Put the brakes on making tax digital for businesses, urges Lords Committee
The Government should delay the launch of ‘Making Tax Digital' (MTD) until 2020 and make the scheme optional for many small businesses and self-employed people.
These are among the recommendations made by the House of Lords Economic Affairs Committee's report, published today, on the Government's ‘Making Tax Digital for business' plans included in the Draft Finance Bill 2017.
The changes proposed by the Government will affect 1.6 million companies, 2.4 million self-employed individuals, and 900,000 residential landlords. But the roll-out of the scheme is being rushed, imposing unnecessary burdens on small businesses, and will yield little benefit to the Government. These changes also coincide with other changes to small business taxation such as to business rates.
Not enough consideration has been given to support those lacking digital skills: HMRC's own research shows that 61 per cent of the self-employed can't or need help to interact with the Government online.
The Committee agrees that the digitalisation of tax is to be welcomed, but recommends a series of modifications to ensure the policy is implemented successfully:
- Revise and improve its assessment of Making Tax Digital's benefits and costs
The Government's estimate of the 'tax gap' savings are fragile and not based on adequate evidence. The assertion that the scheme will initially cost businesses £280 does not reflect the reality of the initial expenses businesses will incur.
- Delay the scheme until 2020 to allow a full pilot
This delay will allow the Government to test whether Making Tax Digital does reduce taxpayer errors, assess the actual costs to business, and receive valuable feedback from business users. It also gives the Government time to raise awareness and put in place support systems for those who lack digital skills.
- Make keeping digital records and quarterly reporting optional for businesses with a turnover below the VAT threshold
For smaller businesses the requirement to report quarterly to HMRC will impose an unnecessary burden, and will be of limited use.
- Look again at which businesses are included in the scheme
The Government should examine whether some kinds of business, such as those with seasonal or highly irregular income, should be outside the scheme.
Commenting on the report, Lord Hollick, Chairman of the House of Lords Economic Affairs Committee, said:
“Many small businesses and landlords are simply unaware of or not ready to cope with the additional administrative and financial burdens that will be imposed by digital taxation.
“We welcome the Government's announcement in the Spring Budget that the scheme would not apply to businesses with a turnover below the VAT threshold until April 2019. However, this does not go nearly far enough and it needs to further delay the scheme's implementation, and take a more incremental and gradual approach based upon the evidence from the pilot.
“This scheme coincides with changes to business rates and dividend taxation, all of which will impact some small businesses.
“A full pilot will ensure the software works and provide hard evidence of the additional financial and administrative burdens on businesses. It will also provide evidence in place of the widely disbelieved assessment of costs and benefits of the introduction of Making Tax Digital.
“We are sceptical of the benefits to small businesses of regular digital reporting. We recommend that the scheme remains optional for businesses with a turnover below the VAT threshold.”
Other findings from the report, The Draft Finance Bill 2017: Making Tax Digital for Business, include:
- The Government is imposing new obligations on the majority of businesses and landlords in order to resolve errors attributable to less than one third of that taxpayer population.
- The Government's estimates of both the initial and the ongoing costs of complying with MTD requirements were met with disbelief by businesses who gave evidence. Even HMRC's own estimate shows that it would take more than 10 years for businesses to recoup their aggregate initial outlay.
- Software houses do not yet have the full specifications and details needed to finalise the development MTD for business compliant software. This appears to be because HMRC has not yet finalised the technical details or system requirements.
- The design and duration of the pilot proposed by HMRC does not conform to government best practice guidelines. It is too short and limited to yield the learning and process improvement benefits that full testing would provide and that are necessary in view of the scale of the changes involved.