On 1 April 2019, the Government intends to mandate Making Tax Digital for VAT for all businesses with taxable turnover of over £85,000. It is the first step towards an ambitious programme of reform in the UK’s tax system. This report follows up on the Committee’s 2017 Draft Finance Bill 2017: Making Tax Digital for Business report, in which we wrote: “Where the Government is wrong is not in the principle, but in the transitional arrangements”. Despite the efforts of our Committee and many others, the evidence we have collected shows that this is still the case. In particular, we are concerned about Making Tax Digital for VAT’s potential impact on smaller businesses.
Many businesses will not be ready for Making Tax Digital for VAT. As much as 40 per cent of affected businesses have not heard of Making Tax Digital, let alone have started to prepare for a substantial change to their accounting processes. The emerging software market appears difficult to navigate. It is unfair to expect businesses to make choices about their accounting software without a better understanding of the future Making Tax Digital regime.
HMRC expects Making Tax Digital for VAT to yield considerable amounts of tax revenue, as businesses make fewer errors filing their tax returns. This, it seems, is the Government’s primary justification for the speed and rigidity with which the programme is being introduced. We were not convinced of this logic in 2017, and we remain unconvinced now.
We also remain confused about the assumptions underlying HMRC’s analysis of costs to businesses. HMRC’s definition of ‘small’ businesses includes any business with taxable turnover between £85,000 and £10 million, taking in 1.15 million (96 per cent) of the 1.2 million businesses for whom MTD for VAT could be mandatory. It is not evident to us that there has been any attempt to calculate the impact of Making Tax Digital for VAT on the smallest businesses. HMRC has also assumed that the programme will result in no additional accountancy fees, either during or after transition. This conflicts with the weight of evidence we have received. In our 2017 report, we recommended HMRC update the assumptions behind its impact assessment in light of what we considered undermining evidence. In response, HMRC published updated impact assessments, but without any substantial change to the approach it was taking.
Making Tax Digital for VAT will make life even more difficult for small businesses given their scarce resources to devote to preparing for the change. If HMRC insists on mandating Making Tax Digital for VAT, it has a duty to support small businesses with its implementation. So far, HMRC appears to have neglected this duty.
We recommend that the Government:
The Government and HMRC have failed to listen to our previous report, and the warnings of many others, in preparing for Making Tax Digital for VAT. They must address the concerns raised by this Committee, businesses, and accountants. In particular, they must start listening to small businesses. Otherwise, the burdens on small businesses may outweigh any potential benefits of the Making Tax Digital programme. By failing to properly engage with small businesses, HMRC risks alienating them from any future modernisation of the tax system.