Lord Hollick, chairman of the House of Lords Economic Affairs Committee, has said that the committee was “very puzzled” by the government’s cost estimates to businesses for implementation of the Making Tax Digital initiative.
Speaking to Accountancy Age, Lord Hollick said that while the estimates were based on models which were likely “a very elegant piece of analysis and modelling”, the committee did not believe that they were based on “facts”.
“The facts will become evident when the pilot has been completed,” he said.
HMRC has estimated that the initial cost of setting a business up for Making Tax Digital will be £280. The chairman said that one business had highlighted to the committee that £280 “barely covers the costs of the first consultation with your agent, be it an accountant or lawyer, and that’s just the first consultation”. The government’s estimated financial costs of MTD were therefore “disbelieved” by most small businesses and sole traders, he said.
Costs were not the only concern the committee had about MTD. Recommending a delay to the introduction of the scheme to 2020, Lord Hollick said that HMRC was not yet ready to launch the pilot, which is intended to look at the four quarterly submissions of income and expenditure, and a fifth submission for the normal tax return. If the pilot was to run through tax year 2017-18, the final submission of accounts would not take place until January 2019, after the introduction of MTD. Lord Hollick said that it was necessary to have data from the full cycle in order to assess the advantages, costs and benefits of the scheme.
While the committee welcomed the opportunity to bring the tax system into the digital age, it raised concerns that the government has not carried out sufficient consultation on the initiative.
Lord Hollick said: “We struggled in certain sectors to find anybody who knew anything about it.
“Let’s take the construction sector for instance. We wanted very much to hear from the construction sector because of the 4m or so people who are going to be affected by this, quite a lot of them work in the construction industry. Well, we were unable to find anybody or any group who knew anything about it. So, I think there’s a real problem of people simply not being informed about it at this stage.
“I think the fact that there’s been no consulting of stakeholders at the outset of this is really a failure to comply with the government’s own approach and principles about policymaking. They’ve made the point for a number of years now that they want to fully consult and to take account of that consultation. We can’t find the evidence that they have done so.”
Bigger businesses set up to comply
Posed with the question as to whether the committee would support a proposal to apply MTD to businesses with the highest turnovers first, and then filter it down to SMEs, Lord Hollick said that it seemed “a much smarter approach”.
“Businesses that are paying VAT are almost by definition, digitally enabled, because they make a quarterly return of VAT. So, that seems to be an obvious group and they would be able to comply relatively quickly,” he said.
“Those below £83,000 for VAT down to £10,000, you’re talking about a very, very large population of small businesses who don’t have a great deal of time to do administration, who are trying to get their businesses moving forward and are dealing with all the things that quite frankly sole traders and small businesses have to deal with day in and day out. We feel that, unless the evidence is absolutely overwhelming, it should be left to those companies with turnovers less than the VAT rate to have the option of doing this, but not have it imposed upon them.”
MTD: a step too far?
Further measures planned by the government, such as business rates rises, will hit small businesses with an additional tax burden, yet Lord Hollick said that SMEs, along with the self-employed and private landlords, were “very much at the heart of the economy”.
Therefore, could MTD be one step too far?
“The last thing we want to do is clobber them with a lot of unnecessary and possibly rather expensive requirements to comply with something. I think, therefore, it comes down to partly, political judgment. I think the small business community and the self-employed will say: ‘why are we being picked upon?’
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Introduced in 2013 to encourage R&D investment, the scheme allows UK businesses to pay only 10% corporation tax on profits derived from any UK or certain EU patents
ACCA and the ICAEW welcome the decision, which provides an opportunity for the measures to be discussed in full following the general election on 8 June