Concessions made for small businesses amidst Making Tax Digital concerns

SUMMARY:

HMRC has been allocated £1.3 billion by the Treasury to bring tax returns online for businesses across the UK – but MPs have raised concerns.

The government has finally admitted that its plans for Making Tax Digital (MTD) may have been over ambitious for smaller businesses and has made some concessions for those that fall below the current VAT threshold of £85,000, following complaints from MPs.

The Treasury Committee has been one of the most vocal opponents to the original proposals, claiming in recent months that the Making Tax Digital project “could be a disaster” if HMRC didn’t consider that the systems and processes could be unwieldy for small business owners – which could potentially put them out of business or result in them not submitting their tax returns to the tax authority.

HMRC was allocated £1.3 billion by the Treasury at the end of 2015 to bring the tax affairs of 1.6 million companies, 2.4 million individuals and 900,000 residential landlords online over the next few years. Instead of doing tax returns annually through the use of physical forms and paper receipts, information will largely be submitted online on a quarterly basis.

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

However, the Treasury Committee recently said that based on the evidence it has seen, that this timeline looks over-ambitious and that for many smaller businesses it will be too costly a task. It called for the project implementation to be delayed until 2019/20 – something the government this week said it would also do.

Andrew Tyrie MP, Chairman of the Treasury Committee, recently 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.

Concessions

The government said this week that it has listened to the concerns raised by parliamentarians, in particularly the Treasury Committee, and now claims that three million of the smallest businesses and landlords will be able to move to the new digital system for tax records “at a pace that is right for them”.

Mel Stride, Financial Secretary to the Treasury and Paymaster General said:

Businesses agree that digitising the tax system is the right direction of travel. However, many have been worried about the scope and pace of reforms.

We have listened very carefully to their concerns and are making changes so that we can bring the tax system into the digital age in a way that is right for all businesses.

Under the new timetable:

• only businesses with a turnover above the VAT threshold (currently £85,000) will have to keep digital records and only for VAT purposes
• they will only need to do so from 2019
• businesses will not be asked to keep digital records, or to update HMRC quarterly, for other taxes until at least 2020

In addition to this, MTD will be available on a voluntary basis for the smallest businesses, and for other taxes. This means that businesses and landlords with a turnover below the VAT threshold will be able to choose when to move to the new system.

Meanwhile, all businesses and landlords will have at least two years to adapt to the changes before being asked to keep digital records for other taxes.

HMRC added that it will start to pilot MTD for VAT by the end of this year, starting with small-scale, private testing, which will be followed by a wider, live pilot starting in Spring 2018. This means that businesses will have over a year of testing before being mandated to use the system.

Taking all this into account, and compared with the original plans, it appears that HMRC and the government have decided to push back the timetable by about a year.

My take

We at diginomica highlighted concerns early on that the project was ambitious and that HMRC should be careful to rush this against unrealistic timeframes. Equally, it’s important that it doesn’t lose small businesses from the plans – it’s good that concerns are being listened to. However, testing at present is still very small scale, and so we know very little about how this will work in practice yet. Only then will we know how effective MTD will be. Necessary for sure, but not a done deal just yet.

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