Lords call for delay in Making Tax Digital for VAT until 2020

A Lords committee has issued a scathing report on HMRC’s Making Tax Digital (MTD) for VAT program, due to come into full effect in April 2019, attacking HMRC’s unrealistic timeframe, lack of communication with businesses, and failure to improve following previous criticism

The House of Lords economic affairs committee said that it had 'been struck with a sense of déjà vu' throughout its inquiry, finding it disappointing 'that many of the concerns raised in evidence to this inquiry have repeated issues addressed in our 2017 report'.

The 2017 report suggested that the tax gap benefit supposed by HMRC was ‘guesswork’, that HMRC underestimated the difficulties faced by the ‘considerable number of people with limited digital skills or inadequate broadband access’, and that the proposed timetable ‘was too tight and entailed unjustifiable risks for businesses, HMRC, tax practitioners and the software industry’. On most issues raised by the committee in 2017 HMRC had taken ‘no meaningful action’.

The committee attacked the ‘speed and rigidity’ with which the programme is being introduced, claiming that this is motivated by the possibility of increased revenue for the government rather than out of a need for greater efficiency, saying that the committee is ‘unconvinced that MTD will reduce error and thereby the tax gap’.

HMRC had said that the reduction of the manual element would reduce errors in both ‘arithmetic’ and ‘transposition’ and the reduced risk of lost paperwork. However, as noted by the committee, a representative of IRIS Accountancy Solutions, which makes MTD-compatible software, said that this reduction in risk ‘seems unlikely while spreadsheets are still being used’.

Government estimates on the return to the Exchequer of MTD by 2022-23 had, the committee noted, reduced from over £3bn to slightly more than £1bn. The committee found issue with this, noting that ‘reducing errors could reduce tax revenue as well as increase it’ and providing an opinion from CIOT in which they had said that the body does not believe ‘that MTD will deliver the “pot of gold” HMRC expects it to’. Fundamentally, the committee found that ‘costs for taxpayers were understated and benefits overstated’.

Communication

A failure to adequately communicate with businesses and taxpayers, a recurring theme of the Lords committee hearings, was also raised, as was HMRC’s ‘dependence on agents to ensure businesses understand their MTD for VAT obligations’ which does not recognise the needs of unrepresented taxpayers.

The committee found that HMRC had elected to communicate primarily with software providers, agent representative bodies and agents, neglecting to inform taxpayers ‘until they were invited to join the pilot’. Although it noted that on 16 October 2018 HMRC had informed the committee that it was ‘significantly increasing its communications activity’, it said that with five months until the introduction, it was ‘too late to begin an effective communications campaign’.

A lack of information had led to the emergence of ‘a spectrum of business readiness’, which ranged from businesses confident in their readiness to those ‘still wholly unaware’. The committee noted that this ‘also has the effect of shifting the costs of supporting taxpayers through this significant change, which HMRC should bear, to taxpayers by increasing their compliance costs’.

Cost to business

The committee noted the difficulty that faced businesses in preparing for MTD, in particular that businesses using older software ‘face costs of upgrading purely to meet MTD requirements, since they are already realising efficiencies through their existing software’. It recommended that the government provide a support package of software independently from a software industry that, in its opinion, had failed to be ‘competitive, accessible and diverse’. It said that HMRC ‘is alone in its confidence that all one million businesses will be ready for MTD for VAT in April 2019. They have underestimated the time for research, planning, training and system changes that some businesses will need.’

The committee criticised HMRC for believing that businesses would incur costs in the transition to MTD but that ‘administrative savings realised would outweigh those costs’. HMRC believes that the average transition cost to a business would be £109, with an additional £43 in ongoing costs on average, with a total estimate of the cost to the 1.2m businesses required to join MTD revised from £37m to £131m.

Witnesses that appeared before the committee had contested this calculation, suggesting that the average cost to a business would be anywhere between £300 and £2,000. A higher figure of £2770 was suggested by research conducted by the Federation of Small Businesses (FSB). HMRC’s estimate was, according to the committee, based on a number of faulty assumptions, including that ‘there will be no additional agents’ costs for transition either’. This meant that ‘HMRC therefore appears to be expecting agents to provide small businesses with additional support without charging for it’.

Pilot extension

The committee also criticised a deferral extended by HMRC which ‘was given mainly to other public sector bodies and a selection of small organisations with the most complicated tax affairs, and not to the smaller businesses for whom implementation will be most burdensome, and who have the fewest resources to devote to implementation’. The extension of the pilot to 600,000 businesses in October 2018 was also cause for concern, as 'there is too little time before 1 April 2019 to make up lost ground and respond to implementation issues identified by taxpayers. HMRC’s systems are still unproven at scale’.

The pilot, the committee noted, would do nothing to change this, as there ‘will be no “pause” to allow the lessons learned in the pilot to be evaluated, particularly from the perspective of taxpayer readiness, and changes made before it is mandatory for most taxpayers. The reliability and performance of the system in dealing with large numbers of VAT traders is unproven’.

The report strongly recommends that the government ‘defers the introduction of mandatory Making Tax Digital for VAT by at least one year, while encouraging businesses to join voluntarily’, plans a staged transition to allow businesses to be fully ready, and waits ‘until at least April 2022’ to implement further planned stages of MTD.

Fundamentally, the committee said that ‘There seems a failure to appreciate, or at least acknowledge publicly, the extent of the risks to implementation that MTD for VAT faces’. It recommended ‘that HMRC’s board challenges the department’s current assessment of the risks’ and that the government ‘take steps to ensure that an adequate budget that is protected by a ring-fence should be available’.

Richard Wild, head of CIOT tax technical team, commented on the report, saying: 'We support the recommendations of the House of Lords Economic Affairs Committee. CIOT is concerned that many businesses will simply not be ready by 1 April 2019. 

'Whilst the use of software can bring many advantages, this should be something which businesses gravitate towards because it delivers those benefits, and not be something they are forced to adopt. This is particularly important because we remain sceptical as to whether Making Tax Digital for VAT will indeed reduce the tax gap, and also expect it will cost businesses far more to implement than HMRC have estimated.'
 
Simon McVicker, director of policy at IPSE, welcomed the suggestion that MTD should be delayed: ‘HMRC’s initial timetable for Making Tax Digital was way too ambitious and targeted the wrong businesses. IPSE was grateful to the government for heeding our calls and delaying the initial implementation until 2019.
 
‘However, we are concerned that many self-employed businesses simply do not know about the new requirements. The costs for implementing these changes could be higher than government predictions, so we would welcome a further delay to give our smallest businesses some extra breathing room. A surprisingly large number of very small businesses still keep paper records.
 
‘They do not have access to in-house accounting and finance departments like bigger businesses and are therefore at greater risk of being disrupted by the new reporting requirements.’
 
An HMRC spokesperson said: 'We are disappointed that the committee’s report does not reflect HMRC’s wide and significant engagement on MTD over the last three years, nor the changes made as a result for small businesses.'
 
Report by James Bunney

 

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