Treasury Select Committee report released on Making Tax Digital

A long-awaited report from the Treasury Select Committee has been released on Making Tax Digital (MTD), revealing the framework for its implementation.

The government has proposed that, subject to a small number of exceptions, all businesses will be required to keep their accounting records in digital format and submit quarterly updates to HMRC.

The Treasury Select Committee however is “concerned” about the costs to businesses, including costs to maintain digital records and updates.

The government consulted over the plans from August 2016, and, as mentioned in the Autumn Statement last year, is proposing to respond to the consultation by publishing a draft of the Finance Bill later this month to legislate for the necessary changes.

Affecting business

MTD requires businesses to begin digital record keeping and reporting for income tax and National Insurance from 1 April 2018 or 1 April 2019, depending on company size, and for VAT from 1 April 2019. Between 2.5m and 5m businesses are likely to be affected as HMRC aims to become the most digitally advanced global tax administrator by 2020.

Frank Haskew, head of ICAEW Tax Faculty, said: “The Treasury Select Committee has called the current MTD proposals ‘over-ambitious’. To implement by April 2018, the government are not giving themselves enough time to address the issues raised by the committee. They should minimise the burden and make MTD voluntary, at least for smaller businesses, if it works, they will adopt it.”

MTD is a £1.3bn investment programme that will mark a “fundamental” change in the way that businesses interact with HMRC. The quarterly updates will be followed by an “end of year reconciliation” to ensure that the year’s tax activity was properly recorded.

In response to the HMRC consultations, the committee backed tax digitisation. However, it concluded that the overall benefits of mandating the new system for all businesses have not yet been proven, and a year is not enough time for fundamental change.

Chas Roy-Chowdhury, head of tax at ACCA said: “HMRC are right to focus on digitisation, but more evidence is required. If profits and productivity fall, the tax system will not be meeting its objective, costing society more than it gains. In the context of post-Brexit uncertainty, the risk of two revisions to VAT reporting in short succession will be a major headache.”

Andrew Tyrie MP, chairman of the Treasury Committee, said: “If the Government gets it wrong, there could be collateral damage from the loss of trust between HMRC and the vast majority of taxpayers, which helps to keep the tax gap down. Their co-operation and trust are hard won.”

The committee’s solution

The report from the Treasury Select Committee proposes a “widely supported” solution involving a deferral of the implementation, and readjustment of the threshold to be set at £83,000, the current VAT threshold, before falling to £11,000 over a three-year period.

Brian Palmer, AAT tax policy adviser, said: “Linking the exemption limit to the existing VAT threshold will allow many of the smallest companies additional time to get to grips with the challenges and opportunities MTD presents, whilst ensuring larger companies remain within scope.”

Lee Murphy, owner of accounting software Pandle said: “HMRC tend to have weak systems, therefore a rushed system will cause lots of issues. Ideally, tax digitisation should be introduced for limited companies first, followed by individuals, instead of the other way around. At present, only around 25% of businesses use accounting software.”

The committee also stated that there should be a comprehensive set of pilots of the end-to-end system before it is made mandatory. Additionally, there is “not enough” information on available free software, which will affect accountants’ fees, and business time management.

Tyrie added: “A fully functioning market in appropriate software is essential. The government will need to include adequate free software for smaller and less complex businesses.”

The AAT and the ACCA support digitisation and changes that improve the effectiveness and efficiency of the tax system, but current evidence indicates that the MTD will have the opposite effect. These concerns were expressed during the consultation period over the timetable and potential costs. The ICAEW agree that there should be a delay and stated that the government “must minimise burdens”.

Tyrie concluded: “The timetable for implementation in April 2018 looks unachievable. There needs to be a delay until 2019/20, possibly later. The long term future can, and probably should, be digital. Better to take care than to have an accident.”

The committee will take evidence from ministers when the government has had time to consider and respond to the report.