131.As mentioned in Chapter 3, the Government announced on 31 January that HMRC would start “piloting digital record keeping and quarterly updates for a full year from April 2017, building up to working with hundreds of thousands of businesses and landlords before rolling the services out more widely. This will ensure that the software is user-friendly and give individuals and businesses time to prepare and adapt.” We welcome this announcement as a small step in the right direction.
132.This chapter considers the proposed pilot, and its objectives and aims, against established best practice, government standards and stakeholder expectations. It goes on to consider HMRC’s current implementation plans in the light of the piloting programme and the state of stakeholder readiness discussed in the previous chapter.
133.HMRC’s proposed pilot will begin in April 2017 with a limited number of volunteers recruited with assistance from the software industry and agents. The numbers participating in the pilot are intended to be increased gradually, building up to several hundred thousand businesses both unrepresented and represented by agents, and a statistically representative group. The build up will also enable more MTD-compatible software, including agent software, to be tested as it becomes available.
134.In the proposed pilot, using that MTD-compatible software, participants will be required to keep their records in a digital form and to provide HMRC with quarterly summaries, drawn from those digital records, of income and expenditure. That means that by April 2018 when the new scheme is due to be implemented, the first wave of recruits to the pilot are expected to be about to submit their fourth quarterly update. Later recruits will have completed fewer. None of the participating businesses will have prepared an end-of-year statement of their tax affairs for 2017/18, the tax year being piloted as this would not be due until 31 January 2019.
135.The overlap between the end of the reporting cycle for the 2017/18 tax year (the pilot year) and the start of the reporting cycle for the 2018/19 tax year (the ‘go live’ year) obviously has implications for the extent to which the full set of processes, software and other services can be tested, evaluated and refined in time for an April 2018 launch (now for fewer, larger businesses).
To assess the scope and likely usefulness of the pilot, we asked HMRC to outline its objectives. These are:
136.These aims and objectives cover a number of issues raised in the evidence we received. However, we were very concerned to note that it is not specifically intended to test the core proposition driving the MTD proposals, namely that mandatory digital record keeping and quarterly reporting will reduce the tax gap, as discussed at above.
137.As explained in paragraphs 134 and 135 above, none of the businesses recruited to the pilot will have completed a full reporting cycle before April 2018. Concerns were expressed in much of the evidence we received about the limitations the short duration of the pilot places on the scope for evaluating the results and applying any lessons learnt to improving the processes being tested and for validating key assumptions. As Mr Lyford-Smith of ICAEW said:
“The pilot study that HMRC is proposing starts in two months, but by the nature of its timeline the full making tax digital will start before that could possibly be finished, because it will only be a year later, so of course we will not have had the full time to run it through the process … It is all very condensed.”
138.It should be noted that businesses subject to MTDfB obligations will also have to select software by April 2018, when its end of year capabilities will not have been tested. For the first cohort, those whose businesses will have turnover over the VAT threshold, digital records may already be used to support online VAT filing.
139.The relatively short duration of the pilot appears to run counter to government guidelines and recognised best practice. The 2006 Carter Review of HMRC online services recommended that each new online service introduced by HMRC be “capacity tested at least a year before” implementation, “in order to ensure they are robust and high quality”. April 2017 to April 2018 testing will at most include three quarterly submissions, yet the Government’s Digital Service Standards requires departments to “test the end-to-end service”. Deferring by one year the start date for businesses below the VAT registration limit does not remove any of these concerns.
140.This is consistent with the lessons learned from overseas tax jurisdictions’ experiences of digitalisation. An international study by the Institute of Chartered Accountants of England and Wales highlighted that “making new systems mandatory too quickly will pass costs on to taxpayers and will adversely affect the digitally excluded.”
141.Ms Middleton, of HMRC, informed us that only the smaller software providers would join the pilot in April 2017, with others joining later. This appears to be partly because some providers were delayed by HMRC changing the APIs on 19 January 2017. Commenting on the tightness of the piloting timetable from a software industry perspective, Mr Daly, of IRIS, remarked that “there needs to be a far greater degree of clarity on the objectives”.
142.The objectives of the pilot include testing with agents, yet the Chartered Institute of Taxation and others tell us their involvement will only start sometime later in 2017. IRIS told us that their software product for agents would not be ready for pilot testing until around October 2017. In practice this means only businesses not using tax agents will be testing the system before then. Given that HMRC estimates that 70 per cent of businesses have agents, the inability of agents to participate in the pilot from the outset limits the testing process significantly.
143.Finally, Ms Middleton of HMRC also told us that HMRC needed to recruit “a statistically representative group” of businesses including those who currently only keep records on paper. Some concerns were expressed about HMRC’s ability to recruit businesses with the right characteristics in sufficient numbers. We understand that HMRC is still attempting to recruit volunteers to the pilot. It is not clear how the trial will proceed if the required volunteers are not recruited or, the sample is biased towards an unrepresentative degree of digital skills and confidence.
