THE DIGITALISATION of tax returns will impose significant additional tax compliance costs on small businesses for little or no medium term benefit, tax and small business experts told MPs on the Commons Treasury Committee.
HMRC is consulting on the Making Tax Digital (MTD) project until 7 November. The project, which will impose quarterly digital tax reporting upon SMEs, has “possibly very adverse implications for hundreds of thousands of small businesses,” committee chair Andrew Tyrie (pictured) said.
ACCA head of taxation Chas Roy-Chowdhury said that while businesses with tax agents are aware of MTD, smaller businesses “probably have no idea whatsoever what’s going to come down the track”. He questioned how MTD would benefit businesses given that tax agents will be engaged five times a year instead of once.
Frank Haskew, head of the ICAEW Tax Faculty, said professional bodies wanted to support the move to digitalisation but the terms of the consultation are such that “it’s very difficult” to support MTD. Fundamental “roadblocks” include mandatory reporting, Haskew said, but the parameters and the timetable appeared to have been set. “We haven’t seen an impact assessment. The jury is still out on the costs and benefits for businesses,” he added.
Mike Cherry, national chair of the Federation of Small Businesses, suggested that a target date of 2025 would enable businesses to “latch on to something that works after being properly tested”.
‘Compliance cost’ concerns
Tyrie said he was concerned that a “large additional compliance cost” was going to appear. The FSB has estimated the cost at around £2,770 per annum per business, Cherry said. Mandatory reporting was “wrong”, he added, given that 75% of businesses do not keep detailed accounts electronically.
“Many small businesses are certainly not aware that this is coming. It’s creating a perfect storm” in the wake of the national living wage and auto enrolment, Cherry said. “We absolutely agree with the [MTD] pathway, but over a much, much longer period of time that businesses can get to grips with.”
Rebecca Benneyworth, tax practitioner and chair of HMRC’s digital advisory group, said the group’s role was help HMRC understand the needs of the smallest businesses. “The goal of having the most digital and most efficient tax authority in the world is a laudable one,” she said. But the current proposals would involve “inflicting the pain on the smallest of businesses”.
The threshold should be at least equal to the VAT registration threshold, Benneyworth said, citing a recent Lloyd’s Bank report that “1.4 million small businesses have no digital skills whatsoever”. HMRC had underestimated the impact of MTD on such businesses.
While a mistake made using paper records can be corrected “quite quickly”, the “mess” that a client can make with a computer program is “beyond sorting out”, she said.
Cherry said tax simplification should be “very much aligned” with the MTD process. FSB would support an £83,000 threshold.
George Kerevan MP said HMRC had provided a global estimate of cost savings for small businesses, in the region of £85m to £250m. “In the short to medium term we can’t identify any [savings] at all,” Benneyworth said.
While free software has been promised for the smallest businesses, the business case for that provision was “quite a challenge”. For many of the businesses that do not receive free software, a cost of £20-£30 a month would be “unjustified”, she said. “I can’t support HMRC in finding cost savings.”
HMRC had suggested, Kerevan noted, that as businesses become more computer-literate in the longer term MTD will help them to gain “greater control, certainty and confidence” over their financial affairs. Benneyworth accepted that, in the longer term, tax advisers may be able to offer them greater “financial control and insight”.
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