HMRC has “failed to adequately support” small businesses with the introduction of Making Tax Digital for VAT, and recommends that the government’s introduction of the digital service be delayed by at least one year.
The House of Lords Economic Affairs Finance Bill Sub-Committee has published a damning report on HMRC’s Making Tax Digital for Business programme and its proposed introduction in April 2019. It finds that many businesses will not be ready for the change and, in particular, “HMRC has inadequately considered the needs and concerns of smaller businesses”.
Research from Moore Stephens highlighted that many small businesses are unaware of this new requirement. In response to its survey, 36 per cent of UK businesses say they are still ‘completely unfamiliar’ with the new regime, while 48 per cent have no plan in place at all to prepare for Making Tax Digital.
“Many businesses simply lack the time and resources to prepare for Brexit and Making Tax Digital at the same time,” said Nick Warner, VAT Partner at Moore Stephens. “The clock is ticking but many businesses are saying they have done no preparation at all – some have not even started the complex process of digitising all their VAT reporting links and upgrading their software and systems.”
Although some organisations in the public sector have been given a six-month deferral, small businesses have not been given such an allowance. The Committee recommends that HMRC wait at least a year before Making Tax Digital for VAT is made mandatory, and transitioning in stages to allow businesses to join when they are ready.
Making Tax Digital for VAT applies to all VAT-registered businesses with a taxable turnover above the VAT registration threshold (currently £85,000). As such, businesses are required to keep digital VAT business records and send returns using Making Tax Digital (MTD) compatible software. Most businesses will need to do this for VAT periods starting on or after 1 April 2019.
Although the pilot for this programme began in April 2018 and is now open to all VAT businesses and their agents, the Committee is not satisfied that businesses will be ready for this change.
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 is 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.”
He added: “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.”
The report highlight that, while the Committee welcomed attempts to modernise HMRC’s systems and increase efficiencies for taxpayers, it is unconvinced that this new system will narrow the tax gap by reducing errors in submissions.
Following Making Tax Digital for VAT, HMRC plans to roll out the programme to other areas of the tax system. However, among the Committee’s recommendations is a call for the government to wait until at least April 2022 before Making Tax Digital is extended to other taxes. This is in order for lessons to be learnt before the programme’s implementation.
