Without sufficient care MTD could be a disaster
This is one of the conclusions from the House of Commons Treasury Committee report on HMRC’s proposals for Making Tax Digital (MTD).
The Treasury Committee report, which was published on Saturday, shines a light through the many holes in the MTD proposals, not least the paper-thin cost and benefit arguments.
The committee focused its attention on the proposals contained in the main MTD consultation document: ‘Bringing Business Tax into the Digital Age’. The other related proposals for HMRC powers, penalties, tax payments and new cash basis reporting will be examined by the committee as part of a larger inquiry into MTD.
The committee supports the idea of digitisation of the reporting of tax, but it says the mutual trust between HMRC and taxpayers could be eroded if HMRC rushes into dealing with individuals in a faceless and automated way before they are ready for it.
The report makes suggestions to mitigate concerns about MTD, but it says if those suggestions are not acceptable to government, pressure will increase for MTD to be voluntary scheme. The committee expressed a large number of reservations about MTD, including the following:
The committee recommends that the government should publish its reasons for the low exemption threshold of £10,000. Its own view is this turnover threshold is far too low. As most taxpayers with such a turnover would not pay tax, there would be no advantage for either HMRC or the business of submitting quarterly reports. The committee said: “To impose MTD on them would palpably be absurd.”
The report recommends that the entry threshold for MTD should be aligned with the VAT threshold, saying: “We heard no strong evidence for setting it at a lower level.”
The report points out that the current MTD proposals have ignored the Carter principle (established by Lord Carter in 2006 when developing online services) and the government’s own digital service standard. The later has 18 principles including: “Test the service from beginning to end with the minister responsible for it.”
A key recommendation from this report is that the MTD processes and systems must be adequately piloted end-to-end. This means undertaking an empirical assessment of likely compliance costs and benefits over an entire reporting cycle of 12 months, plus nine months to complete the end of year reconciliation. The committee also stressed the MTD pilots should reflect the role of tax agents. It asks the government to explain the pilot process that it envisages for agents.
In view of the time needed to undertake and evaluate the necessary pilots the committee is recommending that commencement of MTD should be delayed until at least 2019/20.
Costs and benefits
The cornerstone of HMRC’s rational for introducing MTD is that it will help to reduce the tax gap by £945m, including £625m in the first full year. However, the committee is not satisfied that the government’s calculations of extra tax revenue are based on reasonable assumptions. The report says any errors removed by digital recording will be as much in the taxpayer’s favour as the exchequer’s, and it is plausible that the new method of record keeping will increase errors.
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Government argues that businesses may benefit from a requirement to keep records and submit information digitally. But the committee has yet to see the evidence to support the view that the benefits to business would outweigh the costs of buying software and accounting support to comply with MTD. It goes further to claim the government has not factored in the costs of MTD for businesses, which will reduce their taxable profits, and hence cut the tax they pay. In other words, even if the tax yield were to rise, the return to the whole economy could be negative.
The committee has asked the government to define what is means by “free software” and who will be able to use it. The report calls for the government to ensure that there is a functioning market to produce free software that doesn’t contain disruptive marketing material. The government should ensure that access to the software will remain free.
The 48-page report is worth reading in full (PDF version), to understand the range of concerns presented by the professional bodies and business groups who gave oral evidence over two days. The committee also took written evidence from 35 named individuals and organisations.
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Consulting tax editor for Accountingweb.co.uk. I also edit Bloomsbury's Tax Rates and Tables and write newsletters for other publishers.