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The Government should delay the date for mandating Making Tax Digital for VAT by at least one year, while encouraging businesses to join voluntarily, according to a House of Lords report which warns that many businesses are not ready for the change in how they pay tax.
The report by the Economic Affairs Committee says HMRC has failed to appreciate fully or take account of business and accounting processes early in its project planning and has rushed its timetable with the pilot being “too narrow and too late”.
Making Tax Digital requires businesses to send summary data to HMRC about their business each quarter, or more often if the business prefers. The summary data will consist of total income and total expenditure, with the expenditure broken down into categories such as travel and advertising. It is due to be brought in for small businesses in April 2019.
The report says HMRC has not properly considered the business perspective and challenges in preparing for Making Tax Digital for VAT. Recommendations include an urgent call for HMRC to develop and publish guidance on the practicalities of claiming digital exemption.
It says it has seen no evidence that there is any free software for small businesses to do their accounts digitally and calls on HMRC to develop this. The report said there were valid questions as to whether the changeover to digital record-keeping was necessary at all, given it would provide exactly the same information to HMRC as the current system.
It noted that there was a spectrum of business readiness, from those confident in their readiness, through those trying to prepare but hampered by lack of information, to those still wholly unaware or digitally excluded. It stated: “It is concerning that a substantial proportion of affected businesses appear to be unaware of what they will be expected to do in five months’ time.”
The report also says that the penalties regime linked to Making Tax Digital “could be fairer and better encourage taxpayers to remedy defaults promptly by giving taxpayers a longer grace period before penalties for late payment are applied, and ensuring taxpayers are aware of their exposure sooner”.
It expects the costs to businesses of MTD for VAT, both for initial setup and for subsequent operation, to “significantly exceed” those used in the Government’s impact assessment and it says it “remains unconvinced that MTD will reduce error and thereby the tax gap”.
Simon McVicker, Director of Policy at IPSE which represents self employed people, said: “We support digitisation of the tax system, but we are worried about the speed of the implementation. HMRC’s initial timetable for Making Tax Digital was way too ambitious and targeted the wrong businesses.
“IPSE was grateful to the government for heeding our calls and delaying the initial implementation until 2019. However, we are concerned that many self-employed businesses simply don’t know about the new requirements.
“The costs for implementing these changes could be higher than government predictions, so we’d welcome a further delay to give our smallest businesses some extra breathing room. A surprisingly large number of very small businesses still keep paper records.
“They don’t have access to in-house accounting and finance departments like bigger businesses and are therefore at greater risk of being disrupted by the new reporting requirements.”