Conclusions and recommendations
Introduction
1.After receiving representations from the Committee and other parties, the Government has put back its response to the consultation from the Autumn Statement, when it would ordinarily have been expected, to January 2017. This is welcome. (Paragraph 2)
Key points made in evidence to the Committee and elsewhere
2.Digitisation will provide many opportunities for increasing efficiency of tax collection. This needs to be done not just in a way that may better secure the yield, but also taking into account the reasonable needs of millions of taxpayers. This will require a great deal of care and sensitivity on the part of HMRC. A large proportion of the UK’s businesses, particularly the millions of small businesses, are not currently well equipped to move over to digital record keeping and reporting. Nor may they be so for several years. (Paragraph 29)
3.The Government has been invited, in a series of letters, to explain its position. But the Government has not yet had the opportunity to give detailed oral evidence to this Committee in support of its proposed timetable. The Committee will take further evidence from the Government after it has published its proposals in the light of the consultations that it has undertaken. On the evidence that the Committee has seen, the Government appears intent on keeping to its original schedule. This now leaves little over a year to complete the work. This looks over-ambitious. The Government has yet to publish draft legislation to address crucial concerns raised by this Committee, among others, at early stages of their consultation. Among these concerns are: the need for adequate, free software; the overall costs and benefits of the project; the proposed speed of implementation and the fact that it will be mandatory for the vast majority of businesses within little over two years. (Paragraph 39)
4.The imposition of a requirement to move to digital record keeping and reporting is a fundamental change to the system of tax administration in the UK which requires much wider debate and consultation. Even after the concessions announced to date, it is still likely to affect two and a half million taxpayers and possibly as many as five million. It is extremely unlikely that the vast majority of businesses will be capable of adapting to that start date at reasonable cost. Nor should they be expected to do so. The Committee therefore recommends a delay of the full implementation of MTD until at least 2019/20. (Paragraph 40)
5.In the view of the Committee, a start date of April 2018 for mandatory MTD is wholly unrealistic. Whether a start date of 2019, for the 2019/20 tax year, would be possible will depend on the exact shape of the Government’s proposals. These have yet to be published. But on the evidence that the Committee has seen so far, this also looks unlikely. (Paragraph 41)
6.Any decisions about VAT and the EU are relevant for the timing of MTD. This is because each could cause disruption and costs to businesses. Whether these can be mitigated, or would be aggregated, by implementing MTD and post Brexit related VAT changes simultaneously will depend on the government’s decision for each. Neither of these is currently known in enough detail to form a view. In the absence of clarity about the Brexit-relevant changes, it would be imprudent to press ahead with MTD. To do so could – depending on the shape of the final decisions – leave firms vulnerable to considerable and unacceptable disruption to the VAT reporting. The Committee will expect the Government to provide detailed evidence on this point. (Paragraph 46)
7.HMRC’s “agile” approach – that is, varying the software during the course of a pilot in response to customer feedback – will no doubt provide some useful information. However, it is understood that these pilots are composed of volunteers, therefore are unlikely to obtain information from those most vulnerable to the burdens of the scheme’s introduction. The voluntary scheme will provide limited information about the robustness, or otherwise, of the whole tax system in an MTD environment, and over the entire annual reporting cycle of four quarterly submissions and an end of year reconciliation. An obligatory pilot of the process, “end-to-end”, should take place before full implementation to obtain this information. Such an extended pilot regime would allow empirical assessment of likely compliance costs and benefits over an entire reporting cycle. There will, of course, need to be safeguards in place to protect those in the pilot. (Paragraph 52)
8.It is also important that such pilots reflect the role of agents in tax. The majority of tax returns are currently submitted by accountants and tax advisers and the system being piloted has yet to include this. The Government needs to explain the pilot process that it envisages for agents. (Paragraph 54)
9.The £10,000 threshold, for the requirement on businesses to record and report digitally, is too low. A turnover threshold at that low level would catch many businesses whose profits are far less than the personal allowance. They currently pay no tax. To impose MTD on them would palpably be absurd. Nor does a possible liability of these firms for National Insurance Contributions create a need for MTD. It is one thing for HMRC to impose digital record keeping on taxpayers. For them to impose it on non-taxpayers would be quite another - it would be seen to be as unreasonable as it is disproportionate. Aligning the threshold for MTD with the VAT threshold would be a simplifying approach. There may well be case for going above this. We heard no strong evidence for setting it at a lower level. (Paragraph 59)
10.The Government has argued that businesses may benefit from a requirement to keep records and submit information digitally. But the Committee has yet to see the evidence to support the view that the benefits to business would outweigh the costs. Were digital record keeping as beneficial to business as HMRC claimed, it is plausible to suppose that most businesses would be doing it now. (Paragraph 62)
11.The Government should draw on the experience gained at the beginning of this century from introducing online filing for income tax self-assessment over a period of many years. This suggests that there is merit, both for the customer and for HMRC, in moving gradually. To rush it might imperil the yield. (Paragraph 65)
