‘True costs’ of Making Tax Digital still unclear, says Treasury Committee

The Treasury Committee has again called on HM Revenue & Customs (HMRC) to provide greater clarity on the true costs of Making Tax Digital (MTD) for small and medium-sized enterprises (SMEs).

Chairman of the Committee, Andrew Tyrie MP, has said that HMRC should implement a far-reaching MTD pilot for businesses prior to the mandatory roll-out of the project in 2018, to probe the true extent of transition costs.

In previous weeks, the tax authority has hinted that the average SME is likely to incur costs of around £280 in the year of transition. However, the Federation of Small Businesses (FSB) has predicted that costs could rack up to £2,770 per business.

Commenting on the contradictory data, Mr Tyrie said: “There are huge differences between the FSB and HMRC about the administrative burden of Making Tax Digital.

“The FSB think that with MTD, businesses might spend three times as much time on their tax obligations as they currently do … which serves to illustrate the need for the implementation of one of the Committee’s recommendations that a comprehensive pilot is needed to establish the facts, and before mandatory roll out of the digital regime”.

He added: “I have written to the Administrative Burdens Advisory Board to ask for a view on the basis of their members’ extensive business and accountancy practice networks”.

Consultation on late submission penalties for MTD

HM Revenue & Customs (HMRC) has opened a consultation on penalties for firms that either submit records late under the Making Tax Digital (MTD) scheme or do not pay on time.

When HMRC consulted on its compliance powers last year, it was recognised that more work needed to be done on the matter but has come to the conclusion that in order to support customers during the transition to the new system, they would need to be given at least 12 months before being charged any late submission penalties.

In that consultation, most respondents considered penalty interest to be the most attractive option for a late payment sanction. However, current interest rules for Income Tax and Class 4 National Insurance Contributions (NICs) will continue to apply until the new rules are decided.

The consultation paper sets out three possible models for late submission sanctions and provides an update on late penalty interest, which could also be used for late penalty interest as a sanction for late payment of income tax, corporation tax and VAT.

Model A would be a points-based penalty, whereby a customer would receive a point each time they failed to provide a submission on time; Model B would be a regular review of a customer’s compliance over a set period of time and Model C would be a suspension of penalties whereby the penalty would be suspended on condition that the customer provides the outstanding submission within a specified time.

HMRC is inviting comments from anyone who is affected by or interested in these proposals, including businesses, individuals or agents. They must make their views known by 11 June 2017, when the consultation closes. A summary of responses will be published shortly after this date, as will draft legislation.

Fines of up to £3,000 for failure to comply with Making Tax Digital, says HMRC

Taxpayers who fail to use Making Tax Digital, the Government’s all-new digital tax system, will face fines of up to £3,000, according to a consultation paper released today.

Making Tax Digital will see the end of the paper tax return and force the majority of taxpayers to file quarterly digital tax reports.

In the new consultation paper, HM Revenue & Customs (HMRC) said deliberate failure to keep digital records may result in fines of up to £3,000.

Fines for late submissions were not specified, which may mean that they will follow the current penalty charge of £100.

However, where fines are automatically charged under current rules, fines for Making Tax Digital will operate under one of three suggested schemes.

Under option 1, a tiered points-based system, taxpayers will receive points for non-compliance, which will result in a fine once a penalty threshold has been met.

The number of points given will be determined by the severity of the error.

HMRC adds that long periods of “good behaviour” will result in points being wiped from a taxpayer’s account.

It said firms will also be given a 12-month period where they can adjust to the new system and not be fined for late submissions.

Under option 2, HMRC will conduct an annual review of compliance – an automated yearly review of taxpayers’ submissions.

HMRC proposes ‘that for customers who provide an annual submission (for example, an annual VAT return or income tax self-assessment return) the review would be carried out within two months of the deadline for providing the submission’.

It adds that taxpayers would be contacted once a missed submission was identified and that they would be given the opportunity to remedy their tax affairs.

