The government’s reaction to the House of Lords Economic Committee’s November 2018 recommendations in their paper, 'Making Tax Digital for VAT: Treating Small Businesses Fairly (House of Lords Paper 229)' may not give comfort to any small businesses and their advisers who were hoping that HMRC may yet postpone or modify the current plans to making VAT much more digital.
- Any idea of defering Making VAT Digital (MVD) is rejected.
- HMRC has not accepted any of the Lord's recommendations on penalties.
- It also notable that HMRC has ignored a recommendation to notify taxpayers in writing of its guidance and claims process for digital exemptions when it invites them to join the MVD pilot.
- Plans for introducing Making Tax Digital for income tax and corporation tax are confirmed at being on hold until the outcomes of MVD are known.
HMRC is accountable for its performance and it has promised to update the Committee every six months of progress on MVD, the results, as in success or failure of the different parts of MVD will directly affect policy in making income tax and corporation tax digital.
We note that HMRC still appears to be in denial about the amount of time it takes to make a business fully digital and this has been consistently reflected in its low impact assessments.
Highlights of the House of Lord’s recommendations and HMRC’s responses are as follows.
Recommendation 1.1: Defer the introduction of mandatory Making Tax Digital for VAT by at least one year, while encouraging businesses to join voluntarily (Para 29).
The Government does not accept this recommendation:
- HMRC is already encouraging businesses to join voluntarily in advance of mandation, as part of the pilot, and the service will remain voluntary for the 1 million businesses whose turnover is below the VAT threshold.
Recommendation 1.2: Plan a staged transition for businesses to join Making Tax Digital for VAT and future stages of Making Tax Digital which allows for businesses, not just HMRC, to be fully ready (Para 31).
The Government accepts this recommendation in part.
- The Government has committed that mandation will not be extended to other taxes or to those below the VAT threshold until the system is shown to be working, and not until 2020 at the earliest.
- HMRC will not pursue filing or record keeping penalties where businesses are doing their best to comply with the law.
Recommendation 1.3: Wait until at least April 2022 to implement the next stages of Making Tax Digital, to allow time to learn lessons from the implementation of Making Tax Digital for VAT. (Para 35)
The Government accepts this recommendation in part.
- The scope of MTD will not be extended before it has been tested and shown to work. This remains the case. That will not be before 2020.
Recommendation 1.4: Publish a plan for the long-term development of Making Tax Digital, to encourage businesses to choose digitalisation for productivity, efficiency and modernisation reasons rather than just tax compliance. (Para 34)
The Government accepts this recommendation.
- We set out our vision for the modernisation of the tax system through MTD in 2015 and this vision remains unchanged.
Recommendation 2.1: We recommend that HMRC reviews and learns lessons from its Making Tax Digital for VAT experience. It must fully consider the practicalities affecting underlying business and accounting systems before Making Tax Digital is extended to other taxes. (Paragraph 26)
The Government accepts this recommendation.
- HMRC has robust internal governance processes in place around the MTD programme
- MTD will not be extended until it has been shown to work well, and not before 2020 at the earliest
Recommendation 2.2: We recommend that HMRC urgently publishes full details of how its communication and support systems will meet the needs of taxpayers and agents across different levels of digital capability and skills. (Paragraph 39)
The Government accepts this recommendation.
- HMRC is in the process of writing to all businesses to ensure they are aware of the MTD changes.
- HMRC’s Customer Support Model guides taxpayers to the most appropriate support.
- HMRC is also working with software developers to produce a comprehensive support package that covers software usage, technical issues, as well as straightforward tax enquiries.
Recommendation 2.3: We recommend that HMRC develops guidance on the practicalities of claiming digital exemption with the representative bodies and publishes it as a matter of urgency. HMRC should notify taxpayers in writing of its guidance and claims process for digital exemptions when it invites them to join the pilot. (Paragraph 42).
The Government accepts this recommendation in part.
- HMRC have been clear from the outset that those businesses that are unable to go digital will not be forced to do so.
- Those businesses already exempt from VAT online filing will continue to be so under MTD, so they do not need to take any action
- HMRC should notify taxpayers in writing of its guidance and claims process for digital exemptions when it invites them to join the pilot
Recommendation 3.1: We recommend that the Government urgently provides a support package for software system selection to businesses going digital for the first time and their agents, independently from the software industry. (Paragraph 20).
The Government accepts this recommendation.
- HMRC has already published a list of MTD compatible products that are available now for VAT on GOV.UK. T
Recommendation 3.2: We recommend that HMRC, as its software selection tool is developed, makes provision for establishing and certifying which software options are compliant with Making Tax Digital for VAT. (Paragraph 21)
The Government accepts this recommendation.
