Making Tax Digital for VAT: Treating Small Businesses Fairly Contents

Summary of conclusions and recommendations

Development of Making Tax Digital

1.We acknowledge the announcement on 16 October 2018 of the deferral for some of the more complex organisations, and extension of the pilot programmes. We regret that this deferral was given mainly to other public sector bodies and a selection of small organisations with the most complicated tax affairs, and not to the smaller businesses for whom implementation will be most burdensome, and who have the fewest resources to devote to implementation. (Paragraph 18)

HMRC’s preparations for Making Tax Digital for VAT

2.HMRC’s failure to appreciate fully or take account of business and accounting processes early in its project planning, combined with a rushed timetable, is unhelpful. The soft-landing is welcome but does not address all of businesses’ concerns. (Paragraph 24)

3.We are disappointed that HMRC has not done more to consider the business perspective and challenges in preparing for Making Tax Digital for VAT. A more engaged and collaborative approach will be needed if Making Tax Digital for Business, or Making Tax Digital for corporation tax, is rolled out. (Paragraph 25)

4.We recommend that HMRC reviews and learns lessons from its Making Tax Digital for VAT experience. It must fully consider the practicalities affecting underlying business and accounting systems before Making Tax Digital is extended to other taxes. (Paragraph 26)

5.The timetable for introducing Making Tax Digital for VAT from piloting to implementation is too rushed and the pilot so far has been too narrow and too late. The expansion of the pilot over the coming weeks is welcome but there is too little time before 1 April 2019 to make up lost ground and respond to implementation issues identified by taxpayers. HMRC’s systems are still unproven at scale. (Paragraph 32)

6.HMRC has not done enough to communicate with taxpayers or agents to support their preparations to meet their Making Tax Digital obligations. HMRC’s dependence on agents to ensure businesses understand their Making Tax Digital for VAT obligations does not recognise the needs of unrepresented taxpayers. It also has the effect of shifting the costs of supporting taxpayers through this significant change, which HMRC should bear, to taxpayers by increasing their compliance costs. (Paragraph 38)

7.We recommend that HMRC urgently publishes full details of how its communication and support systems will meet the needs of taxpayers and agents across different levels of digital capability and skills. (Paragraph 39)

8.We recommend that HMRC develops guidance on the practicalities of claiming digital exemption with the representative bodies and publishes it as a matter of urgency. HMRC should notify taxpayers in writing of its guidance and claims process for digital exemptions when it invites them to join the pilot. (Paragraph 42)

The new software market

9.The software industry is, unsurprisingly, responding to the commercial opportunity of Making Tax Digital for VAT. We have seen no evidence that any free software products will be offered. (Paragraph 56)

10.We question the logic of requiring taxpayers to spend additional money to pay their tax. Since a free option has not emerged from the software industry, the Government should consider again the case for providing a basic, free software option. (Paragraph 57)

11.Businesses and accountants using the latest versions of mainstream digital accounting software are likely to be well supported for Making Tax Digital for VAT compliance in April 2019. It is not clear that older packages or specialist software will be updated to be compliant with Making Tax Digital for VAT in time for April 2019. (Paragraph 58)

12.A market in ‘bridging software’ does not seem to have emerged. As there is a greater commercial opportunity for software providers in those businesses who are digitising more substantially, ‘bridging’ customers may be less supported by the larger software providers, and so receive less training and support. (Paragraph 59)

13.Many of the concerns about the software required for Making Tax Digital could be explored and overcome with a longer pilot period. This ought to allow a more developed software market to emerge in 2019. In this context, HMRC’s ‘soft landing’ for digital links is essential. (Paragraph 60)

Taxpayer readiness

14.Although many witnesses supported digital record-keeping in principle, some saw no justification for HMRC to impose digital record-keeping requirements on businesses, especially where it would provide exactly the same information to HMRC as the current system. (Paragraph 63)

15.There was questioning throughout our evidence of whether HMRC should mandate Making Tax Digital at all. It seems unreasonable to make people run their businesses in a different way just to produce the same figures for tax purposes. We have sympathy with the view that HMRC should not impose digital record-keeping requirements purely for tax purposes without compelling reasons, where they hold no benefits for a particular business. (Paragraph 64)

16.A spectrum of business readiness has emerged, from those confident in their readiness, through those trying to prepare but hampered by lack of information, to those still wholly unaware or digitally excluded. It is concerning that a substantial proportion of affected businesses appear to be unaware of what they will be expected to do in five months’ time. (Paragraph 69)

