House of Lords warns against April implementation.
The Economic Affairs Committee has published a report looking at the Making Tax Digital for VAT scheme and its message is clear: delay its introduction by at least a year.
From 1st April 2019, Making Tax Digital for VAT will be compulsory for VAT-registered businesses with a taxable turnover above the VAT registration threshold of £85,000. Businesses will be required to keep digital records for VAT and file VAT returns digitally using compatible software (such as Pegasus Opera 3).
The report from the House of Lords Committee, published on 22nd November, is unequivocal in its view that HMRC has “failed to adequately support small businesses” with the introduction of Making Tax Digital for VAT and has recommended that the government delay the introduction of mandatory Making Tax Digital for VAT by “at least” a year.
A previous report from the Finance Bill Sub-Committee had already warned that the government should delay the digitisation of tax for businesses, noting that not only was the scheme being rushed and that small businesses would be unnecessarily burdened, but also that the benefits to the government would be small. This new report has again focused on the impact on small businesses, noting that while some public sector organisations have been granted a six-month deferral period, small businesses have not been afforded the same opportunity.
The report also reiterates past concerns that the benefits from going digital wouldn’t be all that great, writing that the committee remains “unconvinced” by claims from HMRC that the new system would make any significant differences to the tax gap by reducing submissions’ errors.
Within the details of the report, some of the specific concerns include the fact that 40% of affected businesses are still unaware of Making Tax Digital and that necessary accounting software decisions for businesses to prepare for the digital changes remains challenging for businesses.
Furthermore, the committee is clearly concerned about the true cost to small businesses, questioning HMRC’s assumptions for its analysis of those costs. The report writes that HMRC has “assumed that the programme will result in no additional accountancy fees, either during or after transition”, something which the committee states conflicts with evidence. As far as the committee is concerned, HMRC has not tried to correctly assess the true financial impact on the smallest businesses.
The report has further suggested that not only should Making Tax Digital for VAT be delayed, but also that the next stage in the fuller rollout of Making Tax Digital should be held off until at least April 2022 so that any lessons from Making Tax Digital for VAT can be learned.
The committee’s report has been backed by accountancy bodies such as the Institute of Chartered Accountants in England and Wales, which has also stated that Making Tax Digital should not be mandatory when it is introduced next year. Tax manager Anita Moneith wrote in her comments, “The report today recommends that Making Tax Digital (MTD) should not be mandatory when it is introduced in April 2019, but the pace of take up should instead be led by what is best for businesses themselves.”
The committee’s report is fairly damning of its assessment of progress to date, and we’ll have to wait and see if the government will listen to its concerns.