Draft Finance Bill 2017: Making Tax Digital for Business Contents

Summary of conclusions and recommendations

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

1.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. (Paragraph 34)

Chapter 4: Assessing the case for Making Tax Digital

2.The Government is right to modernise HMRC systems and seek efficiencies for taxpayers through the use of new technologies, but the digitally excluded, and less capable, should be properly catered for. (Paragraph 37)

Impact on the tax gap

3.We do not share the confidence of HM Treasury and HMRC in their estimates of the tax gap reductions from the introduction of MTD from April 2018. On the evidence presented to us, those estimates appear very fragile and little more than guess work. They rely heavily on the untested proposition that sufficient numbers of taxpayers currently making errors will provide HMRC with correct information as a result of adopting digital record-keeping and quarterly reporting and that changes would be in HMRC’s favour. At this stage we regard those estimated tax gap reductions, the main drivers for the mandating the new obligations, as not yet proven. (Paragraph 53)

4.The Government is proposing to impose new obligations on the majority of businesses and landlords in order to resolve errors attributable to less than one third of that taxpayer population. (Paragraph 54)

5.We recommend that, before implementing MTDfB, HMRC revisits and tests thoroughly, as part of its pilot, the behavioural assumptions underlying its estimated tax gap reductions to take into account the evidence suggesting that taxpayers may in fact respond in ways that invalidate those estimates. (Paragraph 55)

Administrative costs to HMRC

6.At this stage, apart from a headline figure of £227 million allocated to HMRC over the current spending review period, the nature of any costs to be borne by and any benefits to accrue to HMRC remains opaque. Full details of how HMRC intends to use the money allocated should be made available. (Paragraph 60)

Impact on businesses

7.The Government’s estimates of both the initial and the ongoing costs of complying with MTD requirements do not fully reflect the costs likely to be borne by a very diverse range of businesses and the differences between them. This is particularly true of the smallest and least digitally engaged businesses, many of whom will have to purchase both new hardware and new software. (Paragraph 77)

8.For the smallest businesses and landlords, any benefits from moving to digital record keeping are likely to be very limited, and that only those simpler businesses with regular flows of income are likely to realise the benefits claimed for quarterly reporting, namely the potential to have a clearer view of their tax liabilities. (Paragraph 78)

9.Under HMRC’s own estimates of the costs and benefits accruing to businesses, it would take more than 10 years for businesses to recoup their aggregate initial outlay. We find it difficult to see the case, from a business viewpoint, for proceeding with the MTD proposals. (Paragraph 79)

10.We recommend that, before proceeding with the implementation of Making Tax Digital, HMRC extend its assessment of the business impact by carrying out and publishing a comprehensive analysis of that impact stratified by business type, size and initial digital capability, and explain what financial support is available to assist them. (Paragraph 80)

11.HMRC has yet to take a final decision on the threshold for inclusion in the scheme. We recommend that below the current VAT threshold, digital record keeping and quarterly reporting should not be made mandatory. HMRC may argue that this would leave a lot of tax uncollected. We do not find this plausible. What is at stake is how much extra tax would be collected simply by mandating record keeping and quarterly reports. (Paragraph 81)

12.We recommend that the Government consider whether businesses with diverse and seasonal affairs, such as agricultural businesses, should be exempt from the quarterly reporting requirements. (Paragraph 82)

Chapter 5: Taxpayer readiness and support needs

13.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. (Paragraph 93)

Awareness

14.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 (Paragraph 94)

15.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. (Paragraph 95)

Software industry readiness

16.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. (Paragraph 105)

17.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.(Paragraph 106)

18.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. (Paragraph 107)

HMRC support for taxpayers

19.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. (Paragraph 118)

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

Digital exclusion

21.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. (Paragraph 128)

22.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 Government’s Universal Service Obligation minimum of 10 mbps. (Paragraph 129)

23.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. (Paragraph 130)

Chapter 6: Piloting and implementation schedule

24.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’. (Paragraph 144)

25.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 (Paragraph 145)

26.We also recommend that the pilot should include a comprehensive analysis of:

Implementation Timetable

27.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. (Paragraph 153)

28.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. (Paragraph 154)

29.We recommend that mandatory implementation of digital record keeping and quarterly reporting should be deferred until April 2020, after the extended pilot period. (Paragraph 155)

Chapter 7: Simplification

30.It would have been preferable to introduce simplifying tax changes before MTDfB becomes mandatory in order to minimise the burden on, and potential for confusion among,. taxpayers. (Paragraph 164)

31.We agree with the Government’s decision to defer the introduction of the further simplification measures it had proposed. Whilst they may be welcomed in due course, introducing them at the same time as businesses have to focus on their transition to MTDfB would have added to their burden. (Paragraph 165)

32.We recommend that the Government develop and publish a coherent road map outlining the principles governing further tax simplification measures to smooth the operation of MTDfB. (Paragraph 166)

33.As part of the roadmap, we recommend that the Government considers, with the Office of Tax Simplification, which measures from that Office’s current reviews into the VAT and corporation tax regimes might be introduced before MTDfB is applied to them. (Paragraph 169)

Cash Basis

34.We support the Government’s plans to extend the cash basis for trading businesses and to include property businesses from 2017/18. However, some businesses who qualify for the cash basis may need the fuller financial insights provided by traditional accounts and they should be made aware of the consequences of opting for the cash basis. (Paragraph 181)

35.The difference between the rules for choosing to apply the cash basis to trading income and to property income is a potential source of confusion and error for many businesses, especially those with income from both sources. (Paragraph 182)

36.We recommend that HMRC develop a plan to communicate the cash basis changes to property businesses and to ensure that trading businesses are clearly informed of the advantages and disadvantages of traditional accounts as compared with opting for the cash basis. (Paragraph 183)

Chapter 8: Effectiveness of the Consultation Process

37.Not consulting stakeholders at the outset of the policy development process constituted a failure to comply with the Government’s own guidelines on tax policymaking. (Paragraph 206)

38.The time now available for consultation on the draft legislation is woefully inadequate and that consigning most of the detailed provisions to secondary has reduced the scope for effective Parliamentary scrutiny. Given the scale and significance of the proposals this could have been anticipated and built into a more appropriate timetable. (Paragraph 207)

39.We are concerned that some of the draft enabling legislation so far published, in particular Clause 8(6), is very widely drafted. (Paragraph 208)

40.HMRC has still not adequately addressed a number of widely held concerns expressed during and after the formal consultation, particularly those concerning the pace of implementation. The 250 pages of consultation and response have done little to reassure those affected that their concerns are being listened to. (Paragraph 209)

41.We recommend that in designing future tax policy initiatives, whether or not driven by Exchequer imperative, the Government allows sufficient time for full and open consultation at each stage of the policy development process, including the initial consideration of options. (Paragraph 210)

42.We also recommend that where, as part of a consultation, particular concerns are widely held, the Government should provide convincing evidence that those concerns were unfounded or that they were being addressed appropriately. (Paragraph 211)





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