Lords Economics Affairs Committee says estimates of savings ‘little more than guesswork’

Peers say HMRC should delay digital tax reforms – Photo credit: PA

Peers have urged the government to delay the start of its £227m Making Tax Digital plan, re-examine the estimated cost savings and reconsider which businesses are included in the scheme.

The House of Lords Economic Affairs Committee has added pressure on the UK’s tax authority to delay the start of the reforms, which will require businesses to keep digital records and file quarterly reports using software that is compatible with HMRC’s systems.

The aim is to reduce avoidable errors in tax returns – which HMRC estimates costs the public purse £8bn a year – but the government has come under fire for placing too much of a technological and financial burden on businesses.

In a report published today (17 March) the committee said that “not enough consideration has been given to support those lacking digital skills” and urged HMRC to push the start date back to 2020 – two years later than current plan.

“The roll-out of the scheme is being rushed, imposing unnecessary burdens on small businesses, and will yield little benefit to the government,” the report said. “These changes also coincide with other changes to small business taxation such as to business rates.”

The committee said it welcomed the end-goal of digitising tax records, but that the government had failed to properly estimate the costs and benefits of the reforms or allow enough time to pilot the software businesses are to use.

Related content

MPs call for delay to implementation of ‘over-ambitious’ digital tax plans
Peers grill HMRC’s Making Tax Digital team over software development plans
Earning public trust in an age of cyber threats

The peers’ comments echo those of the House of Commons Treasury Committee, which described the timeline as “wholly unrealistic” in its January report on the reforms.

HMRC’s current plan is to phase in the start of the reforms, with income tax reporting due to go live first, in April 2018 – however it has already had to grant several exemptions following pressure from smaller businesses.

In August it announced that the smallest businesses and landlords would be exempt from the reforms, while chancellor Philip Hammond announced a year’s delay for unincorporated businesses with a turnover below the VAT registration threshold in last week’s budget.

The latest report from the influential Lords committee will add more pressure on the government to slow down its reforms and extend the length of the year-long pilot that is due to start next month.

However, the committee said that the design and duration of the pilot is “too short and limited” and “does not conform to government best practice guidelines”.

Delaying the launch of the scheme to 2020 would allow a full pilot, the report said, which would let the government assess whether the changes do reduce taxpayer errors, what the actual cost is to businesses and to adapt the plan based on feedback from users.

Part of the pilot’s aim is to assess the software that businesses will be required to use for both recording and reporting their tax, which the committee said would be “crucial” to the plan’s success.

But the report said it was not clear whether HMRC had finalised the technical details or system requirements for the developers.

This means that not all developers have the full specifications needed to finalise business compliant software – something that Making Tax Digital programme manager Theresa Middleton admitted during an evidence session with the committee last month.

Middleton said that the “worst-case scenario” was that some providers’ software would not be ready until October, but stressed that there would still be a range of products available for smartphones and desktop computers during the pilot.

Savings estimates ‘little more than guesswork’

Committee chairman Lord Hollick said in a statement published alongside the report that a full pilot would also provide “hard evidence of the additional financial and administrative burdens on businesses”, which have been widely disputed.

HMRC has said it will cost each business an average of £280 overall – a figure that is drastically different to the Federation of Small Businesses’ estimate of £2,770 a year.

“The government’s estimates of both the initial and the ongoing costs of complying with Making Tax Digital requirements were met with disbelief by businesses who gave evidence,” the committee said. “Even HMRC’s own estimate shows that it would take more than 10 years for businesses to recoup their aggregate initial outlay.”

The committee also questioned the government’s estimate of the savings the plan would bring in, which HMRC has said will reduce the ‘tax gap’ by £10m in 2018-19, £400m in 2019-20, £805m in 2020-21 and £1bn a year after that.

However, the committee said that the assessment was “very fragile and little more than guesswork” because they relied on the untested hypothesis that enough people currently making mistakes on their tax returns will provide accurate figures by using digital record-keeping.

The committee recommended that HMRC thoroughly tests the behavioural assumptions underlying its estimated tax gap reductions to consider evidence that suggests taxpayers “may in fact respond in ways that invalidate those estimates”.

Elsewhere in the report, the peers said that the government needs to give more details on how much the reforms will cost HMRC.

The government should also make keeping digital records and quarterly reporting optional for businesses with a turnover below the VAT threshold, and re-examine whether businesses with seasonal or highly irregular income should be outside the scheme, it said.

“We are sceptical of the benefits to small businesses of regular digital reporting. We recommend that the scheme remains optional for businesses with a turnover below the VAT threshold,” said Hollick.