The UK’s tax department, HMRC, has been given a stern warning from the House of Lords Economic Affairs Committee over its Making Tax Digital plans, which has expressed concern about the effectiveness of the pilot, questioned the predicted benefits, and highlighted the “anxiety” felt by those that the plans affect.
HMRC was been allocated £1.3 billion by the Treasury 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.
And whilst the Committee believes that the overall objective of Making Tax Digital should be “welcomed”, it also states that the government is “wrong” in its “transitional arrangements, the treatment of the digitally disadvantaged, and the threshold for inclusion”.
This follows a warning from the Treasury Committee at the beginning of the year, which said that the plans “could be a disaster”.
This latest report outlines four key recommended changes for the project, which are as follows (taken directly from the Committee’s report):
- The Government must revise and improve its assessment of the benefits and costs of the new scheme. The Government’s estimates 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 small business operations and the initial expenses businesses will incur.
- The Government should make keeping digital records and quarterly reporting optional for businesses with a turnover below the VAT threshold. The case for making it compulsory for smaller business has not been made. There is no evidence that these requirements will reduce taxpayer error: it does not follow that more frequently recorded information is more accurate information. The quarterly reports will impose an unnecessary burden on businesses, but will be of limited use in forecasting their tax liabilities.
- The Government should delay the launch of the scheme until 2020. Crucial to the success of Making Tax Digital will be the software and apps. As currently planned the pilot of the software will begin in April 2017. This leaves insufficient time for the pilot to cover a full tax year, for any review of its findings, or further consultation before the full scheme launches. This delay will also allow the Government to test the underlying behavioural assumptions; to raise awareness of the scheme amongst sectors who remain unaware of the forthcoming changes; and put in place support systems for those who are digitally excluded. The latter are vital: HMRC’s own research reveals that 61 per cent of the self-employed (which may be up to two million people) are either unable to, or require assistance, to interact with Government online.
- Finally, the government should look again at the enormous variety of businesses and should examine whether certain kinds of business, such as those with seasonal or highly irregular income, should be outside the scheme.
Problems with the pilot
Part of the Committee’s report focuses on the likelihood of HMRC achieving its intended benefits through the system, namely by reducing the tax gap (with estimates from HMRC that an extra £1 billion a year will be brought in because of the new system after 2021). The report claims that the government’s “estimates of the ‘tax gap’ savings are fragile and not based on adequate evidence”.
However, it’s the analysis of HMRC’s pilot and implementation plans that should attract the most interest, given that these could impact the long-term viability of the department’s solution and its usability.
diginomica recently outlined HMRC’s broader transformation plans, but it’s useful to have the additional detail as it relates to Making Tax Digital. The report states that “the design and duration of the pilot proposed by HMRC does not conform to government best practice guidelines”.
HMRC’s pilot will begin in April 2017 with a limited number of volunteers recruited with assistance from the software industry. The numbers participating are intended to be increased gradually, building up to several hundred thousand businesses – enabling more software to be tested as it becomes available.
However, because of the proposed timelines, there is going to be an overlap between of the end of the reporting cycle for the 2017/18 tax year (the pilot year) and the start of the reporting cycle for the 2018/19 tax year (the ‘go live year’), which the Committee states “obviously has implications for the extent to which the full set of processes, software and other services can be tested, evaluated and refined in time for an April 2018 launch”.
It has also been pointed out that businesses subject to the Making Tax Digital obligations will also have to select software by April 2018, when its end of year capabilities will not have been tested.
The report explains:
The relatively short duration of the pilot appears to run counter to government guidelines and recognised best practice. The 2006 Carter Review of HMRC online services recommended that each new online service introduced by HMRC be “capacity tested at least a year before” implementation, “in order to ensure they are robust and high quality”.
April 2017 to April 2018 testing will at most include three quarterly submissions, yet the Government’s Digital Service Standards requires departments to “test the end-to-end service”. Deferring by one year the start date for businesses below the VAT registration limit does not remove any of these concerns.
The report also said that there was “widespread scepticism” about the proposed timetable for implementation, not only because of the pilot, because because of “the sheer magnitude of the task ahead to prepare businesses for the transition”.
The evidence suggests that the software industry, as well as the tax practitioner community, is becoming increasingly concerned at the resources and preparation it would need in order to fill any gaps left by HMRC in supporting tax-payers.
The Committee said:
The almost universal concern of witnesses is that the current timetable for mandating digital record keeping and quarterly reporting is too tight and entails unjustifiable risks for businesses, HMRC, tax practitioners and the software industry. It does not allow enough time for full end-to-end piloting and evaluation to avoid unnecessary risks for both HMRC and businesses.
We welcome the Chancellor’s decision to defer until 2019 the mandation of the smallest businesses into the new system. This will help address some of the most pressing concerns by reducing the risks of unnecessary costs and implementation difficulties for these businesses.
However, the Chancellor’s changes do not go far enough. We recommend that mandatory implementation of digital record keeping and quarterly reporting should be deferred until April 2020, after the extended pilot period.
It’s always worrying with these large government projects when serious concerns are being raised this early on about rushed timeframes, inadequate testing and disregard for the user need. Whilst I agree that Making Tax Digital is important, rushing a system that doesn’t work for everyone is the wrong way to tackle the current problem.
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