The Making Tax Digital (MTD) implementation timetable has come under further scrutiny from the House of Lords economic affairs committee who has urged the government to delay the “unnecessary burden” of its tax digitalisation until April 2020 and make it optional for small businesses and the self-employed.
Following its extensive questioning of tax accountants, software developers, small business representatives and HMRC, the Lords committee has released a report today that recommends the government takes a more “incremental and gradual approach” to the scheme’s implementation after an extended pilot period.
12 month delay doesn’t go far enough
The report comes after the Chancellor announced in last week’s Budget a 12-month delay from MTD for unincorporated businesses with turnovers under the VAT threshold. However, the Lords committee has warned that although the Chancellor’s MTD timetable concession acknowledges some of the concern voiced by small businesses it still “does not go far enough”.
“When the Chancellor first announced this scheme in 2015 its purpose was to ‘make tax easier’. For many businesses the Making Tax Digital proposals no longer achieve this and will instead make taxation more burdensome,” it said in the report’s summary.
Although the peers welcomed the digitalisation of tax, they found the transitional arrangements have imposed “anxiety and disquiet among those affected”.
For the smallest businesses and landlords the committee said any benefits they would gain by transitioning to digital record keeping would be “limited”, and businesses would be saddled with the costs from the initial outlay of MTD for more than 10 years. In her evidence to the committee, Tina Riches from Smith & Williamson calculated that the MTD transition would cost her clients £2,000 per year plus VAT.
Four changes for effective implementation
Drawing on the evidence heard in its MTD inquiry, the report suggested four modifications to “bring the scheme back to its original aims”:
- Revise MTD benefits and costs: The Lords committee said the £280 initial cost HMRC claimed to businesses would incur does not reflect the reality of the expenses
- Delay MTD until after a full pilot: The committee believes the planned pilot of the software in April 2017 does not leave sufficient time for the pilot to cover the full year. A delay would provide the government the opportunity to raise public awareness and to introduce measures to support the digitally excluded
- Make digital record keeping optional: “There is no evidence that these requirements will reduce taxpayer error,” said the committee. Therefore, the government should drop mandation for businesses under the VAT threshold
- Review which businesses are included in the scheme: Seasonal businesses and those with highly irregular income should be exempt from the scheme
In addition to this, the readiness of software houses to meet the proposed deadlines came under question. When IRIS chief executive Kevin Dady appeared in front of the committee he admitted that “IRIS is as ready as it can be”. The software houses' unpreparedness indicates that HMRC has not yet finalised the technical system requirements. The committee, therefore, pressed HMRC to provide software houses with the technical specifications needed to be fully MTD compliant.
Throughout February, the Lords committee heard evidence from representatives within the tax profession such as Rebecca Benneyworth, John Whiting and the ICAEW’s David Lyford-Smith.
The concerns raised by the Lords committee echoes the findings of the Treasury committees who reasoned that MTD should be delayed until at least 2019/20 and should undergo an extensive pilot scheme as outlined in the government’s own digital service standard.
Businesses are simply unaware
Responding to the report, Lord Hollick, chairman of the House of Lords Economic Affairs Committee, said many small businesses and landlords are “simply unaware of or not ready to cope with the additional administrative and financial burdens that will be imposed by digital taxation”.
“We welcome the government’s announcement in the Spring Budget that the scheme would not apply to businesses with a turnover below the VAT threshold until April 2019. However, this does not go nearly far enough and it needs to further delay the scheme’s implementation, and take a more incremental and gradual approach based upon the evidence from the pilot.
“This scheme coincides with changes to business rates and dividend taxation, all of which will impact some small businesses.
“A full pilot will ensure the software works and provide hard evidence of the additional financial and administrative burdens on businesses. It will also provide evidence in place of the widely disbelieved assessment of costs and benefits of the introduction of Making Tax Digital."
Keen to keep up with digital tax developments? Sign up for our free monthly MTD digest