The government’s understanding of the implications behind Making Tax Digital (MTD) has come under scrutiny after a letter from Jane Ellison to the Treasury Select Committee hinged on some questionable evidence.
The financial secretary to the Treasury attempted to quell the committee’s MTD concerns in a letter from 31 January addressed to Andrew Tyrie, chair of the committee, justifying how the tax system will benefit from the digital overhaul.
With claims about the eagerness of businesses to adopt accounting software and a low estimation of the MTD impact costs, Ellison’s unwavering optimism towards MTD raised eyebrows among tax commentators.
Opening the letter, Ellison put forth the apparent appetite for the regime: “Two million small businesses already use software to keep their records, produce their accounts or administer their tax. Indeed, to date nearly 9m (92%) have filed their self-assessment return digitally this year, up from just over 39,000 (0.5%) when it was first introduced in 2000.”
AccountingWEB consulting tax editor Rebecca Cave further questioned the relevance of Ellison's presentation of the facts: "HMRC provides a free to use portal to file self assessment returns online that does not require paid for software," she said. "And it is not compulsory to file an SA return online." While another tax commentator argued that adoption of online self assessment filings took 16 years to reach 9m, "not 16 months".
Further on in the letter, Ellison reasoned the need for the reforms because of the £8bn tax gap lost as a result of “avoidable” small business errors: “MTD will help the self-employed, businesses and landlords get their tax right first time”, she said. “[T]his will also reduce the cost, uncertainty and worry that businesses face when HM Revenue and Customs (HMRC) is forced to investigate.”
However, Cave disputed this, arguing that small businesses will be submitting dirty data under the MTD regime, as the numbers have not been checked by an accountant, and the quarterly reporting will add four times the worry.
Spreadsheets and software
Moving on to a much-debated subject on AccountingWEB, Ellison repeated HMRC’s decision to allow the use of spreadsheets provided it can “produce and send the quarterly summary updates to HMRC and complete the end of year activity”.
This, a tax commentator scrawled across a letter sent to AccountingWEB, is “a significant level of functionality for any mere spreadsheet”. The tax commentator added: “we'd expect most SMEs to jump at this if it's viable, but they won't know if it works until software houses can create the packages.”
Ellison claimed that HMRC will test spreadsheet integration with software during the planned pilots. In the next paragraph, Ellison reiterated that free software will be available to the smallest businesses “with the most straightforward affairs, largely those that are unincorporated, under the VAT threshold, and without employees”.
While Cave questioned Ellison’s supposed confirmation of free software for small companies, another tax commentator added: “The tax affairs may look simple; the business affairs may well not be, and the family life of the owners may be inextricably intertwined with the business financial affairs and records”
Ellison signed off the letter with her assurances that “extensive testing should ensure that by the time mandation starts, from April 2018, we can be confident that a range of software products is available at different price points.”
However, the tax commentator didn’t end their penned criticism on the same cheery note, retorting: “This timeline remains incredible. Business doesn't want software for the April 2018 roll-out available from April 2018; it needs it available, tested and reviewed well ahead of that deadline so that it can make an informed and sensible business decision on which package to implement.”
Days after receiving the letter, Tyrie had his own curiosity about the figures Ellison presented in regards to her assertion that the impact assessment forecasts that MTD will provide “an ongoing administrative saving to businesses year on year”.
Tyrie asked both Ellison and Mike Cherry, the chairman of the Federation of Small Businesses, to provide clarity over the pair’s disparate estimated costs of digital record keeping: the FSB expects MTD to costs around £2,770, while the government estimates a much lower transitional cost of £280 per businesses.
Tina Riches from Smith and Williamson in evidence to the House of Lords economic subcommittee calculated that the MTD transition will cost her clients £2,000 plus VAT every year.
Tyrie commented: “The compliance cost estimates are so far apart that at least one of them must be wrong.”
“If the FSB are right, the effects of Making Tax Digital would be crippling for many small businesses. If the government are right, businesses have something to gain in the longer term and one would expect them to be queuing up to join the pilot.”
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