Five recommended changes to Making Tax Digital
Susan Cattell, highlights an important report from the Treasury Select Committee on Government plans for Making Tax Digital for businesses. Going digital is right for the long term, but a new approach to implementation is required.
Digitisation is the way forward – but not in the proposed timeframe
The committee, along with ICAS and many other respondents to the Making Tax Digital proposals, agreed that the long-term future “can, and probably should, be digital”. However, in order to realise the possible benefits, it must be introduced carefully and over time.
Andrew Tyrie MP, Chairman of the committee, said: "Carefully introduced, the digitisation of tax records and reporting (MTD) 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.”
Shortcomings in the current plans
The committee identified a number of serious shortcomings in the current plans. Their main concerns fell into two categories: costs and administrative burdens, and engagement.
Costs and administrative burdens
The committee recognised the importance of costs and administrative burdens for very small businesses and the consequent risk that many may go out of business or move into the hidden economy. This could undermine the revenue the Government expects to raise from MTD. Revenue estimates might in any case not be realistic because, as the accountancy bodies argued in evidence, and 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."
The committee was also concerned about software issues, highlighting cost, the need for guidance for businesses on software selection and the potential inadequacies of the proposed free software. It additionally concluded that spreadsheets are a valuable tool for record keeping and should be accepted for MTD, saying that: “However difficult it might be in software terms, HMRC needs to ensure that tools are available to convert information from spreadsheets into information that can be submitted as part of the quarterly digital update.”
The committee noted the speed with which MTD is being implemented and that, “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.”
Once the precise shape and timing of MTD is known, HMRC will need to engage on an intensive publicity campaign so that all taxpayers become aware of their new obligations.
Committee’s recommendations for a new approach
The committee made five important recommendations for a new approach, expressing concern that without changes to the plans “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.”
- Increase the initial threshold from the proposed £10,000. The committee saw no evidence to justify a threshold below the current VAT threshold of £83,000. A threshold set at £10,000 would catch many businesses whose profits are far less than the personal allowance and do not pay any tax – which would “palpably be absurd”. Aligning the threshold for MTD with the VAT threshold would be a simplifying approach.
- Change the timetable. A start date of April 2018 for mandatory MTD is “wholly unrealistic” in the view of the committee. The start should be delayed until at least 2019/20, possibly later, depending on the exact shape of the Government’s proposals which are yet to be published.
- Comprehensive pilots of the proposed system are essential. These pilots should reflect the role of agents in tax.
- The pilots should cover the entire reporting cycle i.e. four quarterly updates and an end of year reconciliation. They should be evaluated before full implementation and Parliament needs to see evidence of this evaluation.
- A fully functioning market in appropriate software is essential and needs to include adequate free software for smaller and less complex businesses. The Government needs to set out how this will be accomplished. Cyber-security risks also need to be addressed.
The role of agents
In a written submission to the committee ICAS highlighted the importance of agents and our concern about the approach adopted in some of the MTD publicity. We said, in a paragraph which is reproduced in section 19 of the committee’s report:
“We have concerns about the likely impact on agents and taxpayers and around the role and resourcing of HMRC. In particular, we believe some small businesses (and individuals) are likely to be pushed into non-compliance due to an inability to use the mandatory digital systems in this over-ambitious timeframe. We are also concerned about the negative messages about tax agents which are being suggested by publicity around Making Tax Digital and the current exclusion of agents from viewing their clients’ online accounts. We believe agents are vital to implementation and every effort should be made to work with agents.”
We therefore welcome the committee’s comments in its recommendations on pilots (section 54):
“It is also important that such pilots reflect the role of agents in tax. The majority of tax returns are currently submitted by accountants and tax advisers and the system being piloted has yet to include this. The Government needs to explain the pilot process that it envisages for agents.”
The committee had invited Government, in a series of letters, to explain its position – but the Government has not yet had the opportunity to give detailed oral evidence to the committee in support of its proposed MTD timetable. The committee will therefore take further evidence from the Government after it has published its proposals in the light of the MTD consultations undertaken.
On the evidence that the committee had seen, it commented that the Government “appears intent on keeping to its original schedule” but this leaves little over a year to complete the work which the committee felt was over ambitious, given that draft legislation to address crucial concerns of the committee and others has not yet been published.
The committee also observed that “a detailed explanation of how it has arrived at its conclusions on the potential revenue yield will form a crucial part of the Government’s response to the consultations. Even if the total economic return were shown to be modestly positive, the Government must convince Parliament that it is worth the candle.”
ICAS believes that many aspects of the digital future for businesses hold promise but the challenges of MTD implementation should not be underestimated. Success will be more likely if the Government gives this detailed report the careful consideration it deserves and takes account of the recommendations made.
ICAS has been actively contributing to all stages of the Making Tax Digital process, including submitting responses to all the MTD consultations.