HMRC's timeline for digitising record-keeping and the reporting of tax is “wholly unrealistic” and should be delayed until at least 2019-20, the House of Commons Treasury Committee has said.
In its report on the Making Tax Digital reforms, which will see businesses being required to keep digital records and produce quarterly updates for HMRC, the MPs said they were “very concerned” about the burden this would place on businesses.
The plan came under fire when it was first announced in 2015 for putting undue pressure on businesses, and HMRC granted an exemption for small business and the self-employed in August last year.
HMRC seeks to reassure MPs over switch to digital tax system
Watchdog highlights risks in HMRC’s digital transformation plans
HMRC: MPs voice fears over digital shift against backdrop of staff cuts
However, the Treasury committee said that even with this exemption, there are still likely to be a minimum of 2.5m business affected, possibly even twice that figure.
Andrew Tyrie, chairman of the committee, said that carefully introduced digital reforms could greatly improve the administration of the tax system, but that without sufficient care such changes “could be a disaster”.
The committee's criticisms centre on the planned timeline for implementation. HMRC has proposed a phased implementation, with income tax reporting due to go live first in either April 2018 or April 2019, depending on the size of the business.
The committee described this April 2018 start date as “wholly unrealistic”, adding that just over a year was “too short a lead time for such a fundamental change” to the tax administration system, and urged a much wider consultation and debate.
“It is extremely unlikely that the vast majority of businesses will be capable of adapting to the start date at reasonable cost" – Treasury Committee
“It is extremely unlikely that the vast majority of businesses will be capable of adapting to that start date at reasonable cost. Nor should they be expected to do so,” the committee said.
“The committee therefore recommends a delay of the full implementation of [Making Tax Digital] until at least 2019-20.”
However, it added that it “also looks unlikely” that a 2019 start date would be possible – although it noted that this would depend on the exact shape of new proposals due to be published by government this month, following a consultation over the summer.
“A large proportion of the UK’s businesses, particularly the millions of small businesses, are not currently well equipped to move over to digital record keeping and reporting. Nor may they be so for several years,” the committee said.
The MPs also raised concerns that, based on available evidence, the changes might not save the government as much money – the consultation document launched in the summer put a price tag of £625m on it – as it hoped.
“Evidence given to the committee suggests that under the current timetable, the total cost to business (including software, hardware, training, agent fees and, above all, time) might exceed the total benefits in improved tax yield,” the committee said.
“We have consulted business at every step and have already made changes as a result to exempt the smallest businesses" – HMRC spokesperson
“In other words, even if the yield were to rise, the return to the whole economy could be negative. The government’s estimate of the yield may therefore neglect the effect of overall behavioural changes.”
The Chartered Institute of Taxation welcomed the report, with president Bill Dodwell saying that it was right to call for more comprehensive pilots and a delay in the project’s implementation.
“Rushing it through to deliver by April 2018 is just too short a timescale. There are hundreds of different providers of accounting software – in many cases adapted for specific industries and trades. Right now we have no idea how many of these will be ready and tested in time,” he said.
An HMRC spokesperson said: “Many businesses find it hard to get their tax bills right. Making tax digital will modernise the tax system, helping them to get their tax bills right with the least administrative burden.
“We have consulted business at every step and have already made changes as a result to exempt the smallest businesses.”