Making Tax Digital for VAT: Treating Small Businesses Fairly Contents

Chapter 3: HMRC’s preparations for Making Tax Digital for VAT

19.This chapter considers HMRC’s preparations for MTD for VAT since the announcement in July 2017 that MTD would focus on VAT first. It considers five areas: HMRC’s understanding of business systems and concerns, the pilot programme, the communication strategy for taxpayers affected, digital exclusion and the long-term strategy.

Understanding business systems and concerns

20.HMRC’s preparations should be viewed against the background of widespread concern among external stakeholders that it underestimates the extent of change the introduction of MTD for VAT imposes on many of the businesses affected, as well as the complexity of VAT calculations and processes.

21.HMRC announced a ‘soft landing’ in July 2018. Businesses would not be penalised for not having digital links between systems for the first year of MTD for VAT (2019–20), although digital record-keeping and digital filing would still be required.

22.Online filing of VAT returns has been mandatory for some years. It is currently possible for businesses to copy the relevant figures from non-digital records and input them—or ask their agents to do so—through a portal on GOV.UK. It is estimated that around 90 per cent of taxpayers do this.9 The fact that a large majority of VAT businesses file electronically does not mean that they have fully digital accounting systems supplying those figures. Regardless of whether they do or not, for partially exempt businesses, groups, users of special VAT schemes and others, the entries in their VAT returns do not flow directly from such records. The Confederation of British Industry (CBI) told us:

“… businesses will be required to have a clear digitally linked audit trail from the transaction records to the VAT return filing—a ‘digital link’ is responsible for an electronic transfer or exchange of data between software programs, products or applications without the involvement or need for manual intervention. Such a requirement represents a very considerable undertaking for businesses in terms of time and cost, given the potential complexity involved.”10

23.When asked why the deferral for some organisations announced in October 2018 was limited to only a small group, HMRC told us that while the technical functionality would be in place before April 2019, this would not allow enough testing for the more complex requirements of these entities.11 The deferral for this group was expected to have a negligible effect on the tax gap yield.

24.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.

25.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.

26.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.

Pilot programme

27.The pilot programme for MTD for VAT started in April 2018, only 12 months before the new system is due to be implemented. It began with a very limited number of businesses participating on an invitation-only basis and dealing with only the most straightforward processes. This stage of the programme was completed successfully in October 2018.

28.HMRC will be writing to half a million businesses in the coming weeks inviting them to join the pilot. From early 2019, the remaining nearly 600,000 will be invited to join, including types of business not previously eligible, such as partnerships and those who trade in EU countries. This late admission to the pilot has been criticised by some, who say many partnerships will not even have one VAT quarter to test their systems before the system is mandated, and consider this insufficient for preparation and learning.12

29.We are also concerned that the pilot period runs up to 31 March 2019, immediately before the MTD for VAT becomes mandatory. There will be no “pause” to allow the lessons learned in the pilot to be evaluated, particularly from the perspective of taxpayer readiness, and changes made before it is mandatory for most taxpayers. The reliability and performance of the system in dealing with large numbers of VAT traders is unproven.

30.We note with concern that the pilot has made no effort to test HMRC’s assessment of the costs and benefits of Making Tax Digital. HMRC told us “the pilot was really to test whether the system was working on the customer experience side rather than test the effect on tax revenues.”13 In written evidence to our 2017 inquiry, the Treasury and HMRC stated one of their aims for the pilot, which at that point planned to test the MTD for Business programme as a whole, as “to provide evidence and early insight into the effects of the policy on those participating in the pilot”. We recommended in that report that the pilot include analysis of the costs to businesses of MTD for Business, and the impact on error rates and the tax gap.14 HMRC failed to listen to this recommendation, and as a result their estimates remain under criticism, particularly from those representing small businesses.

31.Our evidence showed widespread concern about the lateness of the pilot process relative to the April 2019 deadline.15

32.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.

Communications and taxpayer support

33.HMRC’s communications so far about MTD for VAT have largely focused on agents. HMRC decided to rely initially on agents to raise awareness of the change amongst their clients.

