Despite already making some concessions, HMRC has failed to support small businesses in their transition to Making Tax Digital for VAT and would delay the introduction of the new system by at least one year.
That’s the recommendation being made by Peers on the House of Lords Economics Affairs Select Committee, which in a damning report claims that HMRC has also not made any attempt to calculate the impact of introducing Making Tax Digital for VAT on the smallest businesses.
Today’s report follows concerns raised by MPs on the Treasury Committee, which claimed that the Making Tax Digital Project “could be a disaster”.
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.
However, today’s report by the House of Lords Economic Affairs Select Committee is particularly concerned with the Making Tax Digital for VAT plans, which will apply to all businesses with a taxable turnover of over £85,000.
Despite Making Tax Digital for VAT set to come into effect on 1 April 2019, today’s report highlights that as much as 40 percent of affected businesses have not yet heard of the scheme, let alone started to prepare for a substantial change to their accounting processes.
Lord Forsyth of Drumlean, Chairman of the Economic Affairs Committee, said:
"HMRC has neglected its responsibility to support small businesses with Making Tax Digital for VAT. HMRC are not listening to small businesses, while offering a six-month deferral to many in the public sector. Small businesses will not be ready for this significant change to their practices if it is introduced on 1 April, particularly with Brexit taking place three days earlier. The Government must delay its introduction."
"The Government has failed to listen to the warnings in our previous report. It must slow down its Making Tax Digital programme and listen carefully to the concerns raised by this Committee, small businesses and accountants."
HMRC told the Lords Committee that it expects Making Tax Digital for VAT to yield considerable amounts of tax revenue, as businesses make fewer errors filing their tax returns. This is part of the government’s primary justification for the “speed and rigidity” with which the programme is being introduced.
However, the Lords Committee is unconvinced fo this logic and has made a number of recommendations for HMRC to follow up on.
The report raises a number of concerns for small businesses. For example, it notes that the emerging software market to support Making Tax Digital for VAT appears difficult to navigate and that it is unfair to expect businesses to make choices about their accounting software without a better understanding of the future of the programme.
In addition, the Committee states that there is little evidence that HMRC has made any attempt to calculate the impact of Making Tax Digital for VAT on the smallest businesses. For example, HMRC has assumed that the programme will result in no additional accountancy fees, either during or after transition, which conflicts with the weight of evidence that the Committee has received.
The report is damning and notes that “Making Tax Digital for VAT will make lift even more difficult for small businesses given their scarce resources to devote to preparing for the change”.
It adds that it is HMRC’s duty to support small businesses with the transition and implementation.
As a result, the Committee makes the following recommendations:
- HMRC should defer the introduction of mandatory Making Tax Digital for VAT by at least one year, while encouraging businesses to join voluntarily;
- It should plan a staged transition for businesses to join the scheme and for future stages of Making Tax Digital, allowing businesses to be fully ready;
- Wait until at least April 2022 to implement the next stages of Making Tax Digital, to allow time to learn lessons from the implementation of Making Tax Digital for VAT; and
- Publish its plan for the long-term development of Making Tax Digital, to encourage businesses to choose digitalisation for productivity, efficiency and modernisation reasons, rather than just tax compliance
Dealing with HMRC online is a nightmare. I myself recently experienced an eight month debacle after losing my login details for Government Gateway (having had my laptop stolen). HMRC informed me that I was only able to have my login details posted to me - but I had moved twice since the details were lost. This wasn’t helped by the fact that after telling HMRC of a change of address, it would take up to 46 working days to update the systems. Yup, 46! In the meantime, HMRC had instructed debt collectors to harass me with phone calls and letters. Simply put, dealing with HMRC is NOT EASY.
So, I welcome any change that will making submitting VAT online easier. That being said, as someone operating a small business, I can’t say I’ve received any instruction on how to transition to that point. The message from the Lords Committee is sensible - businesses want to do this, but they just need time and support. HMRC rushing this without putting the necessary measures in place will just result in unnecessary stress and failure. A rushed implementation helps no one.