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Are we heading for a disaster with Making Tax Digital?

Another week has gone by with yet another report suggesting HMRC are heading for a disaster with Making Tax Digital (MTD). This time, the report has been issued by the Treasury Committee. A copy of which can be found HERE.

In the 48 page report the Treasury Committee mainly focus on the ‘Bringing Business Tax into the Digital Age’ consultation document and draw attention to many issues in the Making Tax Digital proposals which have been highlighted by fellow professionals throughout the consultation process.

One of the buzz topics was the introduction of the £10,000 exemption threshold for businesses and landlords to avoid the requirement for quarterly reporting. While this exemption was welcomed, many felt this threshold was too low and this has been echoed by the committee. They have recommended that the government explain the reasoning behind this turnover level which is considered far too low, as taxpayers with a turnover of this level are unlikely to pay tax so there is no advantage for the taxpayer making quarterly updates. The report states “To impose MTD on them would palpably be absurd”.

Through my discussions with agents and taxpayers and our own research during the consultation process, the need to increase this threshold is a key issue. The problem is that HMRC feel that it is those businesses with the lowest turnovers that make errors in their record keeping. While I would support an increase in this threshold, I wouldn’t expect it to increase by a substantial level and certainly not to the VAT threshold.

HMRC’s timetable for MTD is another issue for both businesses and accountancy firms. With MTD scheduled to go live from April 2018 there is very little time to ensure there will be robust solutions in place to make sure taxpayers remain compliant. The report confirms that the current proposals for MTD completely ignore the Carter principle. One of these principles is to “Test the service from beginning to end with the minister responsible for it”.

The report suggests that MTD should run a full pilot of the processes and systems which a taxpayer will need to undertake under these new rules. This would include the 12 month cycle of updating a Digital Tax Account along with a nine month period to complete the end of year declaration. Along with the role of the taxpayer, the report suggests the role of agents needs to be investigated. Based on these timescales it has been recommended that HMRC should delay in introduction of MTD until 2019/20 at the earliest.

A delay in the commencement of MTD would certainly be welcomed by all parties. Accountants would have more time to prepare their clients for the future, taxpayers would have plenty of time to learn about the new requirements and it would give software providers more time to develop excellent tools to assist in meeting these new requirements.

On the subject of software, HMRC is still confident that there will be free software available to deal with the most basic affairs. The report has asked the government to clarify what it means by “free software”. It goes on to suggest that there needs to be a functioning market of free software providers and that these free offerings do not include disruptive marketing material and that the software will need to remain free from the provider in the future.

There will be a market of free software available but I question whether HMRC will eventually get involved and create their own solution if there isn’t a competitive number of providers.

The final area to look at is the committee’s view on the costs and benefits of MTD. The committee have questioned whether the government’s calculations of additional tax revenue from MTD are accurate. For those who are unaware, HMRC believe that introducing MTD will reduce the tax gap by £945m. This figure includes £625m in the first full tax year of reporting under MTD. It also suggests that the new method of record keeping could actually increase the number of errors made by the taxpayer as they adjust to their new ways of working.

While the government claims that MTD will benefit the taxpayer by having to maintain electronic records, the committee have argued that there has been no concrete evidence to support the government’s views. The report suggests that the government has not factored in the costs of moving to MTD with the cost to businesses for acquiring software and training staff on how to use this.

Whether we like it or not, MTD is not going to go away. The government have invested too much time and money to pull the plug on this project. Personally, I think the concept of MTD is a fantastic idea but the timescales and proposals have too many holes to make this work in the short term. The Treasury Committee released their report on 10 January 2017 and urged the government to take on board their findings before releasing their response to the consultation documents later this month.

Whether or not HMRC take this report or the feedback from the consultation documents on board will be seen soon enough, but with time running out before the planning commencement of April 2018, postponement seems to be the only logical option.

Stuart Miller, Product Manager (Tax)

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