Draft Finance Bill 2017: Making Tax Digital for Business Contents

Chapter 5: Taxpayer readiness and support needs

83.This chapter considers in turn the readiness of the essential stakeholder groups—the wide range of businesses affected, tax agents, software houses and HMRC itself—for the proposed introduction of MTDfB from April 2018. It covers progress in developing MTDfB software products and the support HMRC needs to provide to achieve successful implementation. Finally, it considers the issue of ‘digital exclusion’ of businesses and the draft legislation exempting such businesses from the obligations of MTDfB.

Business readiness

84.HMRC originally anticipated that the MTDfB provisions will apply to up to half of the UK’s 5.4m unincorporated businesses, after excluding those with turnover below £10,000.78 Our evidence is that the readiness of those businesses for MTDfB varies considerably. It depends on their awareness of their new obligations, the extent to which they have the necessary IT and book-keeping skills currently to use software for keeping business records, whether they rely on an agent, and the availability of internet connectivity.

85.Businesses which are aware of the impending changes, have an appropriate internet connection and currently have the IT and book-keeping skill to use appropriate software, or use a tax agent, might be said to be ‘ready’ for MTDfB. Crunch Online Accountants, whose clients do perhaps have these characteristics, noted that:

“for our clients we believe they will experience no difference in their accounting and tax tasks, our service will simply automatically update HMRC as and when required”79

86.A sizeable proportion of businesses do not operate in that way at present. Mr Dady of IRIS reported from a survey of their tax agent clients that only 47 per cent of businesses that are their customers currently use any sort of book-keeping product.80

87.A survey of Residential Landlords Association (RLA) members also found limited current use of software to keep business records, with 48 per cent using spreadsheets, 38 percent paper records and only 13 per cent use software. The RLA added that this reflects the “scale of challenge” HMRC face “in seeking to transfer unincorporated property businesses to MTD in the first tranche”.81

88.A key concern of many representing small businesses and business organisations was that taxpayers had so far received little or no information on the significant changes expected.82. We heard a great deal of evidence that, despite the Government’s claims, there remain an enormous number taxpayers who are still unaware of what is proposed.

89.A related issue for those using tax agents is their agent’s awareness of MTDfB, given the key role HMRC appear to be expecting agents to play in preparing their clients. HMRC informed us that as of mid-February 2017 awareness amongst agents was considered to be high, but lower among businesses, which, according to HMRC, did not have to do anything at the moment.83, In a survey undertaken by IRIS in late 2016, 98 per cent of agents said they did not feel HMRC had informed them well about MTDfB.84

90.HMRC told us that they “plan to ramp up our communications once we are confident that the software and our systems are working effectively together”.85 HMRC’s communications plan for businesses in MTDfB may not start until the last quarter of 2017 at the earliest.86

91.A common concern in the evidence was that some smaller businesses did not have sufficient IT and book-keeping skills to make a successful transition to MTDfB. A number of those submitting evidence to us described how some businesses experienced considerable difficulties in converting to digital systems. Such submissions often cited a lack of time to invest in software training and a lack of understanding of book-keeping. 87

92.HMRC accepts that small and micro businesses might be more affected by digital capability issues and find it more difficult to move to the new digital requirements.88 It is concerning that HMRC is placing so much reliance on the Ofcom evidence that 97 percent of small and medium sized businesses have access to online services, and 66 per cent of adults have a smartphone.89 The gap between owning hardware, perhaps only for social purposes, and correctly using business software on that hardware can be wide. As Ms Benneyworth put it, “lots of people use Facebook but they could not in a million years use accounting software”.90

93.A significant proportion of small businesses do not appear to have the skills or digital capability necessary to comply with MTDfB. While business size and digital capability may not directly correlate, it is more likely that larger businesses will have already adopted digital tools for commercial purposes or VAT compliance so that they are readier to adapt to the new system.

94.Levels of awareness of these significant changes to the tax system are very low, particularly amongst the population likely to be most impacted, smaller and less digitally capable businesses.

95.We recommend that HMRC urgently develops and publishes an effective, targeted plan for proactively informing businesses of their new obligations. HMRC should replace their current approach to communications with a comprehensive strategy to make taxpayers aware of the changes. This strategy should include a public awareness campaign led by HMRC using a wide variety of media, including more traditional approaches. It should aim to inform businesses of their new obligations.

