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Will the Making Tax Digital deadline change for small businesses?

Thursday 22 November 2018

In a report out this week, HMRC's Making Tax Digital programme has been slated, with criticism levied at the Government that the new regime, whilst well intentioned, simply hasn't been fully considered and that the timescales for implementation were too optimistic.

Following on from the Making Tax Digital story in our last newsletter, the Economic Affairs Committee (EAC) has now published its report Making Tax Digital for VAT: Treating Small Business Fairly. If the committee manages to win over the Government with its arguments, small business may not need to meet the original April 2019 deadline, with the EAC saying that small businesses haven't had enough time to prepare. 

Under the new Making Tax Digital system businesses with a turnover of £85,000 or more must submit their annual TAX returns digitally. 

The Committee, chaired by Lord Forsyth of Drumlean, found that some organisations in the public sector have been granted a six-month deferral, meanwhile small businesses, who are often not well resourced, have been given no such leeway. They call upon the Government to consider extending the deadline for compliance with the new regime by a period of at least 12 months, saying that small businesses are being treated unfairly and that HMRC have failed to engage with small business and neglected its duty to support them and help them prepare for the change. 

The Committee expressed their disappointment that many of the concerns raised in evidence to the most recent inquiry have repeated issues addressed in their 2017 report, claiming that there is considerable frustration amongst taxpayers about HMRC’s lack of responsiveness to their concerns. 

Other criticisms that the Committee levy at the Government include that its impact assessment underestimated the costs to the smallest of businesses for Making Tax Digital and that as much as 40% of affected business have not even heard of Making Tax Digital, let alone started to prepare for it. 

Furthermore, the pilot scheme should have begun much earlier than it did, with some businesses not even having one VAT quarter to test their systems before implementation. The pilot scheme also runs right up until the deadline for implementation, with no time allowed to conduct a full assessment of the pilot scheme, before it becomes mandatory for some 1.2 million business. 

Other recommendations included:

  • The smallest businesses will struggle unless HMRC provides a basic free software option, as so far, no free software products have been offered by the software industry.
  • The Government should publish its plan for the long-term development of MTD, including milestones and when key decisions will be made.
  • 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.

The future

In terms of extending Making Tax Digital so that it applies to other areas of business, not just VAT, the Committee argued that the Government should wait until at least April 2022 so that lessons can be learnt from the implementation of Making Tax Digital for VAT. They have also requested that HMRC provide updates to the Economic Affairs Committee every six months until the entire MTD programme is rolled out.

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."