Call for farmers to be exempt from quarterly reporting

The House of Lords economic affairs committee has criticised HMRC plans for Making Tax Digital, describing details of potential costs and benefits as ‘opaque’ and calling for a delay in the introduction of quarterly digital reporting

In a report looking at the proposals as part of its scrutiny of the draft finance bill, the committee says the deferral for businesses with a turnover below the VAT threshold until April 2019, announced at the Budget, does not go far enough.

The committee recommends that below the current VAT threshold, digital record keeping and quarterly reporting should not be made mandatory, and says there may be a case for businesses with diverse and seasonal affairs, such as agricultural businesses, to be exempt from the quarterly reporting requirements.

The report states: ‘HMRC may argue that this would leave a lot of tax uncollected. We do not find this plausible. What is at stake is how much extra tax would be collected simply by mandating record keeping and quarterly reports.’

The report is particularly critical of the potential costs and benefits of moving to digital reporting, and says there needs to be more testing of the theories of behavioural changes which underpin HMRC’s thinking.

It states: ‘We do not share the confidence of the Treasury and HMRC in their estimates of the tax gap reductions from the introduction of MTD from April 2018. On the evidence presented to us, those estimates appear very fragile and little more than guess work.

‘They rely heavily on the untested proposition that sufficient numbers of taxpayers currently making errors will provide HMRC with correct information as a result of adopting digital record-keeping and quarterly reporting and that changes would be in HMRC’s favour.’

The report also states: ‘At this stage, apart from a headline figure of £227m allocated to HMRC over the current spending review period, the nature of any costs to be borne by and any benefits to accrue to HMRC remains opaque. Full details of how HMRC intends to use the money allocated should be made available.’

The committee claims that for the smallest businesses and landlords, any benefits from moving to digital record keeping are likely to be very limited. It suggests that using HMRC’s own estimates of the costs and benefits accruing to businesses, it would take more than 10 years for businesses to recoup their aggregate initial outlay, making it difficult to see the case, from a business viewpoint, for proceeding with the proposals.

The report states: ‘We recommend that, before proceeding with the implementation of Making Tax Digital, HMRC extend its assessment of the business impact by carrying out and publishing a comprehensive analysis of that impact stratified by business type, size and initial digital capability, and explain what financial support is available to assist them.’

The committee is also critical of HMRC plans to pilot Making Tax Digital process, saying the design and duration of the pilot do not conform to government best practice guidelines and it is too short and too limited.

The report states: ‘We recommend that the pilot should be extended until after 31 January 2019 to include end of year statements for the 2017/18 tax year. This would allow the software and HMRC systems and business support processes to be properly developed, tested and improved before full implementation and a fully functioning market in compliant products to develop. The delay would also allow more time for HMRC and tax agents to raise awareness and prepare businesses for the change.’

It also describes the time now available for consultation on the draft legislation as ‘woefully inadequate’ and says that consigning most of the detailed provisions to secondary has reduced the scope for effective Parliamentary scrutiny.

The report concludes: ‘HMRC has still not adequately addressed a number of widely held concerns expressed during and after the formal consultation, particularly those concerning the pace of implementation. The 250 pages of consultation and response have done little to reassure those affected that their concerns are being listened to.’

Draft Finance Bill 2017: Making Tax Digital for Business is here.

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