Agent readiness

96.We did not hear any evidence that the tax agent community would not be able to adapt to the requirements of MTDfB, although many were concerned about the amount of staff training time needed and about agent software license costs. Many small accountancy firms expressed concerns that the additional demands on their time, particularly in helping their smaller clients through the transition, would mean they would not have time to support all of their clients.91 Despite concerns the issue of limited agent capacity to assist businesses does not feature in HMRC’s analysis.

Software industry readiness

97.The software industry clearly has a central role in the MTDfB proposals, both as the supplier of the required digital tools and as a major beneficiary. However, it too has concerns about its readiness for the impending changes because its own plans depend on the timing of HMRC decisions on software specifications. Mr Hart of BASDA told us that the industry is committed to meeting HMRC’s timescale, but that is “very dependent on HMRC being able to deliver clarity of information and services.”92 In addition, Sage observed that the specification for ‘prompts’ in MTDfB software, a key element expected to help reduce tax gap errors, was not yet available from HMRC.93

98.Mr Dady from IRIS accepted that a “greater intensity” of dialogue both within the industry and with HMRC was needed to address these issues.94

Free Software

99.HMRC has repeatedly asserted that the software industry will provide free software to the smallest and simplest businesses. It has recently clarified its expectations about the scope of this software, saying that it was primarily designed for unincorporated businesses with no employees, turnover below the VAT threshold, and able to use the cash basis of accounting.95 Around 1 million businesses currently use the cash basis and, whilst some of them may be below the low income threshold, the potential population able to use this free software could be substantial.

100.Whilst free software may benefit many small businesses, it also reduces the size of the commercial market. The scope of any such free offering, and the number of software houses willing to provide it, is uncertain and outwith HMRC’s control. To encourage industry participation, HMRC appears to have accepted that free software will be provided on a so-called “freemium” basis whereby basic services are provided free of charge while more advanced features must be paid for.

101.An alternative model that may be deployed is one where the software is provided free to the business but fees are charged to agents collecting the business’s data and using the agent version of the software to update HMRC. There may also be pricing incentives for agents to encourage them, and by implication their clients, to use only that provider’s products.96

102.The software industry also expressed some concerns about any possible limitations on the extent of mandation because, by shrinking the size of the potential market, they would make investment in new product development riskier.97 Mr Hart of BASDA summed up the challenge:

“the degree and depth of functionality HMRC is looking for in freemium is almost identical to that of a paid-for product, so coming up with a commercial proposition is not the easiest of matters.”98

103.It is concerning that these matters were not resolved before HMRC decided unilaterally that free software should be provided by commercial suppliers.

The use of spreadsheets

104.HMRC conceded in January that the many businesses keeping records on spreadsheets could continue to do so, provided they used software or an app to convert the data to a format suitable for a digital submission. This concession may not be as helpful as it seems given the lack of available conversion software and the wide range of spreadsheets in use:

“The use of spreadsheets and workbooks differ from business to business and person to person and this means it is very difficult to build programmes that can read and understand the data held within them. To enable Sage and other software providers to work with spreadsheets we would need some standardisation and some parameters.”99

105.Software houses do not yet have the full specifications and details needed to finalise the development MTDfB compliant software and apps. This appears to be because HMRC have not yet finalised the technical details or system requirements.

106.Although free software is key to the successful implementation of MTDfB, it is not completely within HMRC’s control and the practical usefulness and functionality of such products may be limited even for the simplest cases for which it is intended.

107.We recommend that HMRC confirms as soon as possible, and provides to software houses, the remaining specifications necessary to proceed with the development and testing of the software and apps, whether free or paid for.

HMRC’s readiness

108.HMRC has informed us their systems are currently undergoing testing for the pilot and are on track for delivery for April 2017. Ms Pink commented that “the Infrastructure and Projects Authority … was called in to scrutinise the delivery and the timetable. It assured us that it was deliverable.”100 Business Tax Accounts and Personal Tax Accounts which should collate businesses’ submissions have been available to taxpayers for some time, so while key elements of the necessary IT infrastructure are in place this capability must be demonstrated through the pilot phase.

