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A group of peers tasked with scrutinising draft finance legislation has praised the way HM Revenue and Customs used public consultation to develop its Making Tax Digital for VAT initiative, but said it should scrap a proposed extension of the time it has to investigate offshore taxes.

In a letter to chancellor Philip Hammond, Lord Michael Forsyth, chair of the Lords Finance Bill Sub-Committee, welcomed HMRC’s publications of the penalties and interest provisions for the reform to digitise tax reporting and record-keeping.

Making Tax Digital was one of two themes – the other being HMRC’s powers – the sub-committee examined during its inquiry into the draft finance bill 2018. It will later produce two reports based on these themes, Forsyth said.

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Forsyth’s letter, which set out the sub-committee’s interim recommendations on the legislation, noted that the Making Tax Digital penalties and interest provisions would not be included in the finance bill. However, he said the peers commended the three-stage consultation process HMRC had used to develop the provisions.

“Several witnesses [to the inquiry] told the sub-committee they valued this process and the time and effort HMRC put into it. We have no doubt that it has contributed to the broad support that this new framework clearly commands,” he wrote.

Forsyth noted that witnesses had raised some concerns about the reform, which he said the sub-committee would address in its upcoming report.

The rollout of the programme has been delayed from initial plans, with businesses not now be mandated to use the Making Tax Digital for Business system until April 2019, and then it will only be to meet their VAT obligations. This is compared to an original rollout across business taxation intended to start with income tax in 2018, followed by VAT and corporation tax in consecutive years. Making Tax Digital will not be mandated for taxes other than VAT until at least April 2020, following concerns from small businesses.

In April 2017 Hammond said he would delay the start date of the digital tax reforms for the smallest businesses, after businesses and the Treasury Select Committee raised concerns about the speed at which they were going ahead.

Elsewhere in the letter, Forsyth noted there had been “deep and consistent opposition” to an extension Hammond announced in the Budget to the time limit for investigating offshore tax non-compliance.

The measure, which was set to come into effect in April 2019 under the finance bill, was part of an effort to crack down on tax evasion. However, the committee said it was unclear how HMRC had arrived at the proposed 12-year limit for looking into taxpayers’ affairs if they had some tax dealings outside the UK – three times the normal time limit for assessments, assuming the person is not suspected of deliberately flouting tax legislation or failing to take adequate care with tax reporting.

The peers said the extension would undermine a provision in the tax system that “honest taxpayers have a fundamental right to certainty and closure after a reasonable time”. The longer time limit would make record-keeping requirements more “unreasonably onerous”, they added.

The sub-committee concluded the measures was “unnecessary and undesirable”, Forsyth said. He recommended that the government strike it from the finance bill and open a fresh consultation with tax professionals about better managing offshore tax matters.

Forsyth also said the sub-committee would investigate the "substantial evidence [it] received alleging abuse and inappropriate use of HMRC powers" in preparing its report into the tax agency's powers, which he said it would publish before Christmas.

He said it would consider suggestions by some witnesses that HMRC's approach to clauses 33 and 34 – the part of the draft finance bill extending the time limit on investigating offshore non-compliance – "was indicative of a system where the balance of powers has started to tip in HMRC's favour".