The third and final option, suspended penalties, would see fines only charged if a taxpayer fails to submit a late return within a specified period of time.

The consultation states that suspension could be applied on more than one occasion, but ‘it is not the Government’s intention to encourage taxpayers to establish a pattern of repeatedly providing submissions late, so the number of occasions on which a penalty would be suspended would need to be limited’.

The consultation paper, ‘Making Tax Digital: sanctions for late submission and late payment’, is available here.

One-year delay to MTD for small businesses ‘not enough’

Chancellor Philip Hammond announced in the recent Budget that plans to digitise tax returns for small businesses have been delayed until April 2019 but critics claim this is not enough to prevent the measures being a burden to entrepreneurs.

The Government’s Making Tax Digital (MTD) roll out was meant to start in April next year but following the announcement, sole traders, the self-employed and buy-to-let landlords with an income of less than the current VAT threshold (£85,000 from 1 April 2017) will have an extra year before they must start reporting on a quarterly basis.

It is believed that the delay will cost the Treasury around £280m in lost revenues, as its success is predicated on a reduction in the number of errors and intentional mistakes made in tax returns.

However, the Association of Tax Technicians (ATT) is calling the announcement merely a “gesture” and says it is not enough to prevent the requirements of the scheme, such as digital record keeping and quarterly updates from “burdening entrepreneurs”. While the Association acknowledges that the delay will allow a little more time for such businesses to find a digital solution, they claim it will still be “overly burdensome”.

When HM Revenue & Customs (HMRC) issued consultation documents on MTD there was a general call for the start to be delayed so that business owners could select the best reporting solution for their individual requirements.

Like most other commentators, the ATT accept that a digital interface between HMRC and taxpayers is the best solution but are concerned at the cost of compliance, particularly since HMRC still has not responded to requests to publish the details of what the cost might be for small firms, so no one knows whether their estimates are accurate.

HMRC defends Making Tax Digital timescale at House of Lords

Taxpayers, businesses and HM Revenue & Customs (HMRC) alike will “learn very quickly” from the Government’s year-long Making Tax Digital (MTD) pilot scheme, which will be phased in from April this year.

The comments come from Jim Harra, director general for customer strategy and tax design at HMRC, who defended MTD yesterday before the House of Lords Finance Bill Sub-Committee.

According to reports, the civil servants behind HMRC’s digital tax reforms have said that the Revenue’s recent consultations into the matter were “the richest [they have ever] seen the department have,” and that forthcoming trials will iron out any issues in good time.

HMRC representatives denied previous claims put forward by the House of Commons Treasury Committee that the project’s timeline – which will see landlords and sole traders required to report to the Revenue with quarterly digital updates from April 2018 onwards – was “wholly unrealistic” and over-ambitious.

Mr Harra insisted that the department, and MTD users alike, would “learn very quickly” from a year-long pilot scheme due to be opened up to around 400,000 people this April.

His sentiment was echoed by Making Tax Digital programme manager Theresa Middleton, who said that HMRC would have “much more confidence” in the plans, and would have addressed any shortcomings, long before MTD is phased in as mandatory.

Making Tax Digital faces fresh criticism from House of Lords

The Government’s hotly-contested Making Tax Digital (MTD) project is now facing fresh criticism over its proposed £10,000 a year exemption threshold, above which businesses and self-employed individuals will need to report to HM Revenue & Customs (HMRC) on a quarterly basis.

This time, the comments come from the House of Lords economic affairs committee, which has labelled the threshold “ridiculous,” according to reports.

Lord Bilimoria, founder and chairman of Cobra Beer, said that he supported calls from tax and business bodies for the Government to raise the exemption threshold to match the current VAT threshold of £83,000.

Speaking to the committee, he said: “I put my cards on the table, I’m not a fan [of Making Tax Digital].

