Draft Finance Bill 2017: Making Tax Digital for Business Contents

Chapter 3: Government’s response to the Making Tax Digital consultation

20.The Government’s response to the comments HMRC received as part of the public consultation on the MTD proposals was published on 31 January 2017.18 It confirmed the main elements of the policy package announced in the 2015 Autumn Statement and amended some of the proposals put forward in August 2016. It also revised official estimates of the impact of the proposed package on Exchequer receipts and on business costs and published a very limited amount of the draft legislation necessary to put in place the new system. These estimates were further revised in the Spring Budget.19

21.HMRC adopted the term ‘Making Tax Digital for Business’ (MTDfB) in its publication, to describe the proposals that would apply to unincorporated businesses, the first to enter the new regime. Both the abbreviations MTD and MTDfB are used in the remainder of this report as appropriate.

22.In his Spring Budget on 8 March 2017, the Chancellor announced a deferral for businesses with turnover below the VAT threshold, currently £83,000,20 from entry to the MTD mandatory digital record-keeping and quarterly reporting regime.21 Although this deferral was announced after all the evidence on which this report is based was received, it has been incorporated into the report commentary below.

Main policy decisions

23.The Government has confirmed that MTDfB will:

(a)include mandating all businesses within its ambit to keep their records in digital form and to update HMRC with income and expenditure information every quarter;

(b)apply to all businesses and private landlords whose annual income exceeded a specified limit (currently £10,000) and which did not fall into an exempt category (see paragraph 27 below); and

(c)begin in April 2018, applying first to income tax for businesses and landlords with turnover over the VAT threshold, followed in April 2019 by income tax for smaller businesses and landlords, and VAT. Corporation tax would be included from April 2020.

Operational policy decisions

24.The Government also confirmed that HMRC will not provide MTDfB-compliant free apps or software. Instead it will ensure that the computer software industry provided such products with the capacity to cater for the needs of the most straightforward small businesses.22

25.HMRC will start piloting the new system from April 2017.23 The proposed pilot, discussed in Chapter 6, goes some of the way towards one of the recommendations in the Treasury Committee report mentioned earlier.

Outstanding decisions

26.HMRC confirmed after the Spring Budget that the low income threshold, currently proposed at £10,000, below which businesses are exempted from MTDfB obligations, is still under review.

Relaxations and deferrals

27.The Government’s response proposed some respite for those regarded as “unable to engage digitally”. It also introduced a number of helpful easements to the original proposals, including agreeing that:

28. The Government also announced further consultation concerning:

(a)the penalty regime to apply to failure to comply with the requirements of MTD;

(b)changes to the current basis period rules for allocating business profits to tax years; and

(c)the introduction of any pay-as-you-go arrangements.

Impact on Exchequer and businesses

29.The documents published on 31 January also contained official estimates of the Exchequer yield from MTD tax gap reductions for an additional year, 2021/22. The profile of receipts was revised to reflect the deferral announcement in the 2017 Spring Budget but the overall expected Exchequer gain remains at nearly £2 billion over the period.

30.Drawing partly on responses to the consultation questions, HMRC also presented, for the first time, estimates of the costs borne by businesses in transitioning to MTD and revised their estimates of the subsequent ongoing costs and benefits to businesses affected by the changes.24

Draft legislation

31.As mentioned above, only a small proportion of the legislation necessary to establish the new MTD system was published on 31 January. This covered the simplification of the cash basis rules for capital expenditure (three pages) and extension of the cash basis rules to property businesses (18 pages) as well as some draft clauses providing enabling powers for regulations to be published later (seven pages).25

32.Legislation covering remaining aspects of the scheme is expected to be included in the Finance Bill 2017 when published, along with the draft regulations enabled by that legislation.26

33.The paucity of draft legislation available in January and February has limited both the scope of this inquiry and the scope for proper Parliamentary scrutiny since much of the detail is in secondary legislation.27

34.We welcome the Government’s announcement in the Spring Budget that the scheme would not apply to businesses with a turnover below the VAT threshold until April 2019. However, this deferral does not go far enough. We also welcome the amendments, announced in January, to the original proposals and the Government’s decision to consult further on the penalty regime appropriate to MTD, on the proposed pay-as-you-go arrangements and on further exemptions and tax simplification measures.

18 HMRC Guidance, Bringing Business Tax into the Digital Age: legislation overview, 31 January 2017: https://www.gov.uk/government/publications/bringing-business-tax-into-the-digital-age-legislation-overview/bringing-business-tax-into-the-digital-age-legislation-overview [accessed March 2017]

19 HMRC, Policy Paper, Overview of Making Tax Digital, 8 March 2017: https://www.gov.uk/government/publications/making-tax-digital/overview-of-making-tax-digital [accessed March 2017]

20 The VAT registration threshold is generally revalorized annually in line with the Retail Prices Index., and will rise to £85,000 from 1 April 2017.

21 HM Treasury, Spring Budget 2017, HC 1025, March 2017: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/597467/spring_budget_2017_web.pdf [accessed March 2017]

22 Discussed in detail at Chapter 7.

23 HMRC, Making Tax Digital: Bringing business tax into the digital age, summary of consultation responses, 31 January 2017: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/587433/Making_Tax_Digital_-_Bringing_business_tax_into_the_digital_age_-_Summary_of_responses.pdf [accessed March 2017]

24 The robustness of both the Exchequer gain and the business impact estimates is discussed further in Chapter 4.

25 Most of these draft clauses are considered in Chapter 7 on the simplifications introduced alongside MTDfB.

26 HMRC, Policy Paper, Overview of Making Tax Digital, 8 March 2017: https://www.gov.uk/government/publications/making-tax-digital/overview-of-making-tax-digital [accessed March 2017]

27 These issues are discussed further in Chapter 8 on the consultative process applied to the MTDfB proposals.

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