109.The OBR in its Policy Costings document alongside the Spring Budget confirmed that “the latest information suggests that delivery remains on track for an April 2018 launch.”101

Business support needs

110.The readiness of HMRC to provide taxpayer support is less clear. HMRC announced that it would need “to develop a customer support model to help businesses that need their help with the transition” and that small businesses will need significant support to make the change.” 102 Its own research report highlighted that:

“in enabling and ensuring positive engagement with the MTDfB proposals, all businesses felt that the design of support, communications and the software would be crucial in ensuring businesses are reassured, enabled and transitioned to MTDfB easily.”103

111.HMRC has so far offered few details of what it plans to do. In its August 2016 consultation document it suggested a multi-channel approach with little personal contact but gave no details. Its written evidence went no further than confirming that it would build and test its existing support model “within the live-testing environment to ensure that the right help is available in a range of ways and through a range of channels to ensure it meets the diverse needs of the business and agent populations.”104

112.The evidence submitted to this inquiry stresses that support to businesses must include specific initiatives to address skills shortages. HMRC appears to have no plans to address the IT and book-keeping skills gap. It seems instead to be assuming that agents (for those who have them) and software providers will offer support, or that civil society organisations may have to be prepared for requests for assistance with MDTfB.105

113.The Federation of Small Businesses noted the OTS’s recommendation that for MTDfB HMRC should consider a “one-stop-shop call-centre” and enable small businesses to engage “in a way that suits their business.”106

114.The Treasury Committee Report also concluded that assistance with software selection would be essential. This was echoed in evidence submitted to us, along with the need for early publication of detailed guidance, and accessible support from HMRC. The Association of Convenience Stores (ACS) summary was typical:

“Guidance and support for businesses on MTD should go beyond publishing a list of available software packages against the type of business they are aimed at. HMRC must be prepared to go cope with a high volume of queries, and advise accordingly.”107

115.HMRC informed us that it only proposes “publishing a register on GOV.UK, confirming which applications are registered with HMRC and are MTDfB-compatible, along with details of the software, in good time for the start of MTDfB in 2018.”108

116.Finally, in its August 2016 consultation, HMRC also suggested that financial support might be provided to businesses to assist with their transition and additional costs. An announcement on this was expected around the time of the Spring Budget 2017, but is still awaited.109 Speaking for the Low Incomes Tax Reform Group (LITRG), Robin Williamson made the case for financial support particularly in relation to assistive technology for those with disabilities.110

117.More widely, in the Digital Economy Bill 2017 the Government plans to make training in basic digital skills free for adults lacking relevant qualifications.111 The details of this training and the level of qualification to which the new duty will apply will be the subject of future consultation.112

118.We welcome HMRC’s plans to verify and identify for businesses, those software products that will be MTDfB compliant and that they will be required to meet minimum performance and security standards. However, there is insufficient publicly available information on HMRC’s strategy and resources for providing support to different taxpayer groups, or to tax agents and software providers.

119.We recommend that HMRC urgently develops, and publicises:

Digital exclusion for businesses

120.In order to better understand digital access, use and skills, HMRC commissioned research to distinguish between people or businesses which were ‘digitally excluded’ and those, referred to as ‘assisted digital’, who would need some form of help to interact digitally with government. 113 For these purposes ‘digital exclusion’ was defined as having no use of the internet because of either a lack of access at their place of work, or because, despite having access, the internet was not used.

Figure 1: Rates of ‘Digital Exclusion’ and ‘Digital Assistance’ in the self-employed, micro-business, taxpayers and general population

Bar chart showing rates of digital exclusion and digital assisted in self employed, micro-businesses, taxpayers and adult population

Source: HMRC: Research report Digital Exclusion & Assisted Digital Research To understand digital access, use and skills among the UK population, August 2015: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/457800/Digital_Exclusion_and_Assisted_Digital_research_publication_report.pdf [accessed March 2017]

121.As illustrated by Figure 1, this research found that, amongst micro businesses (one to four employees), two per cent fell into the Digital Exclusion category and 29 percent into the Assisted Digital category. Amongst individuals who are self-employed with no employees, 19 per cent were in the first category, and 42 per cent in the second.114 These could represent a significant proportion of those who are to be mandated into MTDfB, but for whom HMRC’s plans are unclear.

122.Simply being connected to the internet is not sufficient, of course, if it is so slow as to be of no practical use to a business. The UK government’s current minimum suitable service speed for connection is 2mbps, whilst the Universal Service Obligation proposed to be enacted in the current Digital Economy Bill offers the right to access 10 mbps from 2020.115

123.HMRC maintains 2mbps to be sufficient to submit an update.116 However we have received evidence that some Cloud accounting agent software is slow without superfast broadband.117.