“Nobody in a smaller business can imagine how this can be user-friendly. This will increase the error rate. People who have to create accounts in a short space of time make a lot more errors than those who don’t,” he added.

Lord Billimoria said that HMRC’s proposals represented a “complete lack of commercial reality” and that its proposed MTD exemption threshold was “ridiculous”.

He also criticised the Government’s plans to begin phasing in MTD for landlords and sole traders first, followed by larger businesses shortly afterwards.

He said: “I would suggest we start with companies and end up with the smallest businesses, rather than the other way [around].

“We’ve got the wrong direction of travel on implementation”.

HMRC publishes long-awaited responses to Making Tax Digital consultations

The Government’s long-awaited responses to six consultations about Making Tax Digital (MTD) which were originally opened in August 2016 have now been published.

Despite ongoing criticisms regarding the proposed short MTD timescale, HM Revenue & Customs (HMRC) has now confirmed that the project will not be delayed.

This means that mandatory quarterly digital reporting will be phased in for most landlords and self-employed individuals in April 2018, with small and medium-sized enterprises (SMEs) soon to follow.

By 2020, “most businesses, self-employed people and landlords will be able to keep track of their tax affairs digitally and update HMRC quarterly,” according to the Revenue.

Key highlights and/or changes outlined in the Government’s responses include:

  • Business that ‘cannot’ go digital will not be required to do so.
  • Self-employed businesses and landlords with a turnover under £10,000 a year do not have to keep digital records or send quarterly updates to HMRC if they do not wish to do so; but can opt into MTD if they wish.
  • Partnerships with a turnover of £10m or more will not ‘go digital’ until 2020.
  • Customers will have 12 months or more to become familiar with MTD changes before late submission penalties are applied; and HMRC will consult in the spring on a new penalty model.
  • Charities will not be expected to keep digital records or make quarterly updates.
  • Free software will be available for a number of small businesses.
  • Businesses will be able to continue to use spreadsheets to record receipts and expenditure, but this will then need to be linked to some form of software which will automatically generate and send updates to HMRC.
  • The option to account for income and expenditure on a simplified ‘cash in, cash out’ basis will be extended.
  • HMRC will pilot MTD with ‘hundreds of thousands of businesses’ before officially rolling out the project.

However, the Government has said that some of the above proposals could be subject to further changes.

HMRC’s Director General, Jim Harra, said: “There were more than 3,000 responses to the consultations and I’d like to thank everyone for their time and effort.

“Making Tax Digital will help businesses to get their tax right first time; it will help reduce the likelihood of errors, lower the chance of unwelcome compliance checks and give them greater certainty that they are getting things right”.

Financial Secretary to the Treasury, Jane Ellison MP, added: “As most consultation responses acknowledged, a digital tax system is a logical step in an increasingly digital world.

“For the majority I believe that Making Tax Digital will transform the way businesses, landlords and the self-employed interact with the tax system for the better, by providing clarity and certainty over their tax affairs throughout the year and making it easier for them to get their tax right first time”.

Only six per cent of self-employed business owners are aware of Making Tax Digital

A new survey of self-employed workers and business owners suggests that only six per cent are aware of the Government’s imminent Making Tax Digital (MTD) project – which will make quarterly digital reporting mandatory for the majority of businesses.

This lack of awareness comes despite the fact that the project, which HM Revenue & Customs (HMRC) has said will see the end of the traditional tax return as we know it, will force self-employed individuals to be among the first to adapt to an ‘all-digital’ tax system from next year.

Under current proposals, the Revenue will roll out MTD for landlords and the self-employed in April 2018, shortly followed by small and medium-sized enterprises (SMEs) and larger companies.

Many sole traders, small businesses and self-employed individuals are expected to need to completely change the way that they keep financial records in order to comply with HMRC’s tax systems overhaul.

