HMRC’s rationale and timetable for Making Tax Digital (MTD) came under intense questioning from tax accountants and software developers at the House of Lords Economic Affairs Committee on Monday afternoon.
Tax department executives, who are due to give evidence at Finance Bill hearings later this month, are likely to face a barrage of questions arising from yesterday’s initial evidence hearing.
Committee chairman Lord Hollick said that the committee agenda picked up from the findings of the Treasury select committee last month and would feed into deliberations around the legislation enabling MTD in the Finance Bill 2017.
The Lords committee has no direct powers to block the legislation, but could pave the way for more determined parliamentary scrutiny of HMRC’s plans.
Fuelled by a detailed deconstruction of HMRC’s estimates presented by tax campaigner and City University professor Richard Murphy, the Lords committee already harbours reservations on many of the topics raised by accountancy bodies and AccountingWEB members alike.
Questionable cost/benefit calculations
According to Murphy’s analysis, when software costs are stripped out of HMRC’s £170m estimate of the extra cost to business of MTD, £103m is left to cover the cost of quarterly updates from 5.9m businesses - equivalent to £4.36 per update. Using the national minimum wage as a benchmark, he suggested HMRC was allowing 35mins to complete each update. “That is not plausible,” Murphy told the committee. Based on his estimate that the tasks involved in filing each update would take around half a day, he estimated the cost to business of MTD would be £1.8bn.
When asked by Baronness Kingsmill whether MTD would reduce compliance costs for business, John Whiting, the outgoing Office of Tax Simplification tax policy director replied, “Most of us have some doubts that it will be cheaper.”
Whiting also happens to be a non-executive director at HMRC. Towards the end of his evidence, he commented: “HMRC bases a lot of information on the standard cost model. One useful thing that might come out of this might be pressure to update that to a more modern model. Life has moved on. We’re not convinced that it’s capturing all the right costs.”
Focus and sequencing
Robin Williamson, technical director of the Low Income Tax Reform Group told the committee that most of the tax profession lobbied for a substantially higher exemption limit than the £10,000 currently proposed in HMRC’s documentation - but not yet decided. It would be sensible to align the limit with the VAT threshold, he added, “on basis that VAT payers will be more familiar with online filing”. Rather than reducing errors on small business tax filings, “I very much fear that a lot of people will drift into the shadow economy rather than facing substantial compliance costs that will go with [MTD],” Williamson said.
Whiting endorsed this stance, telling the committee: “I wouldn’t have started from here. I would build on the success of the existing system for [VAT] efiling and broaden it out.”
One of the assumptions HMRC relies on to push the MTD agenda is to reduce the £8bn of tax lost as a result of errors by small businesses. Each of the accountants giving evidence to the Lords committee questioned the reliability of this assumption. Whiting and Williamson both pointed out that better record-keeping could see an increase in expenses claimed. Williamson also drew attention to HMRC’s own errors - which include “horrendous” errors he has seen in PAYE codes. HMRC did carry out a study on small business record-keeping in 2015. “If we can see that [report] we’ll be better informed,” he added.
Murphy articulated a formula that appeared to strike a chord with the committee: “I would start with larger companies, where I think there’s a significant problem with tax unpaid. Then go to small landlords - start with businesses that employ accountants.”
According to Murphy, only a portion of the £8bn tax gap is down to businesses failing to take due care with their returns, and of that 50% is down to small businesses - equivalent to £2.7bn. In contrast, he said the criminal economy is funnelling some £4bn of tax out of the economy and another £6bn of tax is not paid. “It seems the Revenue is looking at a problem they can see, but ignoring the problem they can't see. So they’re penalising the people who are trying to be compliant.”
Ahead of the hearing, Murphy briefed AccountingWEB on his evidence - listen below:
Readiness and education
After the accountants, software industry representatives took their places in the chairs facing the committee in the shape of IRIS CEO Kevin Dady and Kevin Hart, chairman of the software industry trade body BASDA.
The committee was clearly concerned by the points raised in a survey of accountants who use IRIS, showing that 53% of them had clients that did not use accounting aids, and 98% of whom were dissatisfied with the information provided by HMRC on MTD during the consultation period last summer. These findings were very much along the same lines as feedback from AccountingWEB’s MTD survey with Thomson Reuters.
Responding to the survey findings, Lord Leigh commented: “Doesn’t this demonstrate HMRC’s complete lack of real experience? They do not understand business. This is ridiculous, they’re not living in the commercial world.”
Hart and Dady both explained how the massive education effort surrounding tax initiatives such MTD often falls on accountants and their software suppliers. “We’re trying to educate our market via accountants,” said Dady.
The readiness issue extended from taxpayers to HMRC’s in-house systems and whether the software providers could meet the proposed deadlines for testing new systems by this April and going live in April 2018.
When Lord Tugendhat asked if the software industry could meet HMRC’s timetable, Daly replied, “IRIS is as ready as it can be. We’re in leading cohort of suppliers talking to HMRC on a technical basis. We could be better prepared to be frank with you.”
The information flow could have been better to support the ambitious timescales, but is accelerating, he continued, adding that an additional three months would be helpful to be able to test the systems through a full year.
In the final exchanges of the committee hearing Lord Hollick suggested that its advice to HMRC would be: “Take more time, have a longer pilot, and start with larger companies.”
BASDA’s Kevin Hart noted that there were still a number of challenges to work through and that HMRC was beginning to realise “the heat is most certainly on”.
Dady added: “We need to know that that is going to be maintained, so we can support our customers. If they can’t reach HMRC, they’ll ring us.”
In a farewell that doesn’t bode well for tax department representatives when they turn up later in the month, Lord Hollick commented, “We’ll certainly take this up with HMRC.” The full committee hearing can be viewed on Parliament TV.
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About John Stokdyk
AccountingWEB’s Head of Insight has been with the site since 1999 and likes to spend his time studying accountants’ technology habits. When not nerding out, you can find him exploring obscure indie music and searching for the perfect organic sourdough loaf from his base in Brighton, UK.