part, in or full, in 2017 published be January to 14 Not Saturday COPY: on House of Commons a.m. Treasury Committee ADVANCE00.01 Making Tax Digital before Tenth Report of Session 2016–17 form EMBARGOEDany in HC 927 part, in or full, in 2017 published be January to 14 Not Saturday COPY: on a.m. ADVANCE00.01 before form EMBARGOEDany in part, in or full, in 2017 published be January to 14 Not Saturday COPY: on House of Commons a.m. Treasury Committee ADVANCE00.01 Making Tax Digital before Tenth Report of Session 2016–17 form EMBARGOED any Report, together with formal minutes in relating to the report Ordered by the House of Commons to be printed 10 January 2017 by authority of the House of Commons Published on 14 January 2017 HC 927 The Treasury Committee The Treasury Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of HM Treasury, HM Revenue and Customs and associated public bodies. Current membership Mr Andrew Tyrie MP (Conservative, Chichester) (Chair) Mr Steve Baker MP (Conservative, Wycombe) Helen Goodman MP (Labour, Bishop Auckland) part, Stephen Hammond MP (Conservative, Wimbledon) in George Kerevan MP (Scottish National Party, East Lothian) or Kit Malthouse MP (Conservative, North West Hampshire) full, John Mann MP (Labour, Bassetlaw) in Chris Philp MP (Conservative, Croydon South) Mr Jacob Rees-Mogg MP (Conservative, North East Somerset) 2017 Rachel Reeves MP (Labour, Leeds West) Wes Streeting MP (Labour, Ilford North) published The following member was also a member of the committeebe January during the Parliament: to 14 Mark Garnier MP (Conservative, Wyre Forest) Not Powers The Committee is one of the departmental selectSaturday committees, the powers of which are set out in HouseCOPY: of Commons Standing Orders, principally in SO No 152. These are availableon on the internet via www.parliament.uk. a.m. Publication Committee reportsADVANCE are published00.01 on the Committee’s website at www.parliament.uk/treascom and in print by Order of the House. Committee staff before The current staff of the Committee are Sarah Rees (Committee Clerk), Amelia Aspden (Second Clerk), Gavin Thompson (Senior Economist), Marcus Wiltonform (Senior Economist), Dan Lee (Senior Economist), Darren Hackett (Senior Committee Assistant), Elektra Garvie-Adams (Committee EMBARGOEDSupportany Assistant), Matt Panteli (Senior Media and Policy Officer), Toby inCoaker (Committee Specialist on secondment from the NAO), David Hook (on secondment from HMRC), Foeke Noppert (on secondment from the FCA), George Barnes (on secondment from the Bank of England) and Victoria Sena (on secondment from the Bank of England). Contacts All correspondence should be addressed to the Clerk of the Treasury Committee, House of Commons, London SW1A 0AA. The telephone number for general enquiries is 020 7219 5769; the Committee’s email address is [email protected]. Making Tax Digital 1 Contents Summary 3 1 Introduction 4 2 Background 5 The End of the Tax Return? 5 “Making Tax Easier” becomes “Making Tax Digital”, and concerns mount part,5 Consultation offers some concessions but still major concerns persist in 7 or 3 Key points made in evidence to the Committee and elsewhere 10 full, Support for the Principle 10 in Timing issues 11 Implementation should be deferred 2017 12 The end to end process should be adequately piloted 15 Mandation published 17 The proposed £10,000 threshold for makingbe MTD mandatoryJanuary is too low 18 There should be no mandation, even forto larger 14 businesses 20 Exemptions Not 21 The MTD exemption for the “digitally excluded” should be applied widely 21 Specific types of organisation thatSaturday should be exempt 24 COPY: Costs and Benefits on 25 Making Tax Digital will bring extra costs for businesses 25 The revenue from reduceda.m. errors is unlikely to materialise 27 Software issues 29 BusinessesADVANCE will need00.01 help from HMRC in choosing the right software 29 Many free software and apps are likely to be inadequate 30 Promptsbefore and Nudges 33 Spreadsheets 34 Communicationform about MTD 35 EMBARGOEDanyOther issues 36 in Cyber security 36 part, in or full, in 2017 published Conclusions and recommendations be January to 14 Formal Minutes Witnesses Not Published written evidence List of Reports from the Committee during the current Parliament Saturday COPY: on a.m. ADVANCE00.01 before form EMBARGOEDany 3 in 8 4 2 43 4 4 4 5 Making Tax Digital 3 Summary Making Tax Digital (MTD) will mark a fundamental change in the way that businesses interact with HMRC. The Government is proposing that, subject to a relatively small number of exceptions, all businesses will be required to keep their accounting records in a prescribed digital format and submit quarterly updates to HMRC. These updates will be followed by an end of year reconciliation to ensure that the entire year’s activities are properly recorded for