The government’s response to the consultation on “Making Tax Digital” – requiring businesses to keep digital records and make quarterly updates to HMRC – was published this week, together with draft legislation. But, rather like Theresa May at a press conference, the government doesn’t answer some of the big questions.
Businesses, agents and rep bodies have raised serious concerns about the proposals – is it right for them to be mandatory, are they appropriate for the smallest businesses, and are they being rushed in too quickly? MPs on the Treasury Select Committee (TSC) have taken a close interest, and published a report on 11 January. Most recently, the House of Lords’ Economic Affairs Committee has asked for evidence to feed into its own review of the proposals.
The government’s response doesn’t address the concerns around imposing digital record-keeping – it just assumes mandation as a given – and has left open for further consideration whether the proposed exemption for businesses with a turnover of less than £10,000 should be extended to a wider category of businesses. Further consideration is also being given to whether the proposed start date of April 2018 should be deferred for some of the smallest businesses in scope.
There are some concessions on the detail. For example, businesses will be able to continue to use spreadsheets for record keeping, as long as they ensure their spreadsheets “meet the necessary requirements of MTD”, such as combining with specified software. Those small businesses currently eligible for three-line accounts will only need to submit these three lines of information in making their quarterly updates. And the requirement to keep digital records doesn’t mean that invoices and receipts must be produced and stored digitally.
In my October blog on the proposals in the August consultation document, I raised fairly basic questions on the rationale – in particular, the rationale for mandation – as well as more specific questions on data submission, future-proofing, security concerns and timing. Timing is still being considered, but have the other questions been answered?
The concessions suggest the government has stepped away from the extreme version of telling businesses how to keep their records. It is also clearer that the government will not be requiring the submission of complete transactional data. However, there remain serious questions about rationale, and specifically whether the costs to business are worth the projected revenue benefits: in the words of the TSC, “whether the proposals are worth the candle”.
The government’s Impact Assessment estimates the net admin costs to business at a total of £990m by 2019/20. From then on it’s estimated there will be a net admin benefit to business of £100m a year – which means it will take until 2030 for them to recoup the transitional costs.
These cost estimates will be largely driven by the number of businesses in scope (amounting to several million), and the document estimates the average transitional cost at £280 per business. While some might regard that as fairly small beer, it could be a significant burden for a small business. In any event it’s instructive to look at the total cost across the economy in the light of other pressures on business over the same period, notably Brexit.
On the other side of the equation, the revenue benefits shown in the summer consultation document totalled £945m by 2020/21 – less than the projected admin costs. Perhaps anticipating that this looks like a pretty poor cost-benefit ratio, the government reassures us that the revenue benefits will increase when the estimates are revised for the March Budget, and are expected to total £2bn by 2021/22. While that is significantly better than the original estimates, it still represents only a 2:1 ratio of benefit to cost, which seems absurdly low for any tax measure. Moreover, the logic underpinning the revenue benefits has been repeatedly questioned (see my earlier blog, Wendy Bradley’s recent piece on AccountingWeb, and paragraphs 89-98 of the TSC report).
It seems clear that the government’s rationale for mandation is closely linked with these supposed revenue benefits, so it’s hardly surprising that the outstanding decisions on scope and timing will be considered alongside the fiscal impacts. If the start-date for small businesses is deferred, that will push back the revenue benefits at a time when the Chancellor is likely to have a large hole to fill. And just as the total number of businesses in scope drives the total figure of admin costs, so it will also impact on the benefits.
While future-proofing isn’t specifically addressed in the response document, the draft legislation suggests it will be achieved by allowing HMRC to prescribe what is required – raising further potential questions about Parliamentary scrutiny.
The response document recognises that the proposals raise cyber-security issues for businesses themselves as they move to digital records (alongside issues around HMRC’s own security measures). The TSC has also flagged cyber-security as an issue, and it remains to be seen whether the government’s response goes far enough to allay its concerns.
Full steam ahead?
According to the response document, “the majority are supportive of the move to a digital tax system”, though the TSC describes this as support for the principle but with significant reservations. Despite these reservations, the government seems intent on pressing ahead with the Making Tax Digital programme, subject to some concessions on the detail of what is required, and to decisions on the two outstanding points of scope and timing.
Like Brexit, Making Tax Digital is happening, and the government is determined to make a success of it.
[Update following March Budget: The government announced that the threshold for Making Tax Digital remains at £10,000 turnover, but the start date of April 2018 will be deferred to April 2019 for businesses between that level and the VAT threshold (£83,000, rising to £85,000).
Interestingly, the impact of this deferral on the estimated revenue benefits of Making Tax Digital is not shown separately in the Budget Policy Costings document. Instead it is combined with the impact of increasing the level at which small businesses may apply cash basis of calculating their tax liability (p.11) – which seems odd, as the two measures apply to different sets of businesses. Together the measures reduce the estimated yield from Making Tax Digital by a total of £280m by 21/22 (p.11).
Elsewhere, and more than offsetting this reduction, the Budget document itself confirms the increased projections of revenue benefit from Making Tax Digital mentioned above: they are estimated to total nearly £2.2bn by 21/22.]