HMRC buckling under Brexit and MTD?

The tax gods are cruel. As well as the threat of Brexit looming ever closer, on Monday 1 April 2019, over one million UK VAT-registered businesses face the biggest change in their compliance obligations, Making Tax Digital for VAT.

This will come just two days after the UK’s scheduled exit from the EU, which could mean over 140,000 businesses will have to make new VAT and customs declarations for the first time.

HMRC is putting on a stoic front in the face of both of these huge changes. However, a stream of recent delays and doubts raised by the accountancy associations and parliament in response to its plans to ‘resource-up’ underscore the scepticism.

MTD watered down for 35,000 businesses

Last week, HMRC announced a postponement on the April 2019 implementation of MTD for over 35,000 businesses.

The affected tax payers were those with the most complexity in their returns, including some charities, and therefore needed more time to prepare for the new API-filing portal.

However, it has more likely been delayed due to the ongoing slow progress with the existing pilot for simple business cases. This should have been completed in July, according to the original schedule, but has only just moved to the next, public phase last week. The loss of over 50 software engineers to Brexit IT projects may further threaten this timetable.

IT delays aside, the other cause of concern is the lack of MTD awareness amongst the most affected businesses. A recent batch of surveys has indicated that a large proportion of the 1.1 million businesses were not aware that they would have to change how they filed.

On 22 October, the members of the Lords’ Finance Bill Committee were heavily critical of HMRC’s MTD planning, saying businesses and the accountancy bodies were reporting a lack of readiness. HMRC put up a firm defence, claiming that everything was on schedule. But the Lords were unconvinced, given the level of planning and engagement still required.

New customs system misses Brexit launch deadline

A greater concern is HMRC’s Brexit readiness, which was highlighted by parliament this month when it was revealed that IT upgrades will not be in place for a no-deal Brexit.

With negotiations on a Withdrawal Agreement making no progress, the risk of a no-deal Brexit is growing. In this case, HMRC estimates that over 140,000 UK businesses that sell into Europe will face customs declarations and new VAT-reporting requirements. Almost none of these businesses will have made any such declarations in the past.

Two years ago, this threat led HMRC to request extra funding for the ongoing development of its new Customs Declaration Service, CDS. This would be an IT platform for recording cross-border shipments of goods.

At the time, HMRC estimated that a hard Brexit would mean it would have to cope with 255 million declarations for the movement of goods, instead of CDS’ original specifications of just 100 million.

HMRC has now informed parliament that CDS will miss its January 2019 launch date. Instead, HMRC will look at contingency planning to continue with the existing, antiquated Customs Handling of Import and Export Freight’s (CHIEF) system to get through the immediate Brexit phase.

This will place huge amount of pressure on HMRC’s ability  to properly monitor imports and exports, as well as maintaining the tax base. It will also force some traders to use both systems simultaneously.

Brexit: the job creation scheme

The principal worry may be staffing shortages. In 2016, HMRC originally forecast  that it would need 5,000 additional staff to manage the Brexit process. To date, it has only managed to on-board 2,300. This is despite many staff being reallocated from projects like MTD. HMRC now believes it should reach 4,500 by March, but this is still a major shortfall.

Aside from Border Force and customs staff shortages – which could spell chaos at ports – most of the missing hires were pencilled in for tax payer support. In the event of continuing slow recruitment, businesses will struggle to learn of any new declarations and VAT-reporting.

The recommendation by government in the recent no-deal guidance papers – in which they encouraged dialogue with freight exporters – will mean little since the number of freight forwarders has shrunk from 125 to just 24 in Dover alone in recent years, as a result of the success of the Single Market.

What will give?

Since Brexit is the unstoppable cyclone heading towards UK shores, it will always trump HMRC and Treasury’s priorities. Does that mean the 1.1 million businesses, software vendors, and accountants gearing up for MTD are likely to be let off the hook?  Well, it is probably too late to stop such a mammoth IT juggernaut. Particularly as the chancellor is counting on the expected £1bn additional revenue MTD is promised to yield.

But don’t count on Brexit not spoiling everything.