In its report, ‘Making Tax Digital for VAT: Treating Small Businesses Fairly’ published last week, the House of Lords Economic Affairs Committee called upon the Government to delay the introduction of MTD for VAT by at least one year from its proposed start date of 1st April 2019, because of the potential impact on smaller businesses.
As many as 40% of affected businesses have not heard of MTD, let alone having started to prepare for a substantial change to their accounting record keeping and processes and therefore many businesses are simply not ready for MTD for VAT. The emerging software market appears difficult to navigate and it is also unfair to expect businesses to make choices about their accounting software without a better understanding of the future MTD regime.
HMRC expects MTD for VAT to yield considerable amounts of tax revenue, on the basis that businesses will make fewer errors filing their tax returns. This, it seems, is the Government’s primary justification for the speed and singlemindedness with which the programme is being introduced. The Committee remain as unconvinced now as they were last year about this logic.
The Committee 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 %) of the 1.2 million businesses for whom MTD for VAT could be mandatory. There is no evidence that there has been any attempt to calculate the impact of MTD 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 the Committee has received; in their 2017 report, the Committee recommended HMRC update the assumptions behind its impact assessment in light of what they considered undermining evidence. In response, HMRC published updated impact assessments, but without any substantial change to the approach it was taking.
The House of Lords Economic Affairs Committee says that MTD for VAT will make life even more difficult for small businesses given their limited resources to devote to preparing for the change. If HMRC insists on mandating MTD, it has a duty to support small businesses with its implementation but thus far, HMRC appears to have neglected this duty.
Borne out of these concerns the Committee has recommended that the Government:
• Defers the introduction of mandatory MTD for VAT by at least one year, while encouraging businesses to join voluntarily;
• Plans a staged transition for businesses to join MTD for VAT and future stages of MTD which allows for businesses, not just HMRC, to be fully ready;
• Waits until at least April 2022 to implement the next stages of MTD, to allow time to learn lessons from the implementation of MTD for VAT; and
• Publishes its plan for the long-term development of MTD, to encourage businesses to choose digitalisation for productivity, efficiency and modernisation reasons rather than just tax compliance.
Criticism has been aimed at both the Government and HMRC by the Committee, for failing to heed their previous report as well as the warnings of others. They must address all concerns raised not only by the Committee but also businesses and accountants, in particular small businesses. Failure to do so will see the burdens on small businesses outweigh any potential benefits of the MTD programme. By failing to properly engage with small businesses, HMRC risks alienating them from any future modernisation of the tax system.
Both the Chartered Institute of Taxation (CIOT) and the Association of Taxation Technicians (ATT) share many of the doubts expressed in the report and echo the call for a delay to MTD.
Adrian Rudd, Chair of the CIOT/ATT Digitalisation and Agent Strategy Working Group, said:
“Many businesses still have little or no awareness of HMRC’s MTD project. This widespread lack of awareness is a concern with the start date for MTD for VAT less than 150 days away. MTD for VAT will be the biggest overhaul in VAT obligations in decades. With just a few months to go before it kicks in, these knowledge gaps could mean normally compliant firms fail to fulfil their new obligations.”
“If properly implemented, digitisation could lead to efficiencies for taxpayers, agents and tax authorities. But many businesses will really struggle to get ready in time, and we support the Committee’s recommendation of a delay for MTD for VAT. Pushing back the start date for MTD for other taxes to 2022 at the earliest, is something we support, but it is more important that there is sufficient time set aside for a full review and evaluation of MTD for VAT before this programme is extended.”
“The use of software can bring many advantages but it should be something which businesses choose because it delivers those benefits, and not be something they are forced to adopt. This is particularly important because we remain sceptical about HMRC’s assumption that MTD for VAT will indeed reduce the tax gap and it is likely to cost businesses far more to implement than HMRC have estimated.”
“With Brexit in March next year and MTD for VAT coming in just days later it promises to be a spring of change and challenge for businesses.”