Digitalisation of tax is going ahead without delay!
We recently reported how the Treasury Committee had released a 50 page report calling for HMRC to delay implementing their ‘over ambitious’ Making Tax Digital (MTD) plans until 2019/2020. They had also called for implementation to coincide with any changes resulting from a Brexit deal to minimise the number of system-based changes businesses will be exposed to, along with voluntary rather than mandatory introduction. Further the lack of evidence regarding the free software that would be available and the need for substantive cost-benefit analysis was raised.
On Tuesday 31st January (self-assessment deadline day no less) HMRC finally released their response to the MTD consultations, as was promised by the Chancellor in the Autumn Statement. Not only was the call for a delay entirely ignored but there was no reference to the interaction with Brexit, and while a detailed explanation of how it has arrived at its conclusions on the potential revenue yield of MTD was provided, something that the Treasury Committee had called for, absent was a reasonable justification for the assumptions.
In fact one of the key points of general interest to come out of their ‘Bringing Business Tax into the Digital Age’ response was that they estimate businesses will only incur a one-off transitional cost of £280 per business on average and that will be followed by small ongoing annual savings. This is in contrast to the Federation of Small Business (FSB) estimate of £2,770.
Even if HMRC’s estimate is correct, if the 3.3m self-employed individuals, 1.6m companies, 400k partnerships, 900k landlords and 600k self-employed and rental property-owning individuals identified in their impact assessment all spend £280 on conversion on average, in the best case from HMRC’s perspective where taxpayers are only paying tax at 20%, this tax deductible expense for business will result in £380.8m of lost revenue for HMRC at it’s most conservative estimate. No evidence has been put forward to suggest this figure has been factored into their estimate of the extra net tax revenue MTD will bring.
If the FSB estimate of £2,770 is conservatively applied to only the self employed individuals, landlords and self-employed and property-owning individuals, HMRC is looking at £2.66b in lost tax revenues. This far exceeds the now revised £2b contribution (from £945m) estimate that HMRC expects MTD to bring.
So while the numbers raise a series of questions, what else did HMRC’s response to the consultation period deliver?
Businesses will be able to continue to use spreadsheets to record receipts and expenditure, which they can then link to software to automatically generate and send their updates to HMRC – most assumed this was going to be the case anyway.
Free software will be available to the majority of the smallest businesses, although we don’t yet know who will be providing this or how the smallest of businesses is defined.
Businesses that cannot go digital will not be required to do so – the details are highly restrictive in who they apply to.
All self-employed businesses and landlords with a turnover under £10,000 a year will not have to keep their records digitally or make quarterly updates, but can do so if they wish, but an increase in this limit is still be considered – with only 14 months left to go for implementation!
The option to account for income and expenditure on a simple ‘cash in, cash out’ basis will be extended for self-employed businesses and unincorporated landlords.
Charities will not have to keep their records digitally or make quarterly updates.
Taxpayers will have at least 12 months to become familiar with the changes before any late submission penalties will be applied; HMRC will also re-consult again in the spring on a new penalty model.
HMRC will pilot these digital systems with hundreds of thousands of businesses before rolling them out to ensure the software is user friendly, and to give businesses and landlords time to prepare and adapt.
And finally….somewhere along the way, MTD has been renamed to MTDfB (making tax digital for business)!
If you would like a consultation to discuss how Making Tax Digital could impact you or your business please contact Androulla Soteri, speak to your local MHA MacIntyre Hudson advisor or send enquiry.