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News added on 26.11.2018

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HMRC failures lead to recommendation that MTD for VAT is delayed

The Economic Affairs Committee has published a report criticising the introduction of Making Tax Digital for VAT (MTDfV) and recommends that it's delayed until 2020. How has HMRC failed small businesses?

Tight timescale. The report criticises the way in which HMRC has allowed businesses with more complex tax affairs to defer for six months but not the smaller businesses for whom implementation will be most burdensome. The report also berates HMRC for rushing the process, deeming the pilot scheme "too narrow and too late". As most businesses are required to join the programme from April 2019 there is little time to respond to any issues identified by the pilot scheme.

Lack of free software. The Committee questions the logic of requiring taxpayers to spend additional money to pay their tax. As a free option is not currently available from the software industry, the government has been urged to reconsider providing a basic, free software option. Concerns about the software should be explored and overcome during the pilot period; this should be extended to allow a more developed software market to emerge.

Inadequate communication. A substantial proportion of affected businesses appear to be unaware of what they will be expected to do in five months’ time. The report claims that it is too late to begin an effective communications campaign at this stage.

Minimal impact on the tax gap. Businesses using older software face costs of upgrading simply to meet MTDfV requirements, since they are already realising efficiencies through their existing software. Whilst the government’s attempts to modernise HMRC systems and seek efficiencies for taxpayers are welcomed, the Committee remains unconvinced that MTDfV will reduce errors and thereby the tax gap. In the future it is expected that businesses will have to spend more to move to digital systems for other taxes as it is impossible to predict which software will be appropriate in the long term. The costs to businesses are not only that of purchasing and updating software but the implementation of new processes and associated training.

Recommendations. The report claims that HMRC is alone in its confidence that all 1m businesses will be ready by April 2019. It has underestimated the time for research, planning, training and system changes that some businesses will need. The report recommends that the date for mandating MTDfV is delayed by at least one year, while encouraging businesses to join voluntarily. This will enable further development of a competitive software market and specialist sector products, permit HMRC’s systems to be fully and appropriately tested, and allow taxpayers to prepare fully for implementation of new systems. However, it was also noted that deferring the date will not by itself solve the concerns raised in the report if HMRC does not start listening to the concerns of businesses and agents.

Response. HMRC does not have any current plans to delay the programme further in spite of the findings of this report. As the implementation date clashes with Brexit it is important to prepare for MTDfV sooner rather than later. HMRC has already started writing to affected businesses to ensure they know about the changes and how to prepare.

Eligible businesses that want to implement this programme in advance can sign up to the MTDfV pilot scheme here: https://www.gov.uk/guidance/use-software-to-submit-your-vat-returns#sign-up-for-the-pilot.

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