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

22 November 2018

The Economic Affairs Committee publishes its report ‘Making Tax Digital for VAT: Treating Small Businesses Fairly', resulting from the Finance Bill Sub-Committee's inquiry. The report finds that HMRC has failed to adequately support small businesses with the introduction of Making Tax Digital for VAT and recommends that the Government's introduction of mandatory Making Tax Digital for VAT be delayed by at least one year.

Key Findings

The 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 1.2 million businesses in April 2019.

The report finds that many businesses will not be ready for the introduction of Making Tax Digital for VAT in April 2019. In particular, HMRC has inadequately considered the needs and concerns of smaller businesses. The Committee notes that a six-month deferral has been given to some organisations in the public sector, but not to small businesses who have the fewest resources to manage their transition. The Committee therefore recommends waiting at least one year until Making Tax Digital for VAT is made mandatory, and transitioning in stages to allow businesses to join when they are ready.

While the Committee welcomes attempts to modernise HMRC's systems and increase efficiencies for taxpayers, the Committee remains unconvinced by HMRC's claims that the new system will narrow the tax gap by reducing errors in submissions.

The Committee notes that the Government and HMRC have failed to listen to its March 2017 report on Making Tax Digital for Business, and the warnings of many others, in preparing for Making Tax Digital for VAT. The Committee urges the Government and HMRC to start listening, particularly to small businesses. The Committee recommends that the next stage of Making Tax Digital is not implemented until 2022 at the earliest, to allow time to learn and act on lessons from Making Tax Digital for VAT

Chairman's comments

Lord Forsyth of Drumlean, Chairman of the 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."

Key recommendations

Other report findings 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.
  • 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 Government must wait until at least April 2022 before Making Tax Digital is extended to other taxes in order for lessons to be learnt before the programme's implementation.
  • 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.

Further information

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