tax. It is proposed that businesses will start this form of record keeping and reporting for income tax and National Insurance from 1 April 2018 orpart, 1 April 2019, depending on their size, and for VAT from 1 April 2019. At least twoin and a half million businesses are likely to be affected, and possibly as many as fiveor million. The Government consulted on its proposals over the summer and early autumn of 2016 and it is proposing to respond to that consultation, and publish draftfull, Finance Bill clauses to legislate for the necessary changes, in January 2017. in Based on the evidence it has heard, and on published responses to HMRC’s2017 consultation, the Committee supports the idea of the digitisation of the reporting of tax. However it considers that mandating the digitising of record keepingpublished and quarterly reporting, as currently envisaged, has not yet had its overall benefits proven. Just over a year is too short a lead time for such a fundamental changebe inJanuary any event. There should be a comprehensive set of pilots of the end-to-endto system 14 before it is made mandatory for all businesses. The Committee is very concerned about the costs to businesses of introducing MTD, as well as the continuingNot costs of maintaining digital records and submitting quarterly updates. There is not yet enough information about the free software that will be available, but even ifSaturday it remains free in perpetuity, businesses will face costs in terms of time andCOPY: accountants’ fees. In aggregate, these costs may well exceed the benefits to the exchequer onin terms of tax gap reduction as a result of fewer taxpayer errors and the overall impact of MTD could even be negative. This requires further investigation. a.m. As it prepares its response to the consultations about its proposals to make MTD mandatory withADVANCE very few00.01 exemptions, the Government needs very carefully to consider the legitimate concerns about the costs and benefits to business, and set them against any benefits to the Exchequer from the proposed approach. before form EMBARGOEDany in 4 Making Tax Digital 1 Introduction 1. Making Tax Digital (MTD) is shorthand for a proposed new system whereby businesses are required to keep their records in a digital format and submit quarterly updates to HMRC followed by an end of year reconciliation. For many taxpayers, this would take the place of their annual tax return. HMRC has confirmed that the quarterly updates will be “summary totals of the digital record of income and expenditure and not transaction records1”. It is proposed that businesses will be required to start this form of record keeping and reporting for income tax and National Insurance from 1 April 2018part, or 1 April 2019, depending on their size, and for VAT from 1 April 2019. in 2. It was included in the Terms of Reference for the Treasury Committee’s inquiryor into UK Tax Policy and the Tax Base2. Since then, the Committee has received a great deal of evidence, both oral and written, and its members have heard of a wide varietyfull, of concerns about the Government’s proposals. Perhaps acknowledging the strength,in or at least the volume, of the concerns that had been raised in the responses to its consultation papers, the Government has announced that its response to the consultation2017 will not be until January3. After receiving representations from the Committee and other parties, the Government has put back its response to the consultation from the Autumn Statement, when it would ordinarily have been expected, to Januarypublished 2017. This is welcome. The Government has said clearly that it is listening to thebe concerns January being raised. For example, the Financial Secretary said: to 14 “Several significant concessions Notregarding the number of small businesses that were exempt from the system were announced over the summer, but I am listening carefully to the points being made both by colleagues in the Saturday House and by some of theCOPY: important stakeholders with whom we have been engaging. That is why we saidon that we will respond in the new year. We do not want to rush our response; we want to consider all the points carefully.”4 a.m. 3. The Committee is therefore taking the unusual step of publishing a report on a small part of a bigger inquiry, and without having had the opportunity to hear evidence from the Government.ADVANCE The Committee00.01 expects the Government to consider this report before it publishes its response to the Making Tax Digital consultations and the provisions to implement the changes, expected in January 2017. The report makes a number of suggestions to mitigate the widespreadbefore concerns over MTD. If these suggestions are unacceptable to the Government, it is likely that pressure will increase for the Government to introduce MTD as forma voluntary scheme.