Treasury Committee publishes report on Making Tax Digital

‘Carefully introduced, the digitisation of tax records and reporting (MTD) can be an opportunity greatly to improve the administration of the tax system for the long term. Without sufficient care, MTD could be a disaster. Implemented carefully, with long transitional arrangements where necessary, and, having drawn on information from fully inclusive pilots, Making Tax Digital could be designed for the benefit both of the economy and of the tax yield. But with a rushed introduction, it will benefit neither’.

The Committee has identified a number of serious shortcomings with current plans:

1. The costs and administrative burdens for very small businesses. Andrew Tyrie said: ‘the consequent risk that many may go out of business or move into the hidden economy...may undermine the extra revenue that the Government is expecting to raise from MTD, scored in the August consultation document at £625m, possibly larger now. Perhaps this is a realistic estimate; perhaps not. As the accountancy bodies have argued in evidence, and as the Committee concluded: “It is plausible to suppose that, in so far as MTD results in fewer customer errors, those errors will have been as much in the exchequer's favour (such as forgetting to record deductible expenses) as they have been in favour of the individual taxpayers.”’
2. The speed with which MTD is being implemented. ‘So far, there has been insufficient engagement and consultation with the business community. At present, many of those on whom demands from MTD will be made – millions of small businesses up and down the country: the backbone of the economy - are ill equipped to handle the reporting requirements. There may be other concerns which neither the Committee, nor those providing evidence to it, have yet identified'.

‘Taken together, these could undermine the Government’s objectives – for the yield and for the economy - and discredit the approach. The collateral damage could be large. If the Government gets it wrong, the culture of mutual trust and goodwill between HMRC and the vast majority of taxpayers - which still exists in the UK and which helps to keep the tax gap down – could be jeopardised. This is not a minor matter. These reforms will affect millions of taxpayers. Their co-operation and trust are both hard won and easily dissipated. Without them, more of the yield could be at risk than any putative extra revenue from MTD,’ writes Andrew Tyrie.

He says that the Government should change its current approach by:

1. Abandoning its plans for an initial threshold of £10,000. The Committee has yet to see evidence strong enough to justify a threshold below the VAT threshold, £83,000. It may exist, but the Government needs to assemble and publish it.
2. Accepting that there needs to be a delay of the start until at least 2019/20, possibly later.
3. Using comprehensive pilots of the proposed system, with full protection from anything that may go wrong for those required to participate. ‘I understand that HMRC have already undertaken a number of pilots, although little public information is, so far, available about them. Apparently, the businesses participating do so by invitation of HMRC. Clearly, those who might be worst affected by MTD are the most likely to decline the offer, greatly reducing the value of the information collected’.
4. Designing pilots to gather information over the entire reporting cycle – four quarterly updates and an end of year reconciliation. 'These need to be evaluated before full implementation and Parliament needs to see the evidence that this has been done'.
5. Including adequate free software for smaller and less complex businesses. 'The Government has yet to set out how this may be accomplished.'

He concludes by saying:

‘The long term future can, and probably should, be digital. Better to take care on the road to it than to have a road accident. Robust Parliamentary scrutiny could reduce that risk, hence the proposals in my letter of 12 December to the joint CIOT, IFS and IFG study. The Committee will take evidence from Ministers when the Government has had time to consider and respond to this report.'