House of Commons Committee unconvinced by Making Tax Digital
A Parliamentary Select Committee has passed judgement on HMRC’s planned digital tax and record-keeping reforms
HMRC’s Making Tax Digital (MTD) directive, which will mark a fundamental change in the way businesses and their accountants interact with HMRC, has been whipping up a storm since its specifics were revealed, and that storm shows no sign of abating following the release of last week’s report from the House of Commons Treasury Committee.
Bar a small number of exceptions, all businesses will be required to hold their accounting records digitally and submit quarterly updates to HMRC, followed by an end-of-year reconciliation to ensure that the entire year’s activities are recorded for tax.
Initial proposals state that businesses start this form of record-keeping and reporting for income tax and National Insurance from 1 April 2018 or 1 April 2019 (depending on business size), and for VAT from 1 April 2019.
While the Committee generally favours Making Tax Digital in principle, it strongly opposes the project in its current guise.
The Committee determined that current MTD timeframes are overly ambitious and will likely have a negative effect on millions of small businesses throughout the UK.
Their recommendations include a delay of full MTD implementation to 2019/20, the alignment of digital reporting and VAT thresholds at £83,000, a comprehensive range of pilots to test the system end-to-end and a fully functioning market in appropriate software.
Other key issues raised include:
- The cost to businesses of introducing MTD, as well as the continuing costs of maintaining digital records and submitting quarterly updates
- Lack of information regarding the free software that will be available, and the costs businesses will face in terms of time and accountants’ fees
- Further investigation of the cost to the exchequer in terms of tax gap reduction as a result of fewer taxpayer errors and the overall impact of Making Tax Digital
The Rt Hon. Andrew Tyrie MP, Chairman of the Treasury Committee, had this to say on the digitisation of tax records:
“Carefully introduced, [Making Tax Digital] can be an opportunity greatly to improve the administration of the tax system for the long term […] for the benefit both of the economy and of the tax yield. But with a rushed introduction, it will benefit neither.”
The Committee identified the following two major shortcomings with current plans:
- 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.”
- Engagement (the speed with which MTD is being implemented). “There has been insufficient engagement and consultation with the business community. There may be other concerns which neither the Committee, nor those providing evidence to it, have yet identified.”
“Taken together,” Tyrie continued, “these [shortcomings] 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.
So the Government should change its current approach. The long term future can, and probably should, be digital. Better to take care on the road to it than to have a road accident.”
Set in stone?
This reaction shadows the results of our recent Making Tax Digital survey distributed to accountants and agents, almost 1,000 of which responded. You can see the full report here.
Whether or not HMRC will make alterations as significant as the Committee and the accounting industry hope remains to be seen; we’ll know much more when their response to the Making Tax Digital consultation papers feedback is finally published towards the end of January.
You can access those results, and all the latest news, opinion and insight, via our Making Tax Digital Hub, your primary online resource for the digital transition.