12.The Government appears to be starting with the premise that MTD should be mandatory for all businesses, with a few exemptions. The Government has suggested that it intends to exclude those for whom MTD is not “reasonably practical”. For this to provide meaningful protection for the “digitally excluded”, HMRC will need to provide clear guidance, including a more detailed explanation of what they mean. Without it, a larger body of case law, to define “reasonably practical”, is likely to develop than would otherwise be the case. (Paragraph 75)
13.HMRC’s current approach will require it to give very careful consideration to the many requests for specific exemptions, particularly in cases where the costs to the businesses concerned would be disproportionate. It may be that much more extensive transitional arrangements are preferable to an ever lengthening list of exemptions, both to reduce business costs and uncertainty and also to protect the yield. (Paragraph 80)
14.The average cost to business of implementing MTD cannot be substantiated until there is more detail of the requirements and more examples of the software. However, the cost is likely to be significant for a small business. There will be both implementation costs and continuing costs. Evidence given to the Committee suggests that under the current timetable, the total cost to business (including software, hardware, training, agent fees and, above all, time) might exceed the total benefits in improved tax yield. In other words, even if the yield were to rise, the return to the whole economy could be negative. The Government’s estimate of the yield may therefore neglect the effect of overall behavioural changes. (Paragraph 88)
15.A detailed explanation of how it has arrived at its conclusions on the potential revenue yield will form a crucial part of the Government’s response to the consultations. Even if the total economic return were shown to be modestly positive, the Government must convince Parliament that it is worth the candle. (Paragraph 94)
16.A core part of the Government’s case for MTD is that, by sharply reducing the net value of errors, an important part of the tax gap will be closed. This may or may not turn out to be the case. (Paragraph 95)
17.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. It is also plausible to suggest that errors will increase as taxpayers become accustomed to a new type of record keeping. Furthermore, some businesses might cease trading as a result of the additional costs that they face, and others might elect to move into the hidden economy rather than comply with their new MTD obligations. (Paragraph 96)
18.The tax gap for “errors” and “failure to take reasonable care” form a relatively small part of the overall Tax Gap. Some parts of the Tax Gap, such as “criminal attacks” and “non-payment” will never be completely removed, so the elements of the UK Tax Gap that can credibly be reduced are relatively small. The UK compares favourably with other economies. The relatively low tax gap in the UK is in part due to a widely understood culture of mutual trust between HMRC and the vast majority of taxpayers. Unlike some countries, most UK taxpayers try to pay the right amount. Trust is built upon respect for taxpayers’ confidentiality and a feeling that taxpayers are being treated fairly, even if they do not like having to pay tax. That trust could be eroded if HMRC rushes into dealing with individuals in a faceless and automated way before they are ready for it, and with what some taxpayers may perceive to be risks to confidentiality. (Paragraph 97)
19.Before proceeding, the Government needs to provide further evidence that real time reporting does indeed provide the large yield claimed by them for it. This is the sort of information with which the evaluation of a pilot could considerably assist. HMRC also needs to reflect on the Exchequer consequences of the reduced business profits which might well arise from the costs of implementing MTD. (Paragraph 98)
20.The Government needs to ensure that taxpayers receive adequate guidance to help them choose the most appropriate software for their business. This needs to be done in a way which does not disrupt the software market. (Paragraph 104)
21.The Government has stated that some free software will be provided. This is welcome. In order to honour this commitment, the Government needs first to define what it means by free software and to whom this will be available. Second, it should ensure that there is a functioning market to produce free software without disruptive marketing material in it. Third, it should ensure that access would remain free. (Paragraph 114)
22.The Committee notes the potential benefit of “prompts and nudges”. But HMRC will have to accept that they cannot hold taxpayers accountable for errors made in good faith in response to a prompt or a nudge and that given the complexity of the system, these exhortations could cause confusion and more cost. (Paragraph 123)
23.Spreadsheets are a valuable tool for record keeping and should be accepted for MTD. However difficult it might be in software terms, HMRC needs to ensure that tools are available to convert information from spreadsheets into information that can be submitted as part of the quarterly digital update. (Paragraph 126)
24.Once the precise shape and timing of MTD is known, HMRC will need to engage on an intensive publicity campaign so that all taxpayers become aware of their new obligations. (Paragraph 133)
25.The Committee has heard evidence that the scope for hacking and cyber attacks might well increase with MTD. This could extend to disclosure, to third parties, of customers’ data. HMRC will need to provide adequate assurances about the security of customers’ data held by software providers. Were the data to be stored outside the UK in the Cloud, this would be all the more important. (Paragraph 141)
26.A related issue is that of “housekeeping”, particularly computer back up. It is for consideration whether software providers should acquire a duty to ensure that taxpayers’ data is adequately backed up. (Paragraph 142)
11 January 2017