17.Although MTD for VAT-compliant software may be available, there has been insufficient time to establish a competitive, accessible and diverse software market. (Paragraph 76)

18.The lack of HMRC guidance or support for digital product selection means businesses trying to go digital for the first time face considerable challenges. The fast-changing software market and Making Tax Digital for VAT deadline in April 2019 compound the difficulty in making the best long-term choice. These businesses may not be able to make the right choice in time for April 2019 and would benefit from a longer timetable. They should not have to hope for a discretionary waiver of a penalty from HMRC. (Paragraph 77)

19.Businesses using older software face costs of upgrading purely to meet Making Tax Digital for VAT requirements, since they are already realising efficiencies through their existing software. (Paragraph 78)

20.We recommend that the Government urgently provides a support package for software system selection to businesses going digital for the first time and their agents, independently from the software industry. (Paragraph 79)

21.We recommend that HMRC, as its software selection tool is developed, makes provision for establishing and certifying which software options are compliant with Making Tax Digital for VAT. (Paragraph 80)

22.The lateness in piloting has placed unreasonable burdens on taxpayers by reducing their time to prepare or test new systems. (Paragraph 86)

23.As HMRC is relying heavily on agents to support their business clients, it needs to give agents greater support with matters such as software suitability and be more open to their feedback on the digital challenges their clients are facing. (Paragraph 87)

24.HMRC is alone in its confidence that all one million businesses will be ready for Making Tax Digital for VAT in April 2019. They have underestimated the time for research, planning, training and system changes that some businesses will need. (Paragraph 89)

25.HMRC told us on 16 October that it was “significantly increasing its communications activity” to ensure businesses were ready for April 2019. With less than five months remaining before introduction, it is too late to begin an effective communications campaign. (Paragraph 90)

26.We recommend that HMRC increases the communication and support available to agents, and listens to agents’ concerns. Within that communication strategy, HMRC needs to address how it supports unrepresented taxpayers. (Paragraph 91)

27.Some businesses with complex affairs have been granted a six-month deferral after they complained about the April 2019 deadline. Smaller businesses also need to be heard by HMRC specialists and the case for further categories of deferral should be considered. In addition, specific support in dealing with implementation problems will be needed for unrepresented taxpayers. (Paragraph 92)

28.The evidence presented to us suggests that HMRC, taxpayers and the software market are unprepared for the implementation of Making Tax Digital for VAT in April 2019. (Paragraph 94)

29.We recommend that the Government defers the date for mandating Making Tax Digital for VAT by at least one year, while encouraging businesses to join voluntarily. This will enable further development of a competitive software market and specialist sector products, permit HMRC’s systems to be fully and appropriately tested, and allow taxpayers to prepare fully for implementation of new systems. (Paragraph 95)

30.Deferring the date for Making Tax Digital for VAT will not by itself solve the concerns raised in this report, if HMRC does not start listening to the concerns of businesses and agents. (Paragraph 96)

31.We recommend that HMRC plans a staged transition for businesses to join Making Tax Digital for VAT, and future stages of Making Tax Digital which allows for businesses, not just HMRC, to be fully ready. As part of this, HMRC should provide more information on their plans for Making Tax Digital for Business and Making Tax Digital for corporation tax. This will allow businesses to make informed long-term decisions about their software selection. (Paragraph 97)

32.The absence of a long-term plan for Making Tax Digital and digital data collection is a cause of business uncertainty. While businesses do not need to know precise dates, they do need to understand the future direction of Making Tax Digital. (Paragraph 100)

33.It will be unhelpful for businesses, if they have invested in software for Making Tax Digital for VAT, to find they need to reinvest in alternative software for Making Tax Digital for Business or corporation tax. (Paragraph 101)

34.We recommend that the Government publishes its plan for the long-term development of Making Tax Digital, including key decision points, milestones and dependencies. This will give greater certainty, and the software industry the information it needs to develop software that will work across each different aspect of the Making Tax Digital programme. It will also encourage businesses to choose digitalisation for productivity, efficiency and modernisation reasons rather than just tax compliance. (Paragraph 102)

35.We recommend that the next stage of Making Tax Digital is not implemented until April 2022 at the earliest. At least two years are required to learn and act on lessons from the implementation of Making Tax Digital for VAT, and a further year will be required for the software industry and taxpayers to prepare. (Paragraph 103)

