Making Tax Digital (MTD) will mark a fundamental change in the way that businesses interact with HMRC. The Government is proposing that businesses will be required to keep their accounting records in a prescribed digital format and submit quarterly updates to HMRC. These updates will be followed by an end of year reconciliation to ensure that the entire year’s activities are properly recorded for tax. It is proposed that businesses will start this form of record keeping and reporting for income tax and National Insurance from 1 April 2018 or 1 April 2019, depending on their size, and for VAT from 1 April 2019.
The Government consulted on its proposals over the summer and early autumn of 2016 and it is proposing to respond to that consultation, and publish draft Finance Bill clauses to legislate for the necessary changes.
Based on the evidence it has heard, and on published responses to HMRC’s consultation, the Committee supports the idea of the digitisation of the reporting of tax. However, it considers that mandating the digitising of record keeping and quarterly reporting, as currently envisaged, has not yet had its overall benefits proven. Just over a year is too short a lead time for such a fundamental change in any event. There should be a comprehensive set of pilots of the end-to-end system before it is made mandatory for all businesses. The Committee is very concerned about the costs to businesses of introducing MTD, as well as the continuing costs of maintaining digital records and submitting quarterly updates. There is not yet enough information about the free software that will be available, but even if it remains free in perpetuity, businesses will face costs in terms of time and accountants’ fees. In aggregate, these costs may well exceed the benefits to the exchequer in terms of tax gap reduction as a result of fewer taxpayer errors and the overall impact of MTD could even be negative.
As it prepares its response to the consultations about its proposals to make MTD mandatory with very few exemptions, the Government needs very carefully to consider the legitimate concerns about the costs and benefits to business, and set them against any benefits to the Exchequer from the proposed approach.
The House of Commons Treasury Committee have published a report recommending that HMRC change their approach to MTD. They recommend that the timetable for implementing MTD be delayed until at least 2019/20 to allow more time for consultation and engagement. The proposed threshold of £10,000 be raised to at least the VAT threshold (currently £83,000).
A comprehensive set of pilots need to be designed to gather information over the entire reporting cycle: four quarterly updates and an end of year reconciliation. These need to be evaluated before full implementation and the proposed system before it becomes mandatory.
HMRC ensure that adequate free software is available for the smallest businesses. There is not yet a ‘fully functioning market in appropriate software’.
Their Chairman, Rt Hon. Andrew Tyrie MP said that, if carefully introduced, MTD could be an opportunity to greatly improve the administration of the tax system. However, without sufficient care it could be a ‘disaster’. He points out, ‘This is not a minor matter. These reforms will affect millions of taxpayers. Their co-operation and trust are both hard won and easily dissipated. Without them, more of the yield could be at risk than any putative extra revenue from MTD. So the Government should change its current approach.’