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MTD: Revised costs and benefits

19th Dec 2017
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Wendy Bradley digs deep into the government’s metaphorical basement to divine the expected costs and benefits of the revised MTD proposals. 

In my earlier article on the MTD costings I suggested that, even on the government's own figures, the MTD proposals should not go ahead because the benefits did not justify the costs. Plans have since changed.

Revised MTD costs

Smaller businesses and landlords will no longer be required to enter MTD from April 2018. Mandatory MTD reporting will at first apply only to the VAT records of VAT- registered businesses, those with a turnover over £85,000 and an existing obligation to file online.

There is a new costings document, which is not quite a fully revised Tax Information and Impact Note (TIIN). Does it fulfil the purpose of a TIIN and demonstrate that impacts have been considered and the cost/benefit analysis is in favour?

Meat in the TIIN

The cost/benefit analysis tells us that the number of businesses affected by MTD is now around 1.2 million, reduced from 3.5 million. The TIIN is based on the not unreasonable assumption that those businesses will have lower transitional costs from moving to MTD because they are already using HMRC digital services to file their VAT returns. The table below shows HMRC's revised assessment of the administrative burden on those 1.2 million affected businesses:

Administrative burden impacts (all £m)

Year: 2018/19 2019/20 2020/21 2021/22 2022/23
Steady-state (on-going) costs £2 £46 £52 £52 £52
Administrative burden (on-going) savings £0 (£8) (£16) (£16) (£16)
Transitional (one-off) costs £4 £111 £16 £0 £0
Net cost impact £5 £149 £52 £37 £37

Ongoing costs

The key figure is the net impact on business expected for 2021/22 and 2022/23.  This will be the "steady state" once the changes have bedded in. It clearly shows that the prediction is that MTD will permanently impose an extra £37m of costs per year across the 1.2 million affected businesses.

Sense test

Does this feel right? The Treasury Committee was sufficiently concerned by the original figures to ask HMRC's small business stakeholder group, the Administrative Burdens Advisory Board(ABAB), to adjudicate on the wide difference between HMRC's and the Federation of Small Business's figures.

The ABAB's response in April 2017 politely pours cold water on both sets of figures.  The problem I see is that HMRC's figures are based on a calculation that MTD will remove a large number of existing "obligations" in the legislation and thus save administrative burden.  Unfortunately, neither the ABAB nor the Treasury Committee asked HMRC the obvious question, to show exactly what "80 current obligations" MTD will remove.

Useless tool

The main failure of this revised costings document, and the factor that makes it useless as a decision-making tool, is the absence of a revised exchequer figure of additional tax savings. 

How are MPs to determine whether to pass the necessary legislation to allow HMRC to proceed with MTD unless they can see a clear cost/benefit analysis? 

The original TIIN showed the costs and benefits of the proposals did not justify the change. This assessment illustrates the expected administrative burden but leaves the reader to look up the exchequer impact for themselves in the Budget supporting documents.

Dig deep

As I explained in my earlier analysis of MTD costs, the government's optimistic TIIN for MTD included figures for the exchequer impact based on data from adjustments achieved in an extremely small number of random enquiries in Measuring Tax Gaps 2015.

HMRC resisted my Freedom of Information requests for the underlying calculation of their exchequer figures. Is it possible that it has avoided putting the numbers together into a cost/benefit analysis because they don't want us to do exactly that?   

DIY TIIN

I’ve had a go.

The quasi-TIIN says that the expected exchequer effect "combine[s] the published figures in Table 2.2 of Autumn Budget 2017, ‘Making Tax Digital: reducing errors through record keeping’, and ‘Making Tax Digital: one year deferral for businesses with turnover below VAT threshold’; and the published figures in Table 2.1 of Autumn Budget 2017, ‘Making Tax Digital: only apply above VAT threshold and for VAT’."

Go to this page of Budget documents, scroll down to the end, and download the two spreadsheets labelled Table 2.1 and 2.2., look at the three lines quoted:

 

2017/18

2018/19

2019/20

2020/21

2021/22

2022/23

Sheet 2.2 row 33*

0

10

365

770

930

940

Sheet 2.2 row 4**

0

-15

-105

-225

-95

-15

Sheet 2.1 row 86***

-

-

-65

-245

-515

-585

Net effect (my totals)

0

-5

195

300

320

340

*MTD: reducing errors through record keeping

**MTD: 1 year deferral for businesses with turnover below VAT threshold

*** MTD: only apply above VAT threshold and for VAT.

Do the figures add up?  

