Tax & admin · 9 February 2017

Making Tax Digital: Compliance cost confusion riles Treasury committee

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A Treasury consultation on Making Tax Digital concluded in January

Andrew Tyrie MP, chairman of the Treasury select committee, has written to the financial secretary to the Treasury, Jane Ellison MP, and national chairman of the Federation of Small Businesses (FSB), Mike Cherry, asking them to explain how estimates each of their organisations came up with for the overall compliance costs of the proposed digital tax system for businesses came to be so different.

To understand the true effects of Making Tax Digital on small UK businesses, Tyrie, explaining his need to ask Ellison and Cherry for details about the methodology of their estimates, the minister said: “The compliance cost estimates are so far apart that at least one of them must be wrong.”

The government estimated that the average cost for each business making the switch to Making Tax Digital would be £280 a year until 2020, while FSB research claimed the initiative was more likely to set companies back £2,770 a year – 30 times as much.

Tyrie added: “If the FSB are right, the effects of Making Tax Digital would be crippling for many small businesses. If the Government are right, businesses have something to gain in the longer term and one would expect them to be queuing up to join the pilot.”

Making Tax Digital is the government’s plan that will require all individuals and business owners to maintain tax records in digital format, and submit quarterly updates to HMRC on top of a year-end review.

The initiative was first introduced by former chancellor George Osborne in 2015, and the government is expected to roll it out in 2018, despite some UK business leaders calling for the process to be delayed.

It is thought that at least two and a half million UK businesses are likely to be affected by Making Tax Digital, and possibly as many as five million.

A Treasury consultation in January encouraged the government to make a series of landmark concessions to the plans, which included a proposal for free Making Tax Digital software to be made available to the “majority” of small business owners.

Another concession was that those small and micro business owners, who can’t afford the switch to Making Tax Digital, should not be required to do so. The Treasury committee concluded that the financial benefits of quarterly tax reporting and digital record keeping hadn’t yet been sufficiently proven.

Welcoming the Treasury’s caution, Tyrie, commenting after the consultation, said: “This is a welcome, albeit small, step in the right direction. The fact that ministers are reflecting carefully on both the threshold and the possible deferral of the implementation date [of Making Tax Digital] for some small businesses is very welcome.

“All the evidence suggests that proceeding at the rate originally proposed would have led to detriment to millions of small businesses.”

With company owners likely to face a hike in accountancy fees as a result of Making Tax Digital, the committee also called for more information about the software the government would make available, and the eligibility of spreadsheets and other forms of accounting software currently familiar to many business owners.

Tyrie concluded by saying: “Making Tax Digital could undermine the culture of mutual trust between HMRC and the vast majority of taxpayers, which is one of the reasons why the UK has a relatively low tax gap.”

It is expected further details about the government’s Making Tax Digital plan will be revealed by chancellor Philip Hammond in his Spring Budget announcement on 8 March.

Tyrie’s letters to Ellison and Cherry can be read below:

 Tyrie to Ellison

Tyrie to FSB

One in five micro business owners remain clueless about Making Tax Digital

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ABOUT THE EXPERT

Fred Heritage is deputy editor at Business Advice. He has a BA in politics and international relations from the University of Kent and an MA in international conflict from Kings College London. He previously worked as a reporter at Global Trade Review magazine.

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