A Lords committee has called for a delay of at least one year to the mandatory rollout of Making Tax Digital for VAT, asserting that HMRC has neglected its responsibility to support small business and claiming costs will be far more than the government’s impact assessment.
In an excoriating report published today, the House of Lords Economic Affairs Committee laid out its concerns about the impact of the government’s Making Tax Digital for VAT plans.
The committee called for a delay of least one year for the government’s digital VAT regime, currently scheduled to roll out in April 2019. It also asked for a “staged transition” for businesses joining MTD for VAT, and requested that the government wait until at least April 2022 before extending the scheme to other taxes to learn from the VAT implementation.
Criticisms levelled by the Lords included low levels of awareness from affected businesses, the cost of MTD compliance, difficulty in navigating the software market, the justification for the programme and the underlying assumptions behind it.
However, the report did miss the mark on several key points, including the availability of free software and the reason for the delay in mandation for more complex businesses.
Small businesses ‘will not be ready’
Each year the Lords Economic Affairs Committee appoints a Finance Bill sub-committee to inquire into the draft Finance Bill, and this year the committee decided its inquiry should address two areas: progress on MTD and HMRC powers.
Among the most damning assertions in its MTD report published today, the Lords stated that HMRC has “neglected its responsibility” to support small businesses with Making Tax Digital for VAT
Commenting on the reporting Lord Forsyth, the commission’s Chair said the tax authority is “not listening” to small businesses.
“Small businesses will not be ready for this significant change to their practices if it is introduced on 1 April, particularly with Brexit taking place three days earlier,” said Lord Forsyth. “The government must delay its introduction.”
The committee stated that HMRC was “alone in its confidence” that all one million mandated businesses will be ready by April 2019 and although the tax authority has now begun to step up its awareness campaign, with less than five months remaining before introduction the Lords felt it was too late to begin an effective communications drive.
Responding to the report an HMRC spokesperson said: “We are disappointed that the committee’s report doesn’t reflect HMRC’s wide and significant engagement on Making Tax Digital (MTD) over the last 3 years, nor the changes made as a result for small businesses.
“HMRC has already written to 200,000 businesses and will be writing to every other mandated business in the coming weeks to ensure they know about the changes and how to prepare.”
Digital exemptions guidance 'a matter of urgency'
The committee, which took evidence from HMRC, accountancy bodies and professionals and small business owners, also criticised the pilot scheme and project implementation as “narrow” and “rushed”, and called on HMRC to develop guidance on digital exemptions “as a matter of urgency”.
The call for a delay was backed by several leading professional bodies.
“If properly implemented, digitisation could lead to efficiencies for taxpayers, agents and tax authorities,” said Adrian Rudd, Chair of the CIOT/ATT Digitalisation and Agent Strategy Working Group. “But many businesses will really struggle to get ready in time, and we support the committee’s recommendation of a delay for MTD for VAT.”
The Lords also questioned HMRC’s impact assessment on the costs to businesses of MTD for VAT, stating that it will be far more than the government anticipates. A range of reasons was given for this, including the cost of upgrading older software systems or acquiring new ‘MTD compliant’ tools, and additional accountancy or consultation fees.
Although many witnesses supported digital record-keeping in principle, the committee saw no justification for HMRC to impose digital record-keeping on businesses, where exactly the same information would be provided as the current system.
Commenting on the report Simon McVicker, Director of Policy at freelance body IPSE, stated that a “surprisingly large” number of small businesses still keep paper records.
“They don’t have access to in-house accounting and finance departments like bigger businesses and are therefore at greater risk of being disrupted by the new reporting requirements,” said McVicker, whose body came out in support of the delay.
Other findings and recommendations from the committee’s report included:
- HMRC must publish how its communication and support systems will meet the needs of taxpayers and agents across different levels of digital capability and skills.
- We regret that a small number of organisations have been given a six-month deferral, but not the smaller businesses who have the fewest resources to devote to implementation.
- So far, no free software products have been offered by the software industry. The smallest businesses will struggle unless HMRC provides a basic free software option.
- The government should publish its plan for the long-term development of MTD, including milestones and when key decisions will be made.
- The penalties regime could be fairer and encourage taxpayers to remedy defaults promptly by giving taxpayers a longer grace period before penalties for late payment are applied.
- The government’s claim that MTD for VAT will increase the amount of tax collected remains unconvincing. They should revisit their assumptions and publish another revised impact assessment.
- Neither Treasury nor HMRC are taking the risks to implementation of Making Tax Digital seriously enough.
Missed the mark
While many of the Lords' assertions back up longstanding concerns expressed by AccountingWEB readers, institutes and other accounting professionals, several points made in the report did not ring true.
The committee’s assertion that no free option has emerged from the software industry (paragraph 57) is not correct. Several organisations, including Avalara, have made their products available at no cost.
The report also stated that a market in bridging software “does not seem to have emerged” (paragraph 59). According to AccountingWEB’s research (and HMRC’s list), a number of products are available, with more slated to arrive before April. A more accurate complaint could be that the products have been slow to market, partially due to the shifting timelines associated with the MTD project.
The Lords also implied that the reason for a six-month MTD deferral for a number of organisations with more complex requirements was due to their size, and favoured big business over small. As pointed out in AccountingWEB and other publications, the deferral was not based on size of business as implied, but according to sources close to the project was due to HMRC’s system not being ready in time.
HMRC has stated that it will consider its response to the Lords' report and respond in due course. A second report on HMRC powers and safeguards will be published in December.