Making Tax Digital update

“Carefully introduced, the digitisation of tax records and reporting (MTD) can be an opportunity greatly to improve the administration of the tax system for the long term. Without sufficient care, MTD could be a disaster.

“Implemented carefully, with long transitional arrangements where necessary, and, having drawn on information from fully inclusive pilots, Making Tax Digital could be designed for the benefit both of the economy and of the tax yield. But with a rushed introduction, it will benefit neither.”

Tyrie went on to explain the Committee has identified a number of serious shortcomings with current plans for Making Tax Digital:

“First, there are the costs and administrative burdens for very small businesses – with the consequent risk that many may go out of business or move into the hidden economy.

“This may undermine the extra revenue that the Government is expecting to raise from MTD, scored in the August consultation document at £625m, possibly larger now. Perhaps this is a realistic estimate; perhaps not.

“As the accountancy bodies have argued in evidence, and as the Committee concluded: “It is plausible to suppose that, in so far as MTD results in fewer customer errors, those errors will have been as much in the exchequer’s favour (such as forgetting to record deductible expenses) as they have been in favour of the individual taxpayers.”

“Second, there is the speed with which MTD is being implemented.

“So far, there has been insufficient engagement and consultation with the business community. At present, many of those on whom demands from MTD will be made – millions of small businesses up and down the country: the backbone of the economy – are ill equipped to handle the reporting requirements.”

Tyrie also said there may be other concerns which neither the Committee, nor those providing evidence to it, have yet identified.

He went on to say that, taken together, these shortcomings could undermine the Government’s objectives and discredit its approach to Making Tax Digital, with a large amount of collateral damage as a result.

Tyrie explained:

“This is not a minor matter. These reforms will affect millions of taxpayers. Their co-operation and trust are both hard won and easily dissipated. Without them, more of the yield could be at risk than any putative extra revenue from MTD.

“So the Government should change its current approach.”

The Committee has called on the Government to abandon its plans for an initial threshold of £10,000. This is because the Committee has seen no evidence which justify the introduction of a threshold below the VAT threshold of £83,000.

The Committee also says the Government’s proposed timetable for implementation in April 2018 looks unachievable. It is calling on the Government to be realistic and delay the start until at least 2019/20, or possibly even later.

Third, the Committee says comprehensive pilots of the proposed system are essential. Those taking part in these pilots should have full protection from anything that might go wrong.

Whilst HMRC has been carrying out a number of pilot studies, little public information from these is available.

Fourth, the Committee says that the pilots need to be designed to gather information over the entire reporting cycle – four quarterly updates and an end of year reconciliation.

They say these need to be evaluated before full implementation and Parliament needs to see the evidence that this has been done.

Finally, the Committee says that a fully functioning market in appropriate software is essential.

This will need to include adequate free software for smaller and less complex businesses.

Tyrie concluded his statement by saying:

“The long term future can, and probably should, be digital. Better to take care on the road to it than to have a road accident.

“The Committee will take evidence from Ministers when the Government has had time to consider and respond to this report.”