I have a genuine question as to whether it is legitimate simply to total these as I have above. If so, why didn't HMRC do just that?

Will there really be an ongoing £300m extra tax take each year from the 1.2 million businesses above the VAT threshold? Does this justify imposing an additional £37m of administrative burden onto them? The first set of figures HMRC produced were open to question many fronts. 

I would be a lot more sanguine about the latest MTD cost/ benefits iteration if HMRC had the courage of its convictions and presented them up front instead of hiding them in the metaphorical filing cabinet, in the metaphorical basement, with the metaphorical "beware of the leopard" sign on the door.

Replies (19)

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By Vaughan Blake1
20th Dec 2017 10:05

£300m in tax assuming a 20% rate equates to £1,500m in previously under declared income/over declared expenses.

On the basis that 'mistakes' by taxpayers could in some cases be to their detriment, it is therefore a net figure.

I wonder what HMRC's own true cost will be in setting MTD up and administering it?

I just don't see how regular digital filing of records will achieve this level of saving.

My simple cynical side thinks that the MTD monster (like RTI) was originally conceived in an attempt to make Universal Credit work, this time for the self-employed, and it has run away with itself!

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Replying to Vaughan Blake1:
By Wendy Bradley
20th Dec 2017 10:20

Yes: it would make sense as a customer service initiative (of *course* HMRC should have a world-class computer system with a customer-friendly interface!) but some Treasury killjoy has decided it has to "pay for itself", hence mandation and ludicrous numbers.

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Replying to wendybradley:
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By Vaughan Blake1
20th Dec 2017 13:23

Extrapolating the figures further, of the 1.2 million taxpayers some will have accountants acting and some will (miracle of miracles) be doing it correctly unassisted. Some in either camp, will continue to be incorrect under MTD as they will continue to make 'deliberate errors'.

Digital filing will therefore only elicit extra tax by correcting accidental errors.

If we deduct those with accountants (say 50%) and those that either are correct anyway, or make and will continue to make 'deliberate errors' (say 10%), this leaves us 40% of 1.2m ie 480,000 taxpayers. So to collect the £300m, HMRC will have to extract on average £625 from each of them. At say 30% tax, that equates to a corrected accidental under declaration of income of £2,083 net each.

Presumably some innocent mistakes will continue to be made, so lets say MTD picks up 50% of the accidental errors. That now means that on average these taxpayers are making bookkeeping errors of over £4,000 each per annum.

If you then make the £300m net of HMRC's extra costs and re-run the figures.......

Sorry HMRC it doesn't stack up.

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Replying to Vaughan Blake1:
Nigel Harris
By Nigel Harris
08th Jan 2018 10:15

"My simple cynical side thinks that the MTD monster (like RTI) was originally conceived in an attempt to make Universal Credit work" - was my thought exactly until Rebecca Cave pointed out that HMRC and DWP are at loggerheads and do not / will not share data with each other. Sadly I fear there is more politics than logic behind all this mess.

Thanks (4)
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By GW
20th Dec 2017 10:23

Thanks for the article, it is even more concerning when the RTI post Implementation Review includes the carefully worded line:

"Closely associated to this were views expressed through and by ABAB that the Standard Costs Model (SCM) used to underpin the calculation of costs and benefits for business did not sufficiently reflect the experience on the ground of small employers."

Presumably if HMRC believed their own figures they would be more open about how they were arrived at and also not keep hidden the list of 80 things we will no longer have to do.
Why are they not using the 80 tasks as a selling point?

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Tornado
By Tornado
20th Dec 2017 13:55

If Accountants prepared figures the way the Government does .. we would all be in prison by now.

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Chris M
By mr. mischief
20th Dec 2017 22:37

No we would not. Look at the 300 or so dodgy European bank audits back in 2008 and 2009. Not only did none of the dodgy Big 4 auditors go to jail - except in the USA who do not mess about - none of them was even disciplined to the best of my knowledge.

