Making Tax Digital (MTD) will mark a fundamental change in the way that businesses interact with HMRC. The Government is proposing that, subject to a relatively small number of exceptions, all businesses will be required to keep their accounting records in a prescribed digital format and submit quarterly updates to HMRC. These updates will be followed by an end of year reconciliation to ensure that the entire year’s activities are properly recorded for tax. It is proposed that businesses will start this form of record keeping and reporting for income tax and National Insurance from 1 April 2018 or 1 April 2019, depending on their size, and for VAT from 1 April 2019. At least two and a half million businesses are likely to be affected, and possibly as many as five million.
The Government consulted on its proposals over the summer and early autumn of 2016 and it is proposing to respond to that consultation, and publish draft Finance Bill clauses to legislate for the necessary changes, in January 2017.
Based on the evidence it has heard, and on published responses to HMRC’s consultation, the Committee supports the idea of the digitisation of the reporting of tax. However it considers that mandating the digitising of record keeping and quarterly reporting, as currently envisaged, has not yet had its overall benefits proven. Just over a year is too short a lead time for such a fundamental change in any event. There should be a comprehensive set of pilots of the end-to-end system before it is made mandatory for all businesses. The Committee is very concerned about the costs to businesses of introducing MTD, as well as the continuing costs of maintaining digital records and submitting quarterly updates. There is not yet enough information about the free software that will be available, but even if it remains free in perpetuity, businesses will face costs in terms of time and accountants’ fees. In aggregate, these costs may well exceed the benefits to the exchequer in terms of tax gap reduction as a result of fewer taxpayer errors and the overall impact of MTD could even be negative. This requires further investigation.
As it prepares its response to the consultations about its proposals to make MTD mandatory with very few exemptions, the Government needs very carefully to consider the legitimate concerns about the costs and benefits to business, and set them against any benefits to the Exchequer from the proposed approach.
11 January 2017