124.A survey of its members in 2015 by the NFU found that 80 percent of respondents had upload speeds of 2mbps or less. The NFU summarised the concerns of many, mainly but not always in rural areas, that the lack of connectivity would “make a move to a digital only form of record-keeping and more frequent digital reporting challenging, if not impossible”.118

Draft legislation on digital exclusion

125.Schedule A1 to the draft 2017 Finance Bill setting out the draft statutory exclusion from online filing for MTDfB adopts the same definitions as apply to VAT Online filing. At present, the regulations attached to the VAT provision in practice mean that businesses who do not have internet access but can use available workarounds (friends, families or agents, a local library, or telephone filing), are expected to do so.119 Only if none of these options are possible can they apply for exemption.120

126.This approach may give consistency with VAT legislation, but since in practice it exempts very few VAT registered traders, this definition is regarded as inadequate for MTDfB purposes by many giving evidence to us, including TaxAid.121 It does not specifically address how the 19 per cent of digitally excluded self-employed identified in HMRC’s own research discussed above might be accommodated, and, as LITRG pointed out, the draft legislation does not include a right of appeal against the refusal of an exemption, although HMRC has informed us that it will be available.122

127.Finally, Michael Parker of the NFU also expressed dissatisfaction at the unduly restrictive exemption, at Clause 12(3), for partnerships, where, in order for a partnership to be regarded as digitally excluded, each partner must be digitally excluded, despite the fact that the records may be kept on only one partner’s business premises.123

128.We welcome the exemptions for digitally excluded businesses, but the proposed ‘digital exclusion’ criteria are too narrowly defined and should better reflect the practical reality of a lack of digital infrastructure across parts of the UK.

129.We recommend that HMRC works with representative bodies to produce detailed guidance on how the provisions applying to the digitally excluded might be made to work in practice, for those anywhere in the UK who do not benefit from broadband speeds which meet the UK government’s Universal Service Obligation minimum of 10 mbps.

130.We recommend that HMRC considers revisions to clause 12(3) to apply to partnerships where the partner keeping records and making returns is digitally excluded, regardless of the status of other partners.

78 HMRC and Jane Ellison MP, ‘Digital revolution for the tax system to cut red tape for British business’, 15 August 2016: https://www.gov.uk/government/news/digital-revolution-for-the-tax-system-to-cut-red-tape-for-british-business [accessed March 2017]

79 Written evidence from Crunch Online Accountants (FBS0001)

80 Q 12 (Kevin Dady)

81 Written evidence from the Residential Landlords Association (FBS0063)

82 For example Huw Baker, (FBS0033) “taxpayers are blissfully unaware that this is coming and it will be a great shock to them”; Linda Cotterill, (FBS0059) “most of my clients have no idea of this immense change”; and Douglas Haig (Q 44). These repeated concerns raised in Autumn 2016 with the Treasury Committee which led to a recommendation in that Committee’s Report on Making Tax Digital. Treasury Committee, Making Tax Digital (Tenth Report, Session 2016–17, HC 927), paragraph 39

83 Summarised in written evidence from HM Treasury and HMRC (FBS0065)

84 IRIS, Making Tax Digital: results of a survey undertaking by IRIS Software to gauge the views of the accounting profession January 2017: https://www.ukdigitaltax.com/resources/making-tax-digital-survey/ [accessed January 2017]

85 Written evidence from HM Treasury and HMRC (FBS0065)

86 However although the pilot starts in April 2017, some software will not be available for testing until October 2017.

87 Written evidence from the Association of Chartered Certified Accountants (FSB0029);see also Q 21 (Rebecca Benneyworth)

88 HMRC, Policy Paper, Making Tax Digital for Business, 31 January 2017: https://www.gov.uk/government/publications/digital-reporting-and-record-keeping-for-business-income-tax/making-tax-digital-for-business [accessed March 2017]

89 HMRC, Making Tax Digital: Bringing business tax into the digital age, August 2016, para 8.37: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/545715/Making_Tax_Digital-Bringing_business_tax_into_the_digital_age-consultation.pdf [accessed March 2017]

90 Q 21 (Rebecca Benneyworth)

91 For example AJ Carter and Company (FBS0047) and Breckman and Company (FBS0039)

92 Q 12 (Kevin Hart)

93 Written evidence from Sage Group PLC (FBS0064); ‘prompts’ are pop-up items which will ask taxpayers if they need to check details or provide links to explanatory information on the particular item, with the aim of reducing mistakes.

