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MTD: Introduction is too costly and too fast

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20th Feb 2017
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Farmers and small shop owners will suffer due to the rushed Making Tax Digital (MTD) timetable, according to evidence presented to a House of Lords committee.

Witness evidence

On 20 February, the House of Lords Economic Affairs Finance Bill sub-committee heard evidence concerning the impact of MTD for businesses from: Michael Parker of the National Farmers Union (NFU), Edward Woodall from the Association of Convenience Stores (ACS) and Roger Southam of the Administrative Burdens Advisory Board (ABAB).  

The witnesses were in general agreement about the difficulties their members face in transitioning to digital accounting, and making the quarterly reports required for MTD. They also raised the following issues.

Complexity

Parker said most farmers are VAT registered, so they are already providing quarterly returns to HMRC. The NFU members see little point in making quarterly returns for income tax purposes as their income is generated over a 12 month or even longer cycle.

The quarterly MTD updates will provide no useful information, due to the accounting adjustments which need to be made to farming accounts at the year-end. The cash basis, which removes the need for certain end of year adjustments, can‘t be accessed by many farmers. The tax law bars anyone who claims averaging for farmers, or who uses the herd basis, from also using the cash basis.

Parker explained that a diversified farming businesses may consist of three or more separate businesses for income tax such as: Farming, property letting and renewable energy generation, which may have different year ends. For VAT purposes these businesses are all reported on one VAT return, but he fears that under MTD separate quarterly returns will be needed for each diversified arm. This would lead to 12 more interactions with HMRC being required per year.

Costs

The Lords committee had already received evidence from other sources that the costs of converting accounting systems to comply with MTD are likely to be inversely related to the turnover of the business, but the expected savings will be proportional to turnover. For example, the MTD transitional costs for a business with turnover of £10,000 would be the same as a business with a turnover of £30,000 or £50,000. However, the tiny savings achieved by digitising the accounting for the smallest business meant it could take more than 10 years to recoup the costs of moving to MTD. 

Southam said HMRC should recognise the burden on smaller businesses of preparing to move to MTD. He reported that the ABAB has asked HMRC to breakdown the cost of MTD by trade category of businesses.

Timetable

All three witnesses agreed the timetable for introducing MTD was too ambitious, and this was a more important issue that the exemption threshold.

The NFU has called for a delay in implementing MTD for complex farming businesses, particularly as partnerships with turnover of £10m or more have been permitted to delay entry into MTD until 2020. Parker made the point that complexity in a business is not necessarily aligned with its turnover.

Southam said requiring all businesses to start reporting quarterly through accounting software at the same time, was a significant problem. He agreed that the aim of requiring digital submission of accounts is a good idea, but forcing all businesses off a cliff to get there is not.

Southam’s solution is to allow businesses to report quarterly by typing in figures into HMRC’s web-portal, as is currently done by the majority businesses for VAT. The transition to reporting through accounting software could then be introduced gradually.

Preparation

The Residential Landlords Association provided evidence to the committee that only 22% of its members use accounting software. Woodall of the ACS said 53% of their members did not have an electronic till, so converting to MTD would require hardware as well as software costs.

Parker said NFU members were worried about the difficulty of finding suitable accounting software, as 80% of farms had very slow upload broadband speeds. This would prevent them from using cloud-based software, which needs faster upload speeds. He added that the exemption in the draft regulations for people who are digitally excluded is too narrow, particularly for partnerships, as every partner has to be digitally excluded.  

MTD pilot

Southam criticised the time set aside for the MTD pilot. This is due to run from April 2017 to April 2018, but that 12 month period will not include the final year end reconciliation report for each business. There is also no time to assess the results of the pilot before the first businesses are required to start reporting under MTD.

Southam believes the ambitious timetable for MTD is being driven by politicians and not by HMRC.

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Replies (3)

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By Vaughan Blake1
21st Feb 2017 10:54

I just cannot understand how this will work, given the timescale. The pilot scheme starts in just seven weeks and finishes the day before it actually goes live. On the basis that the pilot scheme is meant to highlight problems, the time available is insufficient.

As mentioned the pilot scheme won't touch the final "balancing" submission at all.

What of the third party data supplied to HMRC to populate the returns? I have not heard how this is progressing, yet this is the one area that should (in theory) reduce tax payer errors.

I seem to remember that when the "new" CIS scheme was introduced one premise was that subbie's returns would be pre-populated with earnings/tax deducted under the scheme. No more scrabbling around chasing up lost beer stained 715 certificates from defunct building companies.

If HMRC are serious, step one should be the simple process of populating SATRs with, P60 & P11D entries & state pension. Step two would see the scheme extended to third party information. When this is shown to work, then we start the full MTD trial.

I suspect history will repeat itself, and there will be a repeat of the delayed introduction of the CIS scheme when HMRC realise they are no where near ready and graciously say "In recognition of concerns from the profession, we are delaying the introduction of MTD for 12 months"!

Thanks (9)
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By Ajtms
23rd Feb 2017 11:24

I am relieved that people other than myself are starting to realise that multiple electronic submissions (effectively tax returns) will be needed each year instead of just the one. I am naturally referring to Rebecca's excellent above summary:-

"under MTD separate quarterly returns will be needed for each diversified arm. This would lead to 12 more interactions with HMRC being required per year."

as stated above, but may I just add that for 3 businesses it is 16 tax returns a year as there is a quarterly for each then the subsequent adjustment and declaration for each then there is still the SA100 until it is eventually abolished, but this will not be before 6 April 2020 at the earliest.

To quote from page 19 (PDF version page 21) of the Conservative Party's 2015 Election Manifesto there is the title "WE WILL CUT RED TAPE." followed by the text "This Government was the first in post-war history to reduce the burden of regulation. We will cut a further £10 billion of red tape over the next Parliament through our Red Tape Challenge and our One-In-Two-Out rule. This will support our aim to make Britain the best place in Europe, and one of the top five worldwide, to do business by 2020."

I am now writing to my Conservative MP to remind him of his Manifesto obligations and to CUT RED TAPE and not to increase the burdens on businesses with MTD Quarterly Reporting.

Thanks (4)
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By steve 12321
23rd Feb 2017 11:43

Can't they see the damage this will cause?
The costs will sky rocket.
Many will be unable to do this.
Tax will go down.
Fines may go through the roof
Businesses will suffer and many will fold.
It will be a massive barrier to starting to be self employer
There will be no benefit - none at all.
No cost savings - at all for the "customers"
Support will be insufficient.
This is stupidity beyond anything ever seen before.
It must be stopped

Thanks (6)