesses to get their tax right first time,” said Jim Harra, director general for customer strategy and tax design at HMRC at the time.
“The appetite for digital services is growing, and traditional paper-based processes make no sense in the 21st century, where the vast majority use digital services.”
However, in the Spring Budget last week, chancellor Philip Hammond announced that firms that fall below the threshold for paying VAT will have an extra year, until 2019, to prepare for the new regime.
HMRC received £1.3bn as part of the government’s 2015 spending review towards Making Tax Digital. The roll-out of online personal tax accounts for individuals started in December 2015.