The dodgiest accountants run the profession.

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By Ian McTernan CTA
08th Jan 2018 10:41

I'm glad HMRC have decided that on an ongoing basis doing all those extra submissions and having to deal with their systems will only cost on average £30.83 extra per year.

Where do I send the bill for the rest of the extra expense my clients will incur?

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By P&G
08th Jan 2018 10:46

Yet more fantasy figures from HMRC and still no counter attack from our professional bodies. It's difficult to know who is worse at present, HMRC for imposing yet more unnecessary burdens on taxpayers and by extension accountants, or the likes of ICAEW/ACCA/CIOT et al sitting on their hands and doing nothing.

Don't get me wrong, we as a firm are embracing MTD and the required changes we and our clients will need to make, but let's be clear and open about the additional true cost to our clients and ourselves being unpaid tax collectors.

There will be additional costs, we as accountants know that. However it is time HMRC came clean and accepted the position, trouble is they are out of control and all our politicians are too engaged with BREXIT and lack the real world knowledge to understand they are being taken for a ride. They obviously don't lecture on real issues on all the politics degree course.

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Replying to P&G:
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By Terry Hyman
09th Jan 2018 11:46

I agree entirely with P&G. I wrote an article for the magazine produced by my professional body, The Institute of Financial Accountants, expressing my disdain for MTD. This was in the hope that it might provoke a meaningful discussion. Of course, they haven't printed it. They and most of the other professional bodies are so in thrall to government that they fail to properly represent the views of their members. I think that in the main we are just numbers to them and have to conform to whatever policies they have with no opportunity for dissent.

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Replying to Terry Hyman:
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By DMBAcc
16th Jan 2018 12:09

Did you challenge the magazine editors?

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By Michael C Feltham
08th Jan 2018 11:04

"Smaller businesses and landlords will no longer be required to enter MTD from April 2018. Mandatory MTD reporting will at first apply only to the VAT records of VAT- registered businesses, those with a turnover over £85,000 and an existing obligation to file online."

Really?

"Under the new timetable:

only businesses with a turnover above the VAT threshold (currently £85,000) will have to keep digital records and only for VAT purposes
they will only need to do so from 2019
businesses will not be asked to keep digital records, or to update HMRC quarterly, for other taxes until at least 2020"

Source: https://www.gov.uk/government/news/next-steps-on-the-finance-bill-and-ma...

Still I suppose the fact Wendy was a Tax Inspector, offers a minor explanation... or she failed to complete her description, fully.

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By DMBAcc
08th Jan 2018 11:51

I see another Hitchhikers Guide to the Galaxy fan - the radio version by far the best. Perhaps someone should tell HMRC that the answer is still 42 !!!

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By DMBAcc
08th Jan 2018 11:57

on second thoughts perhaps they already know hence the mess they are in. I blame "Scrabble" (in joke)

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By itp33asso
08th Jan 2018 13:57

Has the kskeidiscope that js mtd clarified to the extent jt can give me a definitive position re my client whoi is uk resident oensioner with total esrnings circa £15k of which 11500 are tax free and 1000 are interest free.

Of the remaining 2500 these are unearned jncone ( dividends and interest) from bonds and equities hekd in an oversead EEA area account fully deckared yearky for UK tax .

Will my client have to embrace small budiness or landlord mtd or not ?

He has only the singke uk residence which us hus only residence worldwide.

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By Robbo
09th Jan 2018 11:00

A bit like the proposed savings by scrapping RFL discs.
No savings, lots of costs.
Why should HMRC collect extra money from MTD, they are making it up.

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By AndrewV12
09th Jan 2018 13:01

Extract above
'registered businesses, those with a turnover over £85,000 and an existing obligation to file online.'

Its going in the right direction, lets now all aim for £100K

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By North East Accountant
11th Jan 2018 08:52

HMRC's figures are a joke, but not very funny.

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By aidan.sergent
15th Jan 2018 12:05

£37 million cost for 1.2 million customers. Can anyone explain to me how HMRC consider that MTD is only going to cost £30.83 extra for each "customer" each year? That's £7.71 per quarterly Return.

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