Making Tax Digital for Business: House of Lords Report Published

The House of Lords Select Committee on Economic Affairs, Finance Bill Sub-Committee has now published a report The Draft Finance Bill 2017: Making Tax Digital for Business.

In response to a call for evidence by the Committee, CTG submitted a note highlighting its concerns that charity trading subsidiaries are not to be included in the general exemption from requirements. CTG reiterated comments made in its original response to the MTD consultations, namely that charities are often required by administrative, legal and financial practicalities to operate a wholly owned trading subsidiary in order to make activities tax effective. Requiring trading subsidiaries to comply with the proposed rules would mean the charity having to operate two systems (which would add complexity) or consider maintaining digital records for the whole charity group, undermining the proposed exemption. For more information on Making Tax Digital developments, click here.

The Sub-Committee examined in detail clauses in the draft Finance Bill that make tax digital for small businesses and the self-employed.  The Committee agrees that the digitalisation of tax is to be welcomed. But it concludes that the roll-out of the scheme is being rushed, imposing unnecessary burdens on small businesses, and will yield little benefit to the Government.

The Sub-Committee recommends a series of measures to ensure that the policy is implemented successfully. The Government should:

  • Revise and improve its assessment of Making Tax Digital’s benefits and costs – The Government’s estimate of the ‘tax gap’ savings are fragile and not based on adequate evidence. The assertion that the scheme will initially cost businesses £280 does not reflect the reality of the initial expenses businesses will incur.
  • Delay the scheme until 2020 to allow a full pilot  This delay will allow the Government to test whether Making Tax Digital does reduce taxpayer errors, assess the actual costs to business, and receive valuable feedback from business users. It also gives the Government time to raise awareness and put in place support systems for those who lack digital skills.
  • Make keeping digital records and quarterly reporting optional for businesses with a turnover below the VAT threshold – For smaller businesses the requirement to report quarterly to HMRC will impose an unnecessary burden, and will be of limited use.
  • Look again at which businesses are included in the scheme – The Government should examine whether some kinds of business, such as those with seasonal or highly irregular income, should be outside the scheme.

Lord Hollick, the Chairman of the Sub-Committee said:

“Many small businesses and landlords are simply unaware of or not ready to cope with the additional administrative and financial burdens that will be imposed by digital taxation.

We welcome the Government’s announcement in the Spring Budget that the scheme would not apply to businesses with a turnover below the VAT threshold until April 2019. However, this does not go nearly far enough and it needs to further delay the scheme’s implementation, and take a more incremental and gradual approach based upon the evidence from the pilot.

A full pilot will ensure the software works and provide hard evidence of the additional financial and administrative burdens on businesses. It will also provide evidence in place of the widely disbelieved assessment of costs and benefits of the introduction of Making Tax Digital. We are sceptical of the benefits to small businesses of regular digital reporting. We recommend that the scheme remains optional for businesses with a turnover below the VAT threshold.”