The Government proposes that 1.6 million companies, 2.4 million self-employed individuals, 900,000 residential landlords will be required to make their tax digital. Businesses that previously gave a box of receipts once a year to their accountant; sectors with seasonal or erratic incomes; rural businesses with poor internet connections; and ‘accidental’ residential landlords will all be required to interact with the tax authorities in a fundamentally different way.
Under the Government’s proposals, from April 2018 the current system of annual self-assessment will be replaced with mandatory digital record keeping which will require businesses to:
The digitalisation of tax administration in a way that assists taxpayers is an objective to be welcomed. Where the Government is wrong is not in the principle but in the transitional arrangements, the treatment of the digitally disadvantaged, and the threshold for inclusion.
These changes have caused anxiety and disquiet among those affected. They coincide with other changes to small business taxation such as to business rates.
By announcing a 12 month delay in the mandating of the scheme for the smallest businesses, the Chancellor appears to acknowledge some of this concern. However this delay does not go far enough. It does not address the concerns we heard in evidence about the scheme’s underlying evidence base, design, piloting, roll out, and scope.
To ensure the effective implementation and operation of these plans we recommend four changes.
(1)The Government must revise and improve its assessment of the benefits and costs of the new scheme. The Government’s estimates of the ‘tax gap’ savings are fragile and not based on adequate evidence. The assertion that the scheme will initially cost businesses £280 does not reflect the reality of small business operations and the initial expenses businesses will incur.
(2)The Government should make keeping digital records and quarterly reporting optional for businesses with a turnover below the VAT threshold. The case for making it compulsory for smaller business has not been made. There is no evidence that these requirements will reduce taxpayer error: it does not follow that more frequently recorded information is more accurate information. The quarterly reports will impose an unnecessary burden on businesses, but will be of limited use in forecasting their tax liabilities.
(3)The Government should delay the launch of the scheme until 2020. Crucial to the success of Making Tax Digital will be the software and apps. As currently planned the pilot of the software will begin in April 2017. This leaves insufficient time for the pilot to cover a full tax year, for any review of its findings, or further consultation before the full scheme launches.
This delay will also allow the Government to test the underlying behavioural assumptions; to raise awareness of the scheme amongst sectors who remain unaware of the forthcoming changes; and put in place support systems for those who are digitally excluded. The latter are vital: HMRC’s own research reveals that 61 per cent of the self-employed (which may be up to two million people) are either unable to, or require assistance, to interact with Government online.
(4)Finally, the government should look again at the enormous variety of businesses and should examine whether certain kinds of business, such as those with seasonal or highly irregular income, should be outside the scheme.
When the Chancellor first announced this scheme in 2015 its purpose was to “make tax easier”. For many businesses the Making Tax Digital proposals no longer achieve this and will instead make taxation more burdensome. Our recommendations will help the Government bring the scheme back to its original aims.
1 HMRC, Making Tax Digital for Business, 8 March 2017: . In addition over 400,000 ordinary partnerships, and about 600,000 businesses with income from different sources will be affected.
2 HMRC, Making tax easier: the end of the tax return, March 2015: , [accessed March 2017]