Chapter 2: Development of Making Tax Digital
7.Our previous inquiry Making Tax Digital for Business considered in detail the Government’s original MTD proposals.5 The MTD for Business proposals were to be mandatory from April 2018 for businesses with annual income greater than £10,000 and were to be extended in due course to corporation tax and VAT reporting.
8.The 2017 report set out the full history and background to the MTD programme. This report considers the policy developments and progress over the last 18 months towards implementation of this significant project.
The 2017 report—key conclusions and recommendations
9.The Committee’s report concluded that the Government was right to seek to modernise HMRC systems and encourage businesses to embrace digitalisation and seek efficiencies. It offered a number of challenges to the MTD for Business proposals, as well as recommendations. The Committee found:
- The suggested impact on the tax gap benefit to the Exchequer, which was HMRC’s main driver for mandatory digitalisation, was unproven and little more than guess work. The report recommended HMRC revisit and test, as part of its pilot, the behavioural responses of taxpayers in reducing errors by adopting digital record-keeping and filing.
- HMRC underestimated the initial and ongoing costs to a diverse range of businesses, which were likely to outweigh benefits; it recommended that HMRC produce a more comprehensive impact assessment, stratified by business type, size and digital capability.
- Levels of awareness of the significant changes the new mandatory obligations would bring were very low and skills needed to be developed; a comprehensive communications strategy was needed to make taxpayers aware of the changes together with a support and resources strategy to assist businesses in compliance.
- HMRC underestimated the difficulties faced by the considerable number of people with limited digital skills or inadequate broadband access; the Committee recommended HMRC should work with representative bodies to develop detailed guidance that would work in practice, particularly for those with insufficient broadband access.
- The pilot programme was too short and limited to yield learning and process-improvement benefits, or to test a full compliance cycle, taxpayer experiences, costs or the impact on error rates and the tax gap. The Committee recommended extending the pilot to early 2019, with a comprehensive scope.
- Witnesses were almost universally concerned that the timetable was too tight and entailed unjustifiable risks for businesses, HMRC, tax practitioners and the software industry. The Committee recommended deferring all mandation until April 2020 at the earliest.
- The late publication of draft legislation meant that the time for consultation was inadequate and the reliance on secondary legislation reduced the scope for effective parliamentary scrutiny. The Committee recommended 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”.
10.The report welcomed the Chancellor’s announcement in the Spring Budget 2017 of a 12-month delay in mandating the MTD for Business scheme for businesses with annual income below £85,000, although it concluded that the deferral had not gone far enough, nor addressed the many broader challenges.
Policy developments and implementation progress
11.In partial recognition of the concerns on the timescales proposed, the Financial Secretary to the Treasury announced in July 2017 that MTD would apply from April 2019 instead of April 2018. Furthermore, MTD would be restricted to VAT only, until April 2020 at the earliest. As a result, from April 2019 MTD will be mandatory only for VAT-registered businesses with annual taxable turnover over £85,000.
12.An updated impact assessment was published at the time of the Autumn Budget 2017.6 Government estimates of the contribution of MTD to the Exchequer by 2022–23 reduced from over £3 billion to just over £1 billion. The assumptions underlying the estimates did not change from those challenged by the Committee. Estimates of the costs to be borne by those businesses mandated from April 2019 were revised to show ongoing net costs (after transition) of £37 million to the estimated 1.2 million businesses affected, confirming our 2017 conclusion that costs would exceed benefits to businesses. Transitional costs were forecast at £131 million, or just over £100 per business.
13.In recognition that spreadsheets were widely used, especially by smaller businesses, HMRC announced in December 2017 that spreadsheets would meet digital record-keeping requirements for VAT. The spreadsheets will have to link through ‘bridging’ software to HMRC’s systems to submit VAT returns digitally.
14.A limited VAT pilot involving a few hundred of the simplest businesses started in April 2018. It began opening on a staged basis to businesses with suitable software in October 2018.
15.HMRC’s detailed requirements for business record-keeping and MTD compliant software were published in July 2018.7 While providing useful clarification for some, the challenges of adapting systems in more complex VAT businesses started to emerge.
16.The draft Finance Bill 2018 was published in July 2018. This included draft clauses to introduce a penalty and interest regime to support compliance with MTD, to be introduced from April 2020.
17.On 16 October 2018, HMRC announced a six-month deferral for some organisations with more complex VAT arrangements, including NHS trusts, local authorities and VAT groups—around 35,000 of the total one million or so mandated from April 2019.8
18.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.
5 Economic Affairs Committee, Draft Finance Bill 2017: Making Tax Digital for Business (3rd Report, Session 2016–17, HL Paper 137)
6 HM Revenue & Customs, Making Tax Digital: changing the scope and pace: technical note (1 December 2017): https://www.gov.uk/government/publications/making-tax-digital-changing-the-scope-and-pace-technical-note/making-tax-digital-for-business [accessed 14 November 2018]
7 HM Revenue & Customs, VAT Notice 700/22: Making Tax Digital for VAT (13 July 2018): https://www.gov.uk/government/publications/vat-notice-70022-making-tax-digital-for-vat [accessed 14 November 2018]
8 Letter from Ruth Stanier OBE, to The Rt Hon Lord Forsyth of Drumlean, 16 October 2018: https://www.parliament.uk/documents/lords-committees/economic-affairs-finance-bill/draft-finance-bill-2018/161018%20MTD%20for%20VAT%20Letter%20LF%20.pdf