94 Q 18 (Kevin Dady)

95 Q 50 (Theresa Middleton)

96 Q 33 (David Lyford-Smith)

97 Q 16 (Kevin Dady)

98 Q 14 (Kevin Hart)

99 Written evidence from Sage Group PLC (FBS0064)

100 49 (Lucy Pink)

101 Office for Budget Responsibility, Spring Budget 2017: policy costings, March 2017, para B22: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/597335/PU2055_Spring_Budget_2017_web_2.pdf [accessed March 2017]

102 HMRC, Policy Paper, Making Tax Digital for Business, 31 January 2017, para 2.5: https://www.gov.uk/government/publications/digital-reporting-and-record-keeping-for-business-income-tax/making-tax-digital-for-business [accessed March 2017]

103 HMRC Research Report 431, Exploring Small Business and Agent attitudes and engagement with Making Tax Digital, Jigsaw Research, February 2017: https://www.gov.uk/government/publications/exploring-small-business-and-agent-attitudes-and-engagement-with-making-tax-digital [accessed March 2017]

104 Written evidence from HM Treasury and HMRC (FBS0066)

105 HMRC, Policy Paper, Making Tax Digital for Business, 31 January 2017: https://www.gov.uk/government/publications/digital-reporting-and-record-keeping-for-business-income-tax/making-tax-digital-for-business [accessed March 2017]

106 Written evidence from the Federation of Small Businesses (FBS0032)

107 Association of Convenience Stores, Submission to HMRC consultation, Making Tax Digital: Bringing Business Tax into the Digital Age: https://www.acs.org.uk/wp-content/uploads/2016/11/ACS-Submission-Making-Tax-Digital.pdf [accessed March 2017]

108 HMRC Bringing Business tax into the digital age: Summary of responses, 31 January 2017, para 13: 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]

109 HMRC, Policy Paper, Making Tax Digital for Business, 31 January 2017: https://www.gov.uk/government/publications/digital-reporting-and-record-keeping-for-business-income-tax/making-tax-digital-for-business [accessed March 2017]

110 Q 10 (Robin Williamson)

111 Digital Economy Bill, section 95 [HL Bill 102 (2016–17)]

113 HMRC, Research report Digital Exclusion & Assisted Digital Research: To understand digital access, use and skills among the UK population, August 2015, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/457800/Digital_Exclusion_and_Assisted_Digital_research_publication_report.pdf [accessed March 2017]

114 HMRC: Research report Digital Exclusion & Assisted Digital Research: To understand digital access, use and skills among the UK population, August 2015, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/457800/Digital_Exclusion_and_Assisted_Digital_research_publication_report.pdf [accessed March 2017].

115 The Explanatory Notes to the Digital Economy Bill state, “In December 2015 the government launched a scheme offering a subsidised satellite broadband connection (including the option of superfast speeds) to homes and businesses unable to obtain an affordable broadband service of at least 2 Mbps. This scheme formed part of the government’s commitment to make sure every home and business in the United Kingdom could access speeds of at least 2 Mbps by the end of 2015. This commitment is termed the “Universal Service Commitment” and currently acts as a non-statutory safety net. In November 2015 the Prime Minister announced that government was planning to create a broadband Universal Service Obligation (“USO”) with the ambition to give people the legal right to request a broadband connection with speeds of 10 Mbps by the end of the Parliament. Unlike the non-statutory Universal Service Commitment, a broadband USO would be a legal right to request a connection, similar to the way the existing USO operates to request a telephone line or equivalent arrangements for utilities”. Where such powers are devolved it will be for the respective parliamentary or other authority to make its own determination. Explanatory Notes to the Digital Economy Bill [Bill 45-EN (2016–17)]

116 HMRC, Making Tax Digital: Bringing business tax into the digital age, August 2016,: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/545715/Making_Tax_Digital-Bringing_business_tax_into_the_digital_age-consultation.pdf [accessed March 2017]

117 Defined as at least 24 mbps

118 Written evidence from the National Farmers Union (FBS0012)

119 The Value Added Tax Regulations 1995 (SI 1995/2518), Regulation 25A(6)

120 HMRC Internal Manual, Vat Accounting Manual, Accounting for VAT: assistance with online filing, July 2016: https://www.gov.uk/hmrc-internal-manuals/vat-accounting/vatac1260 [accessed March 2017]

121 Written evidence from TaxAid (FBS0061)

122 Written evidence from HM Treasury and HMRC (FBS0065)

123 Q 36 (Michael Parker)

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