HMRC urged to undertake comprehensive pilot of Making Tax Digital as costs remain unclear
Detailed figures released by the Treasury reveal how much businesses are expected to have to spend on hardware, software and training
The UK’s tax authority has come under renewed pressure from the House of Commons Treasury Committee over its digital tax reforms, as businesses and government stick to their “hugely” different estimates of how much the plan will cost businesses.
The reforms, known as Making Tax Digital, will require businesses to keep digital records and file quarterly reports using software that is compatible with HMRC’s systems.
The aim is to reduce avoidable errors in tax returns – which HMRC estimates costs the public purse £8bn a year – but the government has come under fire for placing too much of a technological and financial burden on businesses.
This extends to issues with the estimates of the cost of the plan, which the Federation of Small Businesses has said could cost each business £2,770 a year, while the government expects an overall net saving for the reforms, with a one-off transitional cost of £280 per business.
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Last month, the Treasury committee’s chairman, Conservative MP Andrew Tyrie, wrote to both the financial secretary of the Treasury, Jane Ellison, and the chairman of the FSB, Mike Cherry, to ask them to clarify how they came to their estimates.
Their responses indicate that the two bodies have taken very different approaches to the calculations, with the FSB’s based on extra staff time to carry out the quarterly reports required by Making Tax Digital, while HMRC’s also includes software, hardware and training costs.
“There are huge differences between the FSB and HMRC about the administrative burden of Making Tax Digital," said Tyrie in a statement on 27 March.
"This is the heart of the matter. The FSB think that with [Making Tax Digital], businesses might spend three times as much time on their tax obligations as they currently do. This could cost them around £3,000 a year in time, salaries and accountants’ fees.
"HMRC think that they will spend less time, leading to a small net saving. A comprehensive pilot should shed some light on which assumption is closer to reality."
He added that he had written to Teresa Graham, the chair of the Administrative Burdens Advisory Board, to provide an independent view of the FSB’s and HMRC’s cost assessments.
Detailed estimates show discrepancies
Cherry said that the FSB’s estimate was carried out by the Centre for Economics and Business Research based on available data from HMRC - which he described as “limited”.
The CEBR said that businesses would spend three times as long on their tax reporting each year under the new plans, which it said would amount to an average of £2,770 per year.
It emphasised that the costings do not include additional costs of purchasing or upgrading computers, installing the system, training staff, IT support or ongoing software costs, but did not provide estimates for these.
Meanwhile, Ellison’s response set out the methodology behind the calculations, which she said was “well established and based on current evidence” as well as a breakdown of the various costs it expects businesses to have to pay.
This offers more detail of the estimated transitional cost of £280 per business, which HMRC said it “recognised” was an average.
This includes an estimated cost of £870m for the 3.4 million small businesses affected, £80m for the 40,000 medium businesses and £30m for the 10,000 large businesses affected.
Within these transitional costs are money for training and familiarisation with the new technology and approach, which HMRC estimated at £430m for small businesses, £20m for medium and £10m for large.
Hardware is expected to cost less, according to HMRC’s analysis, with small businesses expected to fork out £330m on new hardware, while the costs to medium and large businesses are estimated as being negligible.
“HMRC believes that VAT-registered, medium sized and large businesses are very likely to already have good or adequate IT hardware. If anything additional is required for [Making Tax Digital], this may only require a minor upgrade,” the document said.
Meanwhile, software upgrades are expected to come to £10m for small, £50m for medium and £30m for large businesses.
Agents and accountancy costs are estimated at £90m for small businesses, £5m for medium and negligible for large.
Ongoing costs of software subscription and purchases are estimated to be £150m for small businesses, £10m for medium businesses and negligible for large companies; the cost of providing HMRC with quarterly updates is estimated as £20m across the board.
And, in contrast to the FSB’s estimates, HMRC said that there would be a net administrative burden saving for businesses of £100m once the system reaches steady-state in 2021-22.
HMRC said its overall methodology “has been discussed with the Administrative Burdens Advisory Board”, but that its quantitative estimates of the one-off transitional costs and steady-state savings would be iterated during the pilot.
The reforms are due to come into force as early as April 2018 for some businesses, although the chancellor Philip Hammond announced in the 2017 Spring Budget that there would be a delay of a year for unincorporated businesses with a turnover below the VAT registration threshold.