On 26 April 2016, Mr Tyrie wrote to Mr Gauke requesting, on behalf of the Committee, his assurance that a full impact assessment of the Making Tax Digital proposals is provided; there is full co-operation and consultation, with those most affected and also with Parliament, on it; and an acceptable plan for its gradual introduction is produced.
Commenting at the time, Mr Tyrie said:
"The extra burden placed on small businesses by 'Making Tax Digital' was already a source of considerable concern. It now appears that large businesses could also be affected, if their software and systems are not compatible with HMRC’s requirements. This would make early implementation all the more unacceptable.
Before anything is done to implement these proposals, the Government now need to provide a comprehensive impact assessment. Full co-operation and consultation on it – with those most affected, and also with Parliament – will be needed. An acceptable plan for its gradual introduction is also essential.
Many businesses are now very concerned that the need to establish and maintain a digital account will be mandatory, and at considerable cost to them. So a reassurance is needed from the Government that no changes at all will be imposed until all three of the above have taken place will also help.
No doubt Making Tax Digital is the future. But businesses and their customers should not be expected to foot the bill for the transition."
What is Making Tax Digital?
At the March 2015 Budget, the government set out the vision for a transformed tax system and the end of the tax return. As part of the Government's vision "to modernise the tax system, tax returns will be replaced by digital tax accounts for millions of individuals and businesses. They will bring together each taxpayer's details in one place, just like an online bank account, so they can register for new services, update their information, and understand quickly and easily what they need to pay — without ever having to complete a tax return again."
Making Tax Digital sets out how this vision for the future of the tax system will be achieved by 2020.
Where did this latest information come from?
On 4 March 2016, the Tax Faculty Team at the ICAEW published a blog post, in which they reported that Making Tax Digital will now include a requirement for digital record keeping, and that, in order to meet this requirement, businesses will have to use accounting software, which does not include Excel. They wrote:
"HMRC has been holding informal consultation events around the country to gather feedback from businesses and agents on the MTD proposals so far announced. We have been receiving feedback from our volunteers and ICAEW staff as they attended some of these.
One aspect in particular has not, in our view, been as clearly articulated as it might have been. It is that MTD will also include a requirement for digital record keeping. While HMRC has said very clearly that it does not want transactional data in the proposed quarterly returns, what it will want is for businesses and self employed people themselves to keep their accounting records digitally. Verbally we are told that using excel is not digital record keeping; it will have to be accounting software. If so, this will have serious book keeping consequences for many businesses and it is certain that the old brown paper parcel approach to book keeping will be dead.
To be fair, reading the statements made by HMRC, together with the limited documentation available, very carefully, the reference to digital records is there, but the full extent of the change was less obvious. But if there was any doubt, note the following extract from a speech by the Financial Secretary to the Treasury, David Gauke, at the Armstrong Watson event: 'Essentials of pensions, tax and payroll in 2016'.
'We've also seen the rise of companies providing digital accounting services, using exactly the sort of technology and processes that will be needed when we make tax fully digital.
Just last week, I met FreeAgent, one such company, whose software is already being used by 45,000 customers. And we are working with other innovative firms, such as Intuit and Xero. That is where the market is heading..'
We are expecting five consultations on aspects of MTD to be published between the March 2016 Budget and mid May. These will be important documents for us all to study very carefully indeed."
To clarify this point, for several months HMRC had been talking of keeping business records "in digital form". It had not been clear what this means for businesses. There had been a general understanding among most tax professionals that businesses could use their own choice of package for their record keeping, as long as it was digital. Digital had not been clearly prescribed and was understood to include, for example, excel. The meeting attended by 'volunteers and ICAEW staff', appeared to have provided clarity over HMRC's intended meaning – that businesses will be required to use particular software, and systems that are compatible with HMRC's.
The information contained in the blog post above came from one of a series of meetings, held by HMRC, on the Simpler Payment part of Making Tax Digital during February and early March 2016. These 2 hour sessions were designed to allow HMRC to speak with members in practice and their business clients about the project and to hear their views to help shape modernising the tax system.
Previous correspondence with the FST on Making Tax Digital
On 8 January 2016, Rt Hon. Andrew Tyrie MP sought more information on Making Tax Digital from the Financial Secretary, after concerns were raised by many small businesses and their tax advisers about the proposals. In particular, Mr Tyrie asked for assurance that:
- businesses will not be compelled to pay tax sooner than currently
- businesses will not be required to provide quarterly updates requiring more burdensome record keeping than currently
- adequate arrangements will be made for those businesses who do not use computers
- all the details, including the associated penalty regime, will be subject to full consultation prior to any decisions
The Financial Secretary responded on 12 January 2016. Mr Tyrie wrote again on 25 January for further clarification on the consequences of these proposals on those businesses who do not currently use computers but who do not fall within the category of being 'genuinely unable to adopt digital tools'.
In his last letter to Mr Tyrie, sent on 1 February 2016, Mr Gauke made the following commitment:
"These reforms are being introduced gradually and we will be consulting extensively with businesses and their agents throughout 2016 to ensure their concerns are taken into account and addressed."