HMRC’s £1.3 billion Making Tax Digital project “could be a disaster”, warn MPs

SUMMARY:

The Treasury Committee has yet to hear evidence from HMRC itself and isn’t convinced that the estimated returns are realistic.

The UK government’s tax department, HMRC, has been issued a severe warning by MPs on the Treasury Committee that its £1.3 billion plans for a world-class digital tax system could ultimately “be a disaster”.

HMRC, despite being asked, did not provide evidence to the committee. The MPs on the committee have warned that the department’s timelines for the project are overly ambitious, that it perhaps hasn’t thought through the implications for small business and that the savings projected could well be unrealistic.

When previous Chancellor for the Exchequer George Osborne announced the plans as part of his late 2015 spending review, we at diginomica warned that there could be potential problems ahead, given that the government doesn’t exactly have a stellar track record when it comes to managing projects of this size.

Combine that with the challenges that HMRC faces in winding down its longstanding outsourcing contract, Aspire, and the insourcing of skills that is required – it’s unsurprising that concerns are being raised.

Whilst the digitisation of the tax system in the UK is wholly overdue (the current system is clunky, difficult and completely unintuitive), to pull off an overhaul of this scale will not be an easy task.

Shortly after the project was announced, newly appointed Financial Secretary to the Treasury, Jane Ellison MP, said:

What I’m also really excited about taking forward, is our plan to establish one of the best digital tax services in the world.

Offering businesses and individuals alike the kind of digital services they expect in the 21st century. Now I know it’s not the case for everyone – and for those who can’t get online, we will make special provisions.

And it’s just not right that our tax service should lag behind – stuck in an age of paperwork, letters and phone calls. That’s why we want HMRC to offer all our customers a top quality, fully digital service alongside its existing services.

Not convinced

According to the Making Tax Digital plans, all businesses will be required to keep their accounting records in a prescribed digital format and will have to 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.

HMRC has said it will be joining up its internal systems and it will populate the digital accounts with the information it holds, removing the need for users to collate information from a bunch of different places and inform the department about details it already holds (albeit in silos). This means that when taxpayers log on to their digital account, web forms should already largely be populated with the details HMRC has.

The department also says that it will be analysing this information closely to identify those that are looking to bend or break the rules.

Whilst the Treasury Committee has said that it supports the idea of the digitisation of reporting tax, it has also said that the overall benefits have not been proven. MPs are calling for a comprehensive set of pilots of the end-to-end system before it is made mandatory for all businesses.

The Committee is particularly concerned about the costs to businesses of introducing Making Tax Digital, as well as the continuing costs of maintaining digital records and submitting quarterly updates.

Andrew Tyrie MP, Chairman of the Treasury Committee, said:

Carefully introduced, the digitisation of tax records and reporting (MTD) can be an opportunity greatly to improve the administration of the tax system for the long term. Without sufficient care, MTD could be a disaster. Implemented carefully, with long transitional arrangements where necessary, and, having drawn on information from fully inclusive pilots,

Making Tax Digital could be designed for the benefit both of the economy and of the tax yield. But with a rushed introduction, it will benefit neither.

The Committee has identified a number of serious shortcomings with current plans.

Concerns

The government’s original proposal stated that implementation would take place during 2018. The Committee said that based on the evidence it has seen, that this timeline looks over-ambitious. The concerns as it relates to the timeline include the need for adequate, free software for businesses to use (plans not currently in place for this); the overall costs and benefits of the project; the proposed speed of implementation; and the fact that it will be mandatory for the vast majority of businesses within little over two years.

It is estimated that the changes could affect two and a half million taxpayers – possibly as many as five million. However, the Committee said that it is “extremely unlikely” that the vast majority of businesses will be capable of adapting to that start date at a reasonable cost.

The Committee is recommending the delay of the full implementation until at least 2019/20.

MPs also expressed concern for the way in which HMRC plans to test the system, via the use of volunteers. The Committee’s report states that this will provide limited information on the “robustness” of the system and an obligatory pilot of the end-to-end process should take place before full implementation.

The report also argues that the £10,000 threshold for businesses required to submit tax digitally is too low, as it would catch many businesses that currently pay no tax. It argues that to impose the system on them would be “palpably absurd”.

MPs are also unconvinced that keeping records and submitting information will actually be cheaper for businesses.

Also, the Committee said that although it is plausible that the new system lead to fewer errors, this could actually work against the exchequer. For example, companies and individuals may currently be forgetting to record expenses. Equally, as businesses move to the digital system, this could lead to increased errors.

Tyrie said:

First, there are the costs and administrative burdens for very small businesses – with the consequent risk that many may go out of business or move into the hidden economy. This may undermine the extra revenue that the Government is expecting to raise from MTD, scored in the August consultation document at £625m, possibly larger now. Perhaps this is a realistic estimate; perhaps not.

Second, there is the speed with which MTD is being implemented. So far, there has been insufficient engagement and consultation with the business community. At present, many of those on whom demands from MTD will be made – millions of small businesses up and down the country: the backbone of the economy – are ill equipped to handle the reporting requirements. There may be other concerns which neither the Committee, nor those providing evidence to it, have yet identified.”

Taken together, these could undermine the Government’s objectives – for the yield and for the economy – and discredit the approach. The collateral damage could be large. If the Government gets it wrong, the culture of mutual trust and goodwill between HMRC and the vast majority of taxpayers – which still exists in the UK and which helps to keep the tax gap down – could be jeopardised.

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.

My take

As someone that runs a small business, I can confirm (as anyone with any interaction with HMRC could) that the current system is so desperately painful. The thought of a modern, digital system seems like a pipe dream.

Which is why I don’t really buy into the Treasury’s argument that doing things digitally will make things harder/more expensive for businesses. Most businesses hire an accountant (at considerable cost) because the current system is so tedious and complicated. Introducing some simplicity could potentially reduce the burden on businesses, I believe.

However, the risk with this system lies with HMRC’s execution of the project itself. Getting out of Aspire, consolidating systems, in-sourcing skills, managing silos and establishing meaningful data is no small task. And the government does not have a good track record at managing such projects.

This is desperately needed. But ironing out any concerns earlier, rather than later, is definitely a good idea.

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