- HMRC does not certify, accredit, kitemark or endorse products. However, it does have a robust product and developer recognition process. Every developer and product that is currently listed on the Software Choices page has gone through that process.
Recommendation 3.3: We recommend that HMRC increases the communication and support available to agents, and listens to agents’ concerns. Within that communication strategy, HMRC needs to address how it supports unrepresented taxpayers. (Paragraph 91)
The Government accepts this recommendation.
- HMRC will continue to increase communications with all stakeholders in the lead up to April 2019.
Recommendation 3.4: We recommend that the Government defers the date for mandating Making Tax Digital for VAT by at least one year, while encouraging businesses to join voluntarily. This will enable further development of a competitive software market and specialist sector products, permit HMRC’s systems to be fully and appropriately tested, and allow taxpayers to prepare fully for implementation of new systems. (Paragraph 29 & 95)
The Government does not accept this recommendation.
Recommendation 3.5: We recommend that HMRC plans a staged transition for businesses to join Making Tax Digital for VAT, and future stages of Making Tax Digital which allows for businesses, not just HMRC, to be fully ready. As part of this, HMRC should provide more information on their plans for Making Tax Digital for Business and Making Tax Digital for corporation tax. This will allow businesses to make informed long-term decisions about their software selection. (Paragraph 31 & 97)
The Government accepts this recommendation in part.
- The original timeline for the implementation of MTD was already staged
- We announced in July 2017 that the pace of mandation would be slowed to give businesses, particularly the smallest businesses, more time to prepare.
- HMRC have committed that the scope of MTD will not widen beyond VAT until the system has been shown to work, and not before April 2020 at the earliest.
Recommendation 3.6: We recommend that the Government publishes its plan for the longterm development of Making Tax Digital, including key decision points, milestones and dependencies. This will give greater certainty, and the software industry the information it needs to develop software that will work across each different aspect of the Making Tax Digital programme. It will also encourage businesses to choose digitalisation for productivity, efficiency and modernisation reasons rather than just tax compliance. (Paragraph 34 &102)
The Government accepts this recommendation in part.
- As announced by Written Ministerial Statement in July 2017, MTD will not be extended to other taxes until the system has been show to work and not before 2020 at the earliest.
- We understand that businesses and the software industry will need sufficient time to prepare for any changes.
Recommendation 3.7: We recommend that the next stage of Making Tax Digital is not implemented until April 2022 at the earliest. At least two years are required to learn and act on lessons from the implementation of Making Tax Digital for VAT, and a further year will be required for the software industry and taxpayers to prepare. (Paragraph 35 & 103).
The Government accepts this recommendation in part.
- The Government will not widen the scope of MTD beyond VAT until the system has been shown to work, and not before April 2020 at the earliest
Penalties
Recommendation 4.1: We recommend that the two-stage late payment penalty system is amended to extend the period of grace from 15 to 30 days. (Paragraph 38 & 121).
The Government does not accept this recommendation.
Recommendation 4.2: We recommend that the Government reduces the two-year time limit for HMRC to assess penalties to no more than one year, so that taxpayers are aware of their exposure sooner. (Paragraph 39 & 122).
The Government does not accept this recommendation.
Recommendation 4.3: We recommend the draft legislation is amended to remove the restrictions on repayment interest on VAT. (Paragraph 42 & 130).
The Government does not accept this recommendation.
Recommendation 4.4: We recommend that HMRC introduces a communication and support programme to ensure that taxpayers have a clear and timely understanding of the new penalty and interest regime, including the transitional provisions. (Paragraph 43 & 133).
The Government accepts this recommendation.
Recommendation 4.5: We recommend that HMRC introduces a messaging system to give timely information to taxpayers of penalty points accruing, in order for the new regime to support taxpayers in timely compliance with their tax obligations. (Paragraph 44 & 134).
The Government accepts this recommendation in part.
- HMRC are committed to ensuring that there is clear communication on the new penalty points accrual process, as this is central to an effective late submission penalty regime.
Wider issues
Recommendation 5.1: We recommend that the Government updates the impact assessment to reflect evidence gathered in recent months, including from the pilot. A revised impact assessment should be published alongside the Government’s long-term plan for mandating MTD for other taxes. (Paragraph 47 & 157)
The Government does not accept this recommendation.
Recommendation 5.2: We request that HMRC writes to update the Economic Affairs Committee every six months until the entire MTD programme is rolled out. (Paragraph 53 & 171).
The Government accepts this recommendation.
- HMRC will write to the Committee every 6 months with a progress update.
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