Yet a recent study carried out by 1Tap Receipts suggests that as many as 94 per cent of self-employed business owners have never even heard of MTD – highlighting the need to seek advice sooner rather than later to ensure a smooth transition to the new tax system.

The same survey found that more than half (55 per cent) of self-employed workers dislike the current self-assessment process – suggesting that, for some self-employed business owners, the shift to MTD may be welcomed as a positive change.

50-page report calls upon Government to delay Making Tax Digital

The Government must respond to a 50-page report calling for an immediate delay to Making Tax Digital (MTD), which has been put forward by MPs in the Treasury Committee.

The report, which calls for a one-to-two year delay to MTD, says that the project has the potential to be an “expensive disaster” unless it is pushed back “until at least 2019/20, [or] possibly later”.

Under current plans, MTD will be phased in from April 2018, imposing a new obligation upon landlords and self-employed individuals to report to HM Revenue & Customs (HMRC) on a quarterly basis. Small and medium-sized enterprises (SMEs) and larger companies will shortly follow, and the Revenue says that all tax will be ‘100 per cent digital’ by 2020.

In its report, the Treasury Committee has laid out recommendations for HMRC to consider before powering ahead with current proposals. The Committee has called for:

  • A delay of one to two years for the implementation of MTD.
  • HMRC’s proposed exemption threshold of £10,000 to be raised to match the VAT threshold of £83,000.
  • MTD pilot schemes to be more substantive and designed to gather clear information over the entire reporting cycle.

Committee chairman and Conservative MP Andrew Tyrie, said: “This is not a minor matter. These reforms will affect millions of taxpayers. [HMRC’s] cooperation and trust are both hard won and easily dissipated. Without them, more of the yield could be at risk than any putative extra revenue from MTD.

“If the Government gets it wrong, the culture of mutual trust and goodwill between HMRC and the vast majority of taxpayers – which still exists in the UK and which helps to keep the tax gap down – could be jeopardised”.

“The pilots need to be designed to gather information over the entire reporting cycle – four quarterly updates and an end of year reconciliation. These need to be evaluated before full implementation and Parliament needs to see the evidence that this has been done”.

The Committee’s report added: “The Committee has yet to see evidence strong enough to justify a threshold below the VAT threshold, £83,000. It may exist, but the Government needs to assemble and publish it”.

A long-awaited Government response to six Making Tax Digital consultations opened in August 2016 is expected to be published by the end of January. The Government is also expected to respond to the Treasury Committee’s 50-page report.

Making Tax Digital could lead to “catastrophic collapse” in customer service, say MPs

MPs from the Public Accounts Committee (PAC) have voiced concerns that the “looming threat” of Making Tax Digital (MTD) will result in a “catastrophic collapse” in customer service at HM Revenue & Customs (HMRC).

The committee has said that it is “not convinced” of HMRC’s customer service strategy following the full implementation of MTD.

It said that tax officials are highly likely to experience a customer service collapse akin to that of 2015/16, when the Revenue’s decision to reduce its workforce by 5,600 left hundreds of thousands of taxpayers waiting in telephone call queues for several hours.

Committee chair, Meg Hillier, said: “The lack of a convincing fall-back plan to safeguard service as HMRC undergoes significant change remains a looming threat to its ability to collect tax from individuals simply trying to pay their fair share.

“HMRC’s senior management cannot afford to be complacent about the catastrophic collapse in customer services in 2014/15 and the first half of 2015/16 – nor about what is at stake should their projections about demand for call centres prove wrong.

“Contingency planning should not be an optional extra,” she said.

The PAC insisted that, by the spring, it would “expect to see evidence that HMRC has agreed measures with the Treasury to ensure it is not left playing catch-up at taxpayers’ expense”.

The Committee are the latest in a long line of people to criticise the Revenue’s controversial digital overhaul of the tax system, which many, such as the Federation of Small Businesses (FSB) and the Association of Taxation Technicians (ATT), have suggested is overly ambitious and should be delayed.