HMRC’s digital VAT plans came under the microscope in the House of Lords yesterday, as its economic affairs sub-committee examined the rollout of Making Tax Digital for VAT, its pilot scheme and the recent six-month deferral for complex businesses.
As part of an ongoing inquiry into draft Finance Bill 2018, the committee launched scathing attacks on the level of preparedness among small businesses, the cost of compliance and the figures behind the scheme. The session can be viewed on Parliament TV.
Former business leader Lord Hollick was among the most vocal critics of the programme, and declared that since the issue of Making Tax Digital last came before the committee in March 2017 “precious little progress had been made”, and quoted a famous baseball line that it was “déjà vu all over again” for those who had sat through the previous hearing.
Last year HMRC’s implementation timetable came under scrutiny from the sub-committee, who urged the government to delay its tax digitalisation until April 2020 – a suggestion that was ultimately adopted for income tax.
Responding to committee chair Lord Forsyth, Making Tax Digital for Business director Theresa Middleton said that there were “no plans” to further delay the project and that she expects all groups will be ready ahead of the April 2019 mandation date.
Pilot scheme and awareness
Prior to the hearing, the committee received evidence from parties including software vendors, accountancy bodies and individuals. Lord Lee stated that the evidence showed an “overwhelming lack of awareness and preparedness out there” from businesses and that the impression the committee had was that the project was heading for a “giant car crash”.
Middleton acknowledged that awareness levels were not “massively high” amongst the business population, but asserted that HMRC did not want to promote MTD for VAT before the pilot was publicly available and HMRC’s partners in the software industry and accountancy bodies were ready.
According to Middleton awareness levels are “where we expect them to be,” given that the tax authority only recently begun its promotional campaign.
“Our judgment is that when you start to raise awareness people say ‘what do I do?’”, said Middleton, who went on to state that until the pilot was ready it wasn’t sensible to get people “excited or anxious”.
However, Lord Hollick disagreed, stating that anybody working in the commercial sector would be delighted with high levels of product awareness and that HMRC had a duty to inform taxpayers of a “very important” change in their lives.
Hollick also criticised HMRC for narrowing the definition of the term ‘pilot’ to one that just covered whether the software was working.
“The impression we gained [from last year’s session] is that the pilot would give you the opportunity to see how businesses will react... in every other form of life an extremely valuable input,” he said.
HMRC recently opened up the MTD for VAT pilot to more than 500,000 businesses, and Middleton affirmed that the pilot did not exist just to test the software, but also to examine the “customer support model” (YouTube video tutorials, online guidance, etc) and work out if they were good enough to guide taxpayers through.
Cost to business
Baroness Kramer moved the conversation on to the cost of compliance for business. According to Kramer, a former vice president of Citibank, the evidence presented “two entirely different pictures” when it came to the financial impact on businesses.
“There is one conversation between HMRC and the software companies, for whom this is all their Christmases come together, and on the other side people who actually work with small businesses,” said Kramer.
She went on to state that HMRC’s suggested numbers were “way off the mark” and the reality would actually result in a “crushing increase” in business cost, especially when training and professional support costs were factored in.
Middleton admitted that while under the original MTD proposals HMRC’s figures showed an ongoing saving to business, its reduced scope now showed a “small ongoing cost”. This, she explained, was because those now mandated into MTD were more likely to be using software, and therefore would not reap the efficient benefits of going digital.
According to HMRC figures quoted by Middleton, the typical cost of small business software required to comply with MTD is between £10 and £20 a month, and while businesses currently using paper-based records will bear the cost of buying and learning to use it there would be an “opportunity cost” based on efficiency savings. Middleton went on to state that she believes the market will be “quite competitive”, particularly for businesses currently not using software.
One of the biggest challenges, Middleton stated, was to find a way to help taxpayers navigate through the increasingly extensive list of ‘MTD compliant’ vendors and find software suitable for their business.
Deferral for complex businesses
Along with the opening up of the VAT pilot, HMRC last week announced a six-month MTD deferral for a number of organisations with more complex requirements to give them “sufficient time for testing the service” before they are mandated to join.
Lord Leigh questioned this decision, asking if the delay was because larger companies with more complex VAT affairs had “shouted the loudest,” and if it was an example of HMRC “bending over backwards” for large customers.
This was vehemently denied by HMRC’s director general for customer strategy and tax design Ruth Stanier, who stated that the delay was due to the “complexity involved in making sure necessary IT functionality is in place.”
Stanier went on to point out that the group of businesses affected by deferment is a wide spectrum, including charities and local authorities, and the decision was driven by an assessment of complexity and functionality.
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