HMRC has said it will pilot its digital tax reforms on “hundreds of thousands” of businesses before roll out, but has maintained its initial timeline for implementation – despite MPs branding it “wholly unrealistic”.

HMRC has said it plans to trial the reforms for a year – Photo credit: PA

The tax authority, which aims to be the world’s most digitally advanced through its Making Tax Digital plan, has today issued a response to its three-month consultation on the reforms.

The plan, which will require businesses to keep digital records and produce quarterly – rather than annual – updates for HMRC, aims to reduce avoidable errors in tax returns, estimated at £8bn a year.

However, the plan has come under fire from both businesses and the House of Commons Treasury Committee for placing too great a burden on taxpayers in too short a timeframe.

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In its report into the scheme, published earlier this month, the Treasury committee said that initial start date – set for April 2018 for income tax – was “wholly unrealistic”, and that just over a year was “too short a lead time for such a fundamental change” to the tax administration system.

HMRC’s response to the consultation acknowledged concerns about the pace of change and capability of businesses to meet the requirements, but maintained that it believed transition would be “straightforward” for most businesses because they already use digital tools on a regular basis.

Instead, HMRC highlighted plans to conduct a yearlong pilot, to start in April 2017, that will work with “hundreds of thousands of businesses and landlords” on quarterly returns and digital record keeping.

“This will ensure the software is user-friendly and give individuals and businesses time to prepare and adapt,” HMRC said.

Meanwhile, in an effort to address concerns about the abilities of businesses to deal with the technological side of digital record keeping, HMRC said that spreadsheets can be used to record receipts and expenditure – as long as businesses still meet the requirements of the reforms.

In practice, this is likely to mean combining the spreadsheet with software to generate and send updates to HMRC, something HMRC said it would test during the pilot phase.

It added that it was working with software developers to “ensure there is a good choice of products” available and that it planned to provide guidance to businesses in choosing the right software for their needs.

This, HMRC said, would take the form of a register on GOV.UK, which would confirm which apps are registered with HMRC and are compatible with Making Tax Digital, “in good time for the start…in 2018”.

It said that it expected a “wide variety” of paid-for software packages, as well as a variety of free products, which the government has committed to providing to businesses with “the most straightforward affairs” – unincorporated businesses under the VAT threshold with no employees.

As such, HMRC said that the minimum functionality for a free software package would be one that allowed businesses to keep digital records, generate and send updates to HMRC and complete end of year activity – software developers would not be required to include VAT, corporation tax or Pay As Your Earn functionality.

HMRC also said that it would “ensure that available software will be compatible with forms of assistive technology” for those who require it.

The authority added that a final decision on what further help HMRC will provide to businesses, including on financial support and training, will be made before legislation is laid later this year.

Security and storage

HMRC also said that businesses would not have to make and store invoices and receipts digitally, which it said many had been “particularly concerned about”, and that charities would not need to keep digital records.

Elsewhere in the consultation, respondents raised concerns about security, which HMRC said would be dealt with in detail early this year in a wider set of documents setting out the working relationship between the authority and the software industry.

The government also noted that some respondents had estimated the costs of implementing the changes could be in the thousands of pounds – but offered its own estimate of transition to the system as £280 per business over the period 2017-18 and 2020-21.

This would include time spent getting used to new digital tools and the quarterly submissions, buying new apps and software upgrades, it said.

“Once businesses have transitioned to regular digital record keeping, the obligation to provide quarterly updates to HMRC is expected to result in an overall reduction in burdens compared to the current once a year report requirements.”

The government has estimated that the reforms will save £945m by 2020-21, and £2bn by 2021-22.