144.The design and duration of the pilot proposed by HMRC does not conform to government best practice guidelines. It is too short and too limited to yield the learning and process improvement benefits that full testing would provide and that are necessary in view of the scale of the changes involved. The pilot should include a properly weighted representative sample group and be of sufficient scale to test the robustness of the software’.
145.We recommend that the pilot should be extended until after 31 January 2019 to include end of year statements for the 2017/18 tax year. This would allow the software and HMRC systems and business support processes to be properly developed, tested and improved before full implementation and a fully functioning market in compliant products to develop. The delay would also allow more time for HMRC and tax agents to raise awareness and prepare businesses for the change.
147.There was also widespread scepticism about the proposed timetable for implementation, not only because of the concerns expressed over aspects of the pilot, but also because of the sheer magnitude of the task ahead to prepare businesses for the transition and to support them effectively. The ACCA were concerned that the short window for businesses to implement new processes increased the “likelihood of decisions being rushed and unnecessary costs incurred as a consequence”. In order to address these concerns, they recommended that businesses below the VAT threshold should be initially exempted, perhaps being phased in over three to five years.
148.Edward Woodall of the ACS commented about the wider impact on business processes in his sector where 53 per cent of independent retailers do not currently have electronic point of sale.
149.The evidence we received suggested that the software industry, as well as the tax practitioner community, was becoming increasingly concerned at the resources and preparation it would need in order to fill any gaps left by HMRC in supporting tax-payers. Ms Riches of Smith and Williamson commented that the timescale limited what tax agents could do to prepare their clients and assist them to make the transition.
150.Mr Dady was also concerned about the uncertainties currently surrounding the timetable and other aspects of the scheme:
“If we are to maintain the current published timetable the supplier community needs to know that it will be maintained, so that we can resource adequately and lead our customers through it. Frankly, it will probably be the phones in my call centres that are ringing when people cannot use the products or find that there are some stumbling blocks. If they cannot get through to HMRC, they will probably ring me”
151.A similar perspective was put by the agent representatives, who were concerned about the time available to select software, train their staff and assist clients in the transition over the first quarter of 2018, a time of year when agents are at their busiest.
152.Perhaps most importantly, there is real concern over the proposals to mandate the smallest businesses into MTD first. Advice from ABAB was to build on the lessons learned from the rollout of RTI and phase implementation. Mr Southam noted:
“Larger firms are the ones most likely to have digital solutions … For small businesses, it seems crazy to put them at the front. The majority of these guys will not be in a position to meet the deadline currently envisaged”.
153.The almost universal concern of witnesses is that the current timetable for mandating digital record keeping and quarterly reporting is too tight and entails unjustifiable risks for businesses, HMRC, tax practitioners and the software industry. It does not allow enough time for full end-to-end piloting and evaluation to avoid unnecessary risks for both HMRC and businesses.
154.We welcome the Chancellor’s decision to defer until 2019 the mandation of the smallest businesses into the new system. This will help address some of the most pressing concerns by reducing the risks of unnecessary costs and implementation difficulties for these businesses.
155.However, the Chancellor’s changes do not go far enough. We recommend that mandatory implementation of digital record keeping and quarterly reporting should be deferred until April 2020, after the extended pilot period.
124 HMRC, Bringing Business tax into the digital age: Summary of responses, 31 January 2017: [accessed March 2017]
125 The Rt Hon Andrew Tyrie MP, Chair of the Treasury Committee, commented in similar terms that “this is a welcome, albeit small, step in the right direction”. Treasury Committee, Chair on HMRC response to Making Tax Digital, 1 February 2017: [accessed March 2017]
126 Written evidence from HM Treasury and HMRC ()
127 and (Theresa Middleton)
128 HMRC Bringing business tax into the digital age: Summary of responses, 31 January 2017: [accessed March 2017]
129 HMRC Guidance, Bringing Business Tax into the Digital Age: legislation overview, 31 January 2017: [accessed March 2017]
130 For example, written evidence from the Institute of Chartered Accountants of Scotland (); the Country Land and Business Association (); and the Association of Chartered Certified Accountants ()
131 (David Lyford-Smith)
132 Lord Carter of Coles, Review of HMRC Online Services, March 2006: [accessed March 2017]
133 Government Digital Service, ‘Digital Service Standards’: [accessed March 2017]
134 ICAEW Information Technology Faculty, Digitalisation of tax: International perspectives, November 2016: [accessed March 2017]
135 (Theresa Middleton)
136 Written evidence from HM Treasury and HMRC (). An API is an Application Protocol (or Programming) Interface, which enables MTD-compatible software to communicate with HMRC’s systems
137 (Mr Dady)
138 Written evidence from the Chartered Institute of Taxation ()
139 (Theresa Middleton)
140 For example, (Michael Parker)
141 (Theresa Middleton)
142 Written evidence from Association of Chartered Certified Accountants ()
143 (Edward Woodall)
144 (Kevin Dady and Kevin Hart)
145 (Tina Riches)
146 (Kevin Dady)
147 Written evidence from UK200Group ()
148 Written evidence from the Administrative Burdens Advisory Board ()
149 (Roger Southam)