Making Tax Digital (MTD) is a fantastic new piece of legislation introduced by HMRC to transform the UK tax system into ‘one of the most digitally-advanced tax administrations in the world by 2020.’
While the introduction of MTD will make tax administration more effective and efficient, the government’s fast-paced move towards full digitisation has not found favour amongst MPs of the House of Commons Treasury Select Committee.
According to their 48-page report on the reforms, which mainly analyses the proposals contained in the main MTD consultation document: ‘Bringing Business Tax into the Digital Age’, the committee has called on HMRC to delay the implementation of its digital project.
They said that although the idea of digitisation of tax is welcome largely by accountancy committees and trade bodies, there are a number of pressing issues that have gone unaddressed. In the blog, we have summarised the most important ones.
1. Defer implementation
With a few exceptions, from April 2018, a wide range of taxpayers, including most businesses, self-employed people, landlords, as well as individual taxpayers, will transition to the new system. While the committee saw numerous benefits of MTD, they found the timescales of implementation very ambitious.
As per the report, the government has been invited to explain its position of its proposed timetable but as yet hasn’t found an opportunity to provide detailed evidence. The committee will take further evidence from the government including how any decisions about VAT and EU are relevant for the timing of MTD, plus a detailed explanation of how Brexit related VAT changes will be dealt with.
Among the other reasons cited for delay was the need for taxpayer training and education. Including the time required for training, the report highlights the cost of staff training in the use of MTD.
The report suggests that the implementation date should be put back to 2019/20.
2. Run an ‘end-to-end’ pilot
Rather interestingly, the report points out that HMRC have ignored the Carter principle, established by Lord Carter in 2006 when developing online services and the government’s own digital service standard. One of the 18 principles of the standard says, “Test the service from beginning to end with the minister responsible for it.”
This key recommendations from the report is that an obligatory pilot of the process, “end-to-end”, should take place before full implementation. This allows empirical assessment of likely compliance costs and benefits over an entire reporting cycle. The report also stresses the role accountants and tax agents can play in the MTD pilots.
3. Align MTD entry threshold with the VAT threshold
The committee calls for HMRC to publish its reason for the low exemption threshold of £10,000. They think the threshold is too low, and of no advantage for either HMRC or the business submitting quarterly returns, as most taxpayers with such a low turnover would not pay any tax. The committee said, “To impose MTD on them would palpably be absurd.”
The report recommends that the MTD threshold for businesses should be aligned with the VAT threshold.
4. Clearer guidance on exemptions
The report says that the MTD exemption for the “digitally excluded” should be applied widely. The government’s consultations only exclude those for whom MTD is not “reasonably practical”.
For it to provide meaningful protection for the “digitally excluded”, HMRC will need to provide clearer guidance, including a more detailed explanation of what they mean.
5. Evidence of costs and benefits
HMRCs consultation documents stated that “Making Tax Digital changes will help reduce the tax gap and contribute £945 million to the Exchequer by 2020/21” (£625 million in the first full year).
However, the committee is not satisfied with HMRCs assumptions. It has asked the government to provide further evidence that real time reporting will indeed provide the large yield they are claiming. An evaluation of a pilot could assist in figuring this out.
6. Accounting software issues
The other main area of concern is the accounting software that will be necessary for MTD, especially, if the software is in addition to the software a business currently uses. The committee has called for the government to not expect businesses to invest in additional IT requirements, as this is a mandatory change forced on them.
In fact, it has recommended HMRC to provide free software that is at par with paid software. Expanding on this, the committee said, ‘HMRC will need to work closely with the software companies to ensure that free software has sufficient functionality, as well as comprehensive prompts and nudges, for it to be a viable choice for small businesses.”
This is in addition to guidance to businesses and their accountants in the choice of software.
7. Assurances about cyber security
The committee is aware that the scope for cyber-attacks and hacking might increase with MTD. As this could compromise customer’s data, they have asked HMRC to provide adequate assurances about the security of data held by software providers.
8. Intensive publicity campaign about MTD
Given the lack of digital engagement among some sectors of the population, the report has stressed that HMRC will need to run an intensive publicity campaign so that all taxpayers are aware of their new obligations.
Professional bodies and business groups raised various other issues too. These are too detailed to cover in this summary. You can read the full report here.
If you’d like to find out about how QXAS can help you prepare for Making Tax Digital, please feel free to contact a member of the team at firstname.lastname@example.org or call 0870 803 1033.