Small businesses could pay a heavy price for Making Tax Digital for VAT

22-Nov-2018

The Government’s introduction of mandatory Making Tax Digital for VAT should be delayed by at least one year. The Government must wait until at least April 2022 before Making Tax Digital is extended to other taxes in order for lessons to be learnt from the implementation of Making Tax Digital for VAT.

These are the key recommendations of the House of Lords Economic Affairs Committee’s report, Making Tax Digital for VAT: Treating Small Businesses Fairly.

This report considers progress on the ‘Making Tax Digital’ programme since the Committee’s March 2017 report on Making Tax Digital for Business, and the proposed introduction of Making Tax Digital for VAT for 1.2m businesses in April 2019.

Lord Forsyth of Drumlean, chairman of the House of Lords Economic Affairs Committee, said: 

“HMRC has neglected its responsibility to support small businesses with Making Tax Digital for VAT. HMRC are not listening to small businesses, while offering a six-month deferral to many in the public sector. Small businesses will not be ready for this significant change to their practices if it is introduced on 1 April, particularly with Brexit taking place three days earlier. The Government must delay its introduction.

“The Government has failed to listen to the warnings in our previous report. It must slow down its Making Tax Digital programme and listen carefully to the concerns raised by this Committee, small businesses and accountants.”

Other report findings and recommendations include:

  • HMRC is alone in its confidence that all one million businesses will be ready for Making Tax Digital for VAT in April 2019.
  • The costs to businesses of MTD for VAT will be far more than HMRC’s impact assessment.
  • HMRC must publish how its communication and support systems will meet the needs of taxpayers and agents across different levels of digital capability and skills.
  • We regret that a small number of organisations have been given a six-month deferral, but not the smaller businesses who have the fewest resources to devote to implementation.
  • So far, no free software products have been offered by the software industry. The smallest businesses will struggle unless HMRC provides a basic free software option.
  • The Government should publish its plan for the long-term development of MTD, including milestones and when key decisions will be made.
  • The penalties regime could be fairer and encourage taxpayers to remedy defaults promptly by giving taxpayers a longer grace period before penalties for late payment are applied.
  • The Government’s claim that MTD for VAT will increase the amount of tax collected remains unconvincing. They should revisit their assumptions and publish another revised impact assessment.
  • Neither Treasury nor HMRC are taking the risks to implementation of Making Tax Digital seriously enough.

The House of Lords Economic Affairs Committee appoints a Finance Bill Sub-Committee each year to inquire into the draft Finance Bill. This year the Sub-Committee decided its inquiry should address two areas: progress on the ‘Making Tax Digital’ programme since the Committee’s March 2017 report on Making Tax Digital for Business and developments in the balance of powers and safeguards between Her Majesty’s Revenue and Customs and the taxpayer.

This report considers the first of these areas. A second report on HMRC powers and safeguards will be published in December.