A critical report that calls for a far more cautious approach by the Government to the roll-out of Making Tax Digital and a delay to the scheme from the planned 2018 to 2020, has been welcomed by the Association of Taxation Technicians (ATT), the Chartered Institute of Taxation (CIOT) and the Low Incomes Tax Reform Group (LITRG).
The report, ‘The Draft Finance Bill 2017: Making Tax Digital for Business’ has been published today by the House of Lords Select Committee on Economic Affairs, Finance Bill Sub-Committee. In it, the Lords conclude that the roll-out of the scheme is being rushed, imposing unnecessary burdens on small businesses and landlords, and will yield little benefit to the Government. The call for a delay to the scheme until 2020 to allow for a full pilot chimes with the tax bodies’ calls for the Government to move at a more judicious pace on the compulsory requirements of Making Tax Digital (MTD).
Yvette Nunn, Co-chair of ATT’s Technical Steering Group, said:
“The report should give the Government the impetus to tap on the brakes on this juggernaut, to allow more time for full end-to-end testing, piloting and evaluation to avoid unnecessary logistical and financial risks for both HMRC and businesses.
“We support concerns in the report that the Government's estimate of the 'tax gap' savings are fragile and not based on ‘adequate evidence’. Similarly, we are highly sceptical of HMRC’s assertion that the scheme will initially cost businesses on average just £280, a figure that does not reflect the reality of the initial expenses businesses will incur.
“We welcome the committee highlighting that the difference between the rules for choosing to apply the cash basis to trading income and to property income, is a potential source of confusion and error for many businesses, especially those with income from both sources.” [Based on the draft legislation published on 31 January, businesses will have to opt out of the property cash basis (i.e. the cash basis will be the default basis of accounting), whereas businesses currently have to opt in to the trading cash basis (i.e. Generally Accepted Accounting Principles – GAAP – is the default basis).]
Adrian Rudd, Chairman of the Joint CIOT and ATT Digitalisation and Agent Strategy Group, said:
“We welcome the committee’s recognition of the unprecedented technological and logistical challenges which will be faced by the many small businesses and landlords which are not currently maintaining digital records or interacting with HMRC on a frequent basis.
“The timetable for MTD remains extremely challenging and a delay would enable the diverse nature of businesses affected to be addressed and a little more consideration of how their tax agents and accountants can support them. A full pilot would ensure the software is ready and works.”
Anthony Thomas, Chairman of LITRG, said:
“Like the committee, LITRG believes that a digital programme, implemented with care and sufficient regard for the needs of the taxpayer, can greatly improve the administration of tax.
“We welcome the Chancellor’s Budget announcement that businesses with a turnover below the VAT limit will have an extra year before being required to keep digital records and report to HMRC each quarter, but agree with the committee that this does not go far enough; the digital programme should be optional for businesses below the VAT threshold, for people will naturally gravitate towards systems that are good, intuitive and easily navigable, without the need for compulsion.
“We also concur with the committee’s recommendation that HMRC urgently assess and make public how it intends to support the digitally assisted population, and business owners with disabilities that require the use of assistive technology.”
The Finance Bill Sub-Committee’s Draft Finance Bill 2017: Making Tax Digital for Business can be read here.
The Sub-Committee recommends a series of modifications to ensure the policy is implemented successfully:
- The Government's estimate of the 'tax gap' savings are fragile and not based on adequate evidence. The assertion that the scheme will initially cost businesses £280 does not reflect the reality of the initial expenses businesses will incur.
- Delay the scheme until 2020 to allow a full pilot. This delay will allow the Government to test whether Making Tax Digital does reduce taxpayer errors, assess the actual costs to business, and receive valuable feedback from business users. It also gives the Government time to raise awareness and put in place support systems for those who lack digital skills.
- Make keeping digital records and quarterly reporting optional for businesses with a turnover below the VAT threshold. For smaller businesses the requirement to report quarterly to HMRC will impose an unnecessary burden, and will be of limited use.
- Look again at which businesses are included in the scheme. The Government should examine whether some kinds of businesses, such as those with seasonal or highly irregular income, should be outside the scheme.
The results of a survey of members of the Chartered Institute of Taxation (CIOT) and the Association of Taxation Technicians (ATT) in 2016 strengthened the two bodies’ concern that the timescale for implementing compulsory digital record keeping is unrealistic and must be delayed. The survey found that 89 per cent of members believed that the timeframe for implementing quarterly reporting should be extended to help businesses. Link here.
Making Tax Digital is a key part of the Government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs - meaning the end of the annual tax return for millions. At Spring Budget 2017 the Government announced that it would provide 3.1 million small businesses with an extra year (until 2019) before they are required to keep digital records and send HMRC quarterly updates. Read more here.