34.VAT Notice 700/22 was published in July 2018 to give guidance to affected businesses, along with a communications pack for other stakeholders.16 The notice is not an easy read and there has been criticism that it does not cover all the necessary issues.17

35.There is widespread concern about the absence of direct communications from HMRC to make taxpayers aware of their obligations and about HMRC’s failure to support small businesses who are unrepresented, digitally excluded or have limited digital skills to meet their new digital obligations. When HMRC writes directly to businesses once the pilot is opened to them, they intend to include advice about the actions the business needs to take to get ready. This will be too late to be helpful. We return to this in chapter 5.

36.HMRC’s performance in this area was compared unfavourably by the Federation of Small Businesses (FSB) with the arrangements made by the Australian tax authority in similar circumstances. In Australia there was a year-long programme of engagement with key stakeholders—workshops, information sessions and webinars, videos, guides and regular newsletters.18 HMRC’s approach is inconsistent with best practice in change programmes and it underestimates the impact it will have on some taxpayers and their agents.

37.HMRC recently published its own research,19 undertaken from July–September 2017, on how it might communicate most effectively with affected businesses. It is not clear that it has developed a support package to reflect that research or to communicate with those with no awareness or who may be digitally excluded. Even when HMRC writes to businesses directly, its support material will link to online videos and other digital means,20 which is unhelpful to those who are less digitally enabled and in greater need of support. More generally, witnesses suggested that HMRC does not have sufficient resources to assist businesses to the extent necessary.21

38.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.

39.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.

Assisting the digitally excluded

40.A common concern raised with us was that the method of claiming digital exemption or exclusion by reason of age, disability or broadband connection problems had still not been made available, nor was there any clarification of what rules HMRC would apply in practice. For example, how old do taxpayers have to be to qualify for an exemption on ground of age? The lack of information on exemptions and the rules that might be applied to such businesses is a cause of frustration.22 We also heard that HMRC has been unwilling to grant exemptions from using the existing digital portal. As a result, some witnesses were sceptical that HMRC would take account of digital capabilities when granting exemptions.23 The Low Incomes Tax Reform Group said: “For those vulnerable taxpayers who are likely to be covered by the exemption, delays in this area will almost certainly be causing unnecessary stress and worry”.24

41.We heard from agents about the difficulties they, and their clients, have with broadband connections.25 Many small businesses with inadequate broadband coverage file online at present using workarounds, such as passing information to their agent to file or filing by phone. As Kevin Ringer, a partner in a firm of chartered accountants (writing in a personal capacity), commented, workarounds for online VAT are practical “because they are only required periodically and do not disrupt the business. But MTD is completely different because MTD requires digitisation of all transactions i.e. every day of the year.”26 As HMRC has failed to communicate adequately on this issue—one not dependent on software or pilots—it is not possible to tell whether it has underestimated the additional number of applications for exemptions to replace current workarounds that will no longer suffice and so will not be able to process new claims in time.

42.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.

9 Q 11 (Frank Haskew)

10 Written evidence from CBI (DFC0079)

11 Q 43 (Ruth Stanier)

12 Supplementary written evidence from Kevin Ringer (DFC0095)

13 Q 45 (Theresa Middleton)

14 Economic Affairs Committee, Draft Finance Bill 2017: Making Tax Digital for Business (3rd Report, Session 2016–17, HL Paper 137)

15 Written evidence from National Farmers’ Union (DFC0084), Association of Taxation Technicians (DFC0061), Low Incomes Tax Reform Group (DFC0067), Institute of Chartered Accountants of Scotland (DFC0068), Association of Convenience Stores (DFC0087)

17 Written evidence from National Farmers’ Union (DFC0084) and CIOT (DFC0071)

18 Written evidence from FSB (DFC0076)

20 Q 49 (Theresa Middleton)

21 See written evidence from Institute of Chartered Accountants of Scotland (DFC0068), Chartered Institute of Taxation (DFC0071), Michael C Feltham and Associates (DFC0077) and CBI (DFC0079)

22 Written evidence from James Smith (Accountant) Ltd (DFC0039), Kevin Ringer (DFC0064), NFU (DFC0084)

23 Private oral evidence taken on 22 October 2018 (Session 2017–19) and written evidence from Kevin Ringer (DFC0064)

24 Written evidence from Low Incomes Tax Reform Group (DFC0067)

25 Written evidence from Kevin Ringer (DFC0064)

26 Ibid.

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