In October 2016 the Treasury select committee heard evidence from the Federation of Small Businesses (FSB) that the switch to quarterly digital updating on tax is likely to result in additional compliance costs of £2,770 per business per year.

However, in its published response to the consultations on Making Tax Digital, the Treasury said its latest estimate indicates the cost is likely to be no more than £280, and will become neutral within four years.

Now Tyrie has written to both Mike Cherry, national chairman of the FSB and Jane Ellison, financial secretary to the Treasury, asking them to provide more information about the basis for their claims.

Tyrie said: ‘The compliance cost estimates are so far apart that at least one of them must be wrong. I have written to both the Treasury and the FSB to ask for detailed supporting methodology for their estimates.

‘If the FSB are right, the effects of Making Tax Digital would be crippling for many small businesses. If the government are right, businesses have something to gain in the longer term and one would expect them to be queuing up to join the pilot.’

In a letter sent to Tyrie in response to the committee’s report on Making Tax Digital, Ellison disputed the figures given to MPs by other sources.

‘We recognise that there is an inevitable one-off transitional cost of reform. However, this is far lower than those cited in the Treasury select committee’s report.

After the transition, the impact assessment forecasts an ongoing administrative saving to businesses year on year. We will continue to refine the impact assessment as we begin to trial MTD,’ Ellison wrote.

In its most recent assessment, published along with the consultation outcomes, the Treasury said Making Tax Digital would impact around 3.3m self-employed individuals (including around 900,000 landlords), 1.6m companies, over 400,000 ordinary partnerships, and about 600,000 businesses with income from different sources (for example, both self-employment and property).

It says once businesses have transitioned to regular digital record keeping, the obligation to provide quarterly updates to HMRC is expected to result in an overall reduction in burdens compared to the current once a year reporting requirements.

The Treasury acknowledges businesses will incur transitional costs in moving to the new arrangements. Its current estimate is that the transitional costs average about £280 per business over the period 2017/18 to 2020/21.

The costs are likely to cover time businesses spend in familiarising themselves with the new digital tools and quarterly submission of information; purchase of new apps and upgrading existing software and, in some cases, hardware; plus additional accountancy/agents costs.

However, the Treasury says savings will start to be made from 2020/21 onwards. It argues that once all businesses complying with Making Tax Digital have fully transitioned, and are making full use of software capabilities, steady state savings associated with an overall reduction in time spent complying with existing ITSA and VAT obligations, plus the complete removal of certain obligations, are estimated at £270m.

The SCM provides the estimated costs for a proportion of businesses incurring ongoing software and external agent costs as a result of complying with these obligations, and until behavioural responses to Making Tax Digital are better understood, these costs are maintained at current levels. Costs are then estimated for increased software subscription costs, and making quarterly updates. Steady state costs are estimated at £170m.

The Treasury says this produces a net administrative burden saving of £100m (steady state in 2021 to 2022).

These calculations were challenged by Richard Murphy, professor of practice in international political economy, City, University of London, at a recent House of Lords economic affairs select committee.

Murphy argued Making Tax Digital is likely to cost businesses at least £1.8bn a year, or an average of £305 for each of the 5.9m million businesses HMRC says will be affected.

Murphy said: ‘HMRC assume that the maximum additional cost small business will pay to comply with the Making Tax Digital programme will be £170m, including software costs. Stripping out the smallest estimate I could make of those software costs left just £103m to cover the cost of 5.9m businesses submitting four extra sets of accounting data a year, each of which will have to be right if penalties are avoided.

‘Simple division suggests each will cost £4.36 in HMRC's view in that case.

‘HMRC's estimate suggests they think a person paid the UK minimum wage should be able to prepare and submit quarterly accounts for a UK small business in just 35 minutes.

‘I estimate an average one-person business might take half a day to do this. Based on annual average self-employed earnings that represents a cost of £108 a year.

‘However about two thirds of all small businesses and 78% of companies seek help with their tax returns. If they do that with Making Tax Digital returns, as seems likely, I think their costs will vary from £300 to £600 a year. Only small landlords might get away with additional costs of no more than £100 a year. That's how I come to an estimate of £1.8bn including software costs.’

Tyrie’s letter to the FSB is here.

Ellison’s letter to Tyrie is here.

Tyrie’s response to Ellison is here.