The Making Tax Digital penalty and interest regime

36.We commend the consultation process which underlies these proposals, which was key in achieving broad support. This demonstrates the value of the ‘new approach to tax policy making’ when it is used effectively. (Paragraph 110)

37.The penalties regime could be fairer and better encourage taxpayers to remedy defaults promptly by giving taxpayers a longer grace period before penalties for late payment are applied, and ensuring taxpayers are aware of their exposure sooner. (Paragraph 120)

38.We recommend that the two-stage late payment penalty system is amended to extend the period of grace from 15 to 30 days. (Paragraph 121)

39.We recommend that the Government reduces the two-year time limit for HMRC to assess penalties to no more than one year, so that taxpayers are aware of their exposure sooner. (Paragraph 122)

40.While we support the points-based approach for late filing of penalties we remain concerned that the complexity of the provisions, the transition process and the timescales may be confusing to taxpayers until they become familiar with the new system. (Paragraph 125)

41.The absence of any incentive for HMRC to conclude VAT inquiries promptly risks taxpayers being unfairly disadvantaged by HMRC delays. (Paragraph 129)

42.We recommend the draft legislation is amended to remove the restrictions on repayment interest on VAT. (Paragraph 130)

43.We recommend that HMRC introduces a communication and support programme to ensure that taxpayers have a clear and timely understanding of the new penalty and interest regime, including the transitional provisions. (Paragraph 133)

44.We recommend that HMRC introduces a messaging system to give timely information to taxpayers of penalty points accruing, in order for the new regime to support taxpayers in timely compliance with their tax obligations. (Paragraph 134)

Revisiting the case for Making Tax Digital

45.We support the Government’s attempts to modernise HMRC systems and seek efficiencies for taxpayers, but we remain unconvinced that MTD will reduce error and thereby the tax gap. If Making Tax Digital does not deliver the additional tax yield HMRC expects, the argument for mandating Making Tax Digital for VAT in April 2019 is much diminished. (Paragraph 143)

46.Our evidence suggests the costs to businesses of MTD for VAT, both for initial setup and for subsequent operation, will significantly exceed those used in the Government’s impact assessment. (Paragraph 156)

47.We recommend that the Government updates the impact assessment to reflect evidence gathered in recent months, including from the pilot. A revised impact assessment should be published alongside the Government’s long-term plan for mandating MTD for other taxes. (Paragraph 157)

HMRC’s responsiveness to our 2017 report

48.We have been struck with a sense of déjà vu throughout our inquiry. It is disappointing that many of the concerns raised in evidence to this inquiry have repeated issues addressed in our 2017 report. There is considerable frustration amongst taxpayers about HMRC’s lack of responsiveness to their concerns. (Paragraph 166)

49.On most issues we raised in 2017 HMRC took no meaningful action. HMRC and businesses are unlikely to have a smooth and efficient transition to digital tax reporting if it is mandated on the current timetable, particularly for businesses implementing any changes necessitated by Brexit at the same time. We believe HMRC’s unwillingness to listen and learn lessons will result in difficulties for taxpayers. (Paragraph 167)

50.We have been concerned by HMRC’s optimism in its evidence to this inquiry. There seems a failure to appreciate, or at least acknowledge publicly, the extent of the risks to implementation that Making Tax Digital for VAT faces. We recommend that HMRC’s Board challenges the Department’s current assessment of the risks. (Paragraph 168)

51.It is possible that many of the problems in implementing Making Tax Digital stem from inadequacy of resources devoted to the enterprise. We urge the Government to take steps to ensure that an adequate budget that is protected by a ring-fence should be available for Making Tax Digital. (Paragraph 169)

52.The Financial Secretary to the Treasury’s refusal to give oral evidence during our current inquiry does not convince us that the Treasury is taking seriously the risks of implementation, or the widespread criticism of HMRC’s proposals. These issues need serious and prompt attention by ministers. (Paragraph 170)

53.We request that HMRC writes to update the Economic Affairs Committee every six months until the entire MTD programme is rolled out. (Paragraph 171)

54.It is time to take a fresh look at the plans for MTD. The modernisation of the tax system and encouragement to businesses to embrace technology should be a positive move. A different approach is needed to deliver maximum advantage for all. (Paragraph 172)

© Parliamentary copyright 2018