Treasury Committee Calls for MTD Delay

More thinking time needed before implementation

The House of Commons Treasury Committee has recently published its report on Making Tax Digital (MTD), which calls for a delay in the implementation of MTD and for more extensive piloting of the reforms.

Whilst the Committee agree that MTD will increase the efficiency of tax collection, this should be done not just in a way that improves tax yield, but also taking into account the reasonable needs of millions of taxpayers. This will require a great deal of care and sensitivity on the part of HMRC, a concept that might be foreign to the department! A large proportion of the UK’s businesses, particularly millions of small businesses, are presently not well equipped to move over to digital record keeping and reporting. Furthermore, they may not well be ready for several years to come.

On the evidence that the Committee has seen thus far, the Government appears intent on sticking to its original schedule for implementing MTD which only leaves little over a year to complete the work. This is over-ambitious. Crucial concerns raised by the Committee are still to be addressed, including the need for adequate, free software; 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 two years time.

Such a fundamental reform of the UK tax system requires much wider debate and consultation. As such, the Committee considers a start date of April 2018 for mandatory MTD to be wholly unrealistic and recommends a delay until at least April 2019. However, this may be unlikely.

Threshold

The £10,000 threshold at which point businesses must record and report digitally is, quite rightly, considered to be too low. Such a level would catch many businesses whose profits are far less than the personal allowance and to impose MTD on them would be “absurd”. Aligning the MTD threshold with the VAT threshold, currently £83,000, or even beyond this would be an option.

Benefit to business

It has been argued by the Government that businesses may benefit from a requirement to keep records and submit information digitally but the Committee has yet to see evidence that supports the view that such benefits would outweigh the costs. If it were so beneficial to business as HMRC claim, then it is reasonable to suppose that most businesses would be doing it by now.

The average cost to business of implementing MTD cannot be substantiated until there is more detail of the requirements and more examples of the software. However, the cost is likely to be significant for a small business. Evidence given to the Committee suggests that under the current timetable, the total cost to business (including software, hardware, training, agent fees and, most importantly, time) might exceed the total benefits in improved tax take. Thus, even if tax revenue were to rise, the return to the whole economy could be negative.

Lessons from Self Assessment

Rather than trying to stick to an unrealistic timetable, the Committee believe the Government should draw on the experience gained at the beginning of the 21st century from introducing the online filing for income tax Self Assessment over a period of many years. This would suggest there is merit, for both taxpayers and HMRC alike, in moving things forward gradually.

Trust

The UK’s relatively low tax gap in the UK is, in part, due to a widely understood culture of mutual trust between HMRC and the vast majority of taxpayers. Unlike some countries, most UK taxpayers try to pay the right amount. Trust is built upon respect for taxpayers’ confidentiality and a feeling that taxpayers are being treated fairly, even if they do not like having to pay tax. That trust could be eroded if HMRC rushes into dealing with individuals in a faceless and automated way before they are ready for it, and with what some taxpayers may perceive to be risks to confidentiality.

Software and spreadsheets

It is important that taxpayers receive adequate guidance from the Government to help them choose the most appropriate software for their business.

Spreadsheets are a valuable tool for record keeping and should be accepted for MTD. However difficult it might be in software terms, HMRC needs to ensure that tools are available to convert information from spreadsheets into information that can be submitted as part of the quarterly digital update.

Once the precise shape and timing of MTD is known, HMRC will need to embark on an intensive publicity campaign so that all taxpayers become aware of their new obligations.