Christopher Prescott – Written evidence (DFC0055)

1. Introduction This submission addresses two aspects of the Committee’s Call for Evidence with regard to Making Tax Digital for Vat (MTDfV). 1) The likely costs, direct and indirect, both for businesses that may need to make possibly fundamental changes to their methods of recording and categorising transactions in order to submit Vat returns under HMRC’s proposals, and to the Treasury of errors arising during the transition process, and 2) the lack of preparedness of software developers and businesses. The latter are necessarily dependent on the former to complete and test their products, and then to bring them to market. Only then can businesses begin the not inconsiderable task of selecting software, prior to implementation, training and testing.

2. Radical change is risky at any time, but a prudent government or business will seek to minimise the risk by allowing appropriate time for implementation, and by avoiding change at a time when there is further change in a related area.

3. The present proposals and timetable are contrary to both of these maxims. The necessary software is incomplete and largely untested; the business community is therefore not yet in a position to begin to make purchasing decisions; meanwhile there is considerable uncertainty around the position with regard to future trading with the EU, which is likely to impact heavily on Vat procedures.

4. Costs to businesses are by their nature are difficult to quantify because hardware and software needs, training needs, including time, and specifications, will vary. Direct costs may include some or all of the following:

• Acquiring bookkeeping and compatible Vat filing software, which is often based on a monthly subscription, as opposed to analysis books, or desktop software which is often a one-off purchase. At the time of writing these costs are unknown. However a business switching from hand-written books, to a digital solution, such as Xero or Sage, can expect a monthly fee of £20 upwards. These are current prices; they may increase to encompass MTDfV. https://www.xero.com/uk/pricing/ https://www.sage.com/en-gb/products/sage-50c-accounting/
• Acquiring hardware, such as scanning equipment. Scanners may cost £75 upwards, depending on specification. There are usually additional costs for software. https://www.thescannershop.com/results.aspx?sort=Price:%20Low%20-%20High&=A4&=No&=No 
• The training cost of learning to use the new software.

5. Less tangible costs include:

• The possibility of error in entering transactions in the unfamiliar software. This

is particularly the case when the software is reading source documents.

• The possibility of error in the software itself. It is commonplace for software to

have “bugs”. This is particularly likely when software has been developed in a hurry.

• The time involved in the scanning process. This includes removing staples, sorting for and removing extraneous pages such as delivery notes, straightening and flattening pages, etc. Paperwork of differing sizes must generally be scanned separately. This should be compared to time putting documents into a ring-binder or other folder.

6. Indirect costs may include the potential costs of incorrect returns. HMRC seems to be convinced that error arises as a result of human error, but in many cases the opposite is the case.

7. A simple example will illustrate the potential costs to the Treasury. In one case concerning my own practice, we adopted online software for a pub client. A full Vat quarter went by before we realised that the software was including input Vat at 20% for all food purchases, which should have had Vat at 0%. The error amounted to more than £1,000. We spotted this as a result of a comparison with previous quarters (a standard review which we undertake as part of our procedures). However, it is quite likely that a trader submitting their own Vat returns would not have noticed, and the error could have continued for a matter of years, at a recurring cost to the Treasury.

8. The reason for the error was incorrect settings in the document-reading software. These settings can be varied to default to the typical Vat rate for a particular supplier, or a particular cost centre or account code. Once set, the tendency is to consider the matter final, rather than revisit the settings periodically. Even if initially set correctly, software updates may make changes that a trader or accountant fails to notice.

9. The end-to-end digital process envisaged by MTDfV would not have picked up this error, which could have been repeated Vat quarter after Vat quarter.

10. The key point is to retain human oversight; however the temptation is to believe what the computer says.

11. Timing. Whatever the merits of digitising the tax system, a worse time to introduce this for Vat cannot be imagined, bearing in mind the considerable uncertainty that exists at the time of writing (only six months prior to the proposed change to Vat filing procedures).

12. It is not known what Brexit may mean in practical terms. However, it must be remembered that trading with the EU differs for Vat purposes from trading with the rest of the world. What from China would be an import, from the EU is an “acquisition”. Imports and acquisitions are treated differently for VAT, and go in different places on the Vat return. Boxes 8 and 9 are solely for trading with the EU. Businesses have their hands full preparing for possible post-Brexit trading scenarios. To complicate matters by introducing changes to Vat procedures at the same time would seem to be sheer folly.

13. It may be suggested that the Vat filing procedure is a mere detail; that the substantive matters of keeping books and calculating Vat will continue in any case. However this overlooks the issue of locating new software and learning to use it, as discussed above. This involves a significant research and training overhead. A large number of software vendors are still in the process of developing their software.  At the time of writing, no business is able to select its proposed software solution (unless it has written its own, which would be applicable only to the largest businesses). Furthermore, there is no certainty as to when solutions will be available. Businesses are being exhorted to prepare for MTDfV; however this is an impossibility when the solutions are not yet available.

14. This need to select and implement brand new software is on top of any changes that a trader needs to make to keep doing business with EU countries, whether selling or buying.

15. The government’s main focus at this time should be on enabling businesses to continue trading as seamlessly as possible, rather than imposing an additional compliance burden.

16. It is not alarmist to suggest that there is potential for an outcome that is disastrous both for business and for government if the current proposals are not deferred.

17. I therefore call on the Committee to recommend that the government defer the MTDfV timetable to a time of more stability and certainty.

30 September 2018

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