Tax digitalisation being rushed, say peers

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A House of Lords committee has warned that the digitalisation of tax is being rushed.

According to a report from the House of Lords Economic Affairs Committee, the idea behind the Making Tax Digital for Business scheme is sound and should be implemented.

However, members of the committee are concerned the rollout is being forced through too quickly and therefore imposing unnecessary burdens on small businesses.

"Many small businesses and landlords are simply unaware of or not ready to cope with the additional administrative and financial burdens that will be imposed by digital taxation," said Lord Hollick, chairman of the body.

Ministers have therefore been urged to delay the scheme until 2020 to allow a full pilot. The committee said this would allow the actual costs to businesses to be assessed, as well as reduce the number of taxpayer errors and allow the government to gather feedback from those affected.

Peers also suggested that the delay could give the government time to raise awareness of the tax digitalisation scheme and put support systems in place for those who lack digital skills.

In addition, ministers were urged to revise and improve their assessment of the benefits and costs of Making Tax Digital.

The committee stated that this is because the official estimate of the tax gap savings are "fragile and not based on adequate evidence".

Indeed, it said the suggestion that Making Tax Digital will initially cost businesses £280 does not reflect the initial costs businesses will incur.

Peers have also suggested that quarterly reporting and keeping digital records be optional for businesses with a turnover below the VAT threshold.

The committee went on to advise the government to look again at which businesses are included in the initiative, as there is case for excluding some kinds of firms, such as those with highly irregular or seasonal income.

About 1.6 million companies stand to be affected by the Making Tax Digital scheme, along with 2.4 million self-employed individuals and 900,000 residential landlords.

Lord Hollick commented: "We welcome the government's announcement in the Spring Budget that the scheme would not apply to businesses with a turnover below the VAT threshold until April 2019. 

"However, this does not go nearly far enough and it needs to further delay the scheme's implementation, and take a more incremental and gradual approach based upon the evidence from the pilot."

He pointed out that the scheme coincides with changes to business rates and dividend taxation, which will both have an effect on many small businesses.

Lord Hollick argued that a full pilot would ensure the software works and provide "hard evidence of the additional financial and administrative burdens on businesses". 

"It will also provide evidence in place of the widely disbelieved assessment of costs and benefits of the introduction of Making Tax Digital," he said.

Lord Hollick added that the committee is "sceptical" of the benefits to small businesses of regular digital reporting, which is why it needs to be optional for businesses with a turnover below the VAT threshold.

The committee's stance has been hailed by the Federation of Small Businesses (FSB), which said a delay to 2020 would give "hard-pressed" businesses time to get their systems ready.

Mike Cherry, national chairman at the FSB, commented: "A higher exemption threshold would take out those that are going to be struggling the most with this change.  

"In addition, we want to see a more comprehensive impact assessment as more details of the scheme become clear."

The comments from the House of Lords committee come shortly after the Treasury Committee in the House of Commons identified some "serious shortcomings" with the Making Tax Digital plans.

MPs said the costs and administrative burdens for the smallest firms could force some to go out of business or "move into the hidden economy".

Committee chair Andrew Tyrie said this would undermine the extra revenue that the government is expecting to raise from Making Tax Digital.

The body also flagged up concerns over the speed with which the scheme is being implemented, as it believes the level of engagement and consultation with the business community has been insufficient.

"At present, many of those on whom demands from Making Tax Digital will be made - millions of small businesses up and down the country: the backbone of the economy - are ill-equipped to handle the reporting requirements," Mr Tyrie said.

He acknowledged that Making Tax Digital offers an opportunity to greatly improve the administration of the tax system for the long term. However, he said this depends on the new processes being carefully introduced.

"Without sufficient care, Making Tax Digital could be a disaster," Mr Tyrie warned.

"Implemented carefully, with long transitional arrangements where necessary, and, having drawn on information from fully inclusive pilots, Making Tax Digital could be designed for the benefit both of the economy and of the tax yield. But with a rushed introduction, it will benefit neither."