The House of Lords Finance Bill Sub-Committee has called on HMRC to put the brakes on Making Tax Digital (MTD) for business amidst widespread fears that MTD won't make any savings for government and is being rushed.
The Sub-Committee has been taking evidence and examing the MTD clauses in the draft Finance Bill 2017.
It welcomes digitalisation of tax yet concludes that the roll-out of the scheme is being rushed, imposing unnecessary burdens on small businesses, and will yield little benefit to the Government.
The Sub-Committee recommends a series of modifications to ensure the policy is implemented successfully:
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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.
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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.
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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.
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Look again at which businesses are included in the scheme. The Government should examine whether some kinds of businesses, such as those with seasonal or highly irregular income, should be outside the scheme.
Chairman's comments
Chairman of the Sub-Committee, Lord Hollick, 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."
Notes
MTD will affect just under 5.5 million businesses: including 1.6 million companies, 2.4 million self-employed individuals, and 900,000 residential landlords.
- HMRC is already commencing a pilot scheme in 2017 for the self employed and landlords.
- It was announced in the Spring Budget that MTD will be postponed by one year (i.e. to 2019) for those small businesses who have a turnover under the VAT threshold.
- Small business with a turnover above the VAT threshold will report quarterly under MTD from April 2018 (as orginally planned)
- Those with a turnover under £10,000 and the digitally excluded are exempted.
- See Making Tax Digital (index)