Lords want digital tax accounts for small firms delayed

The Making Tax Digital deferral for public sector bodies and organisations with ‘complicated’ tax affairs does not go far enough, peers say.

In a new report criticising both HMRC and the government, the House of Lords Economic Affairs Committee speaks of its ‘regret’ that the MTD deferral overlooks small companies.

It is these tiny traders, “for whom implementation will be the most burdensome” because they have “the fewest resources”, that “HMRC appears to have neglected,” the Lords say.

Such small enterprises must therefore get one year’s grace from the April 2019 commencement date of MTD for VAT, the report says, especially if MTD will be mandatory.  


This anti-compulsion point is gaining momentum, so much so that even if April 2020 is agreed to, say the Lords, “encouraging” firms to MTD must be the focus, not imposing it on them, as a tax charity argued last month.

“If a system is good and has benefits you would expect people to naturally want to use it,” said the LITRG, speaking at the time. “[Similar to] self-assessment…we do not think it [MTD] needs to be mandatory.”

Adrian Rudd of the Chartered Institute of Taxation agrees. “The use of software can bring many advantages but it should be something which businesses choose.

“[It should] not be something they are forced to adopt,” he said. “This is particularly important because… it is likely to cost businesses far more to implement than HMRC have estimated.”


Further doubts about HMRC’s claims are expressed by the Lords – about the projected extra yield from MTD (“we remain unconvinced”), and about no extra accounting fees for MTD-covered firms (“this conflicts with the weight of evidence we have received”).

“We also remain confused about the assumptions underlying HMRC’s analysis of costs to businesses,” the committee said, tabling four recommendations including the year-deferral.

“[And] it is not evident to us that there has been any attempt to calculate the impact of Making Tax Digital for VAT on the smallest businesses.”

The committee’s other concerns justifying its call for a 12-month delay (the farther off April 2022 is recommended for MTD’s next stage), include low awareness (40% of firms have not even heard of MTD), and the “difficult to navigate” software market.


“It is unfair to expect businesses to make choices about their accounting software without a better understanding of the future Making Tax Digital regime,” the Lords say, adding:

“It will be unhelpful for businesses, if they have invested in software for MTD for VAT, to find they need to reinvest in alternative software for MTD for business or corporation tax.”

Also unhelpful according to the Low Incomes Tax Reform Group, is that “HMRC have only just started” writing to firms to let them know when MTD begins and how it affects them.

“The chances of the introduction of MTD for VAT in April 2019 being a success are reducing all the time,” the group warns.

“This leaves insufficient time to enable a business to research and consider options with regard to software and establish new procedures or modify existing procedures for its record keeping”.


Victoria Todd, head of LITRG’s team, says the mooted exemption from MTD for VAT purposes is a worrying case in point.

“Some small businesses may want to apply for exemption from the new regime, which they are allowed to do where it isn’t reasonable to expect them to use digital tools because of age, disability or remoteness of where they live or work.

“However, HMRC have not yet told people how they should apply for an exemption, or what they can do if their application is turned down.”

She added: “As it is likely to take some time to get a decision under any process introduced, if someone is denied an exemption when they were expecting to get it, they will now have very little time to get themselves ready to go digital by April 2019 – this is completely unacceptable.”

'Knowledge gaps'

Trying to size up the scale of the huge task facing both HMRC and taxpayers, a daunted CIOT reminded that the introduction of MTD for VAT was now less than 150 days away.

“MTD for VAT will be the biggest overhaul in VAT obligations in decades,” the institute said. “With just a few months to go before it kicks in, [small companies’] knowledge gaps could mean normally compliant firms fail to fulfil their new obligations.”

Lord Forsyth, chair of the House of Lords Economic Affairs Committee, said:  “HMRC has neglected its responsibility to support small businesses with Making Tax Digital for VAT.

“HMRC are not listening to small businesses, while offering a six-month deferral to many in the public sector. Small businesses will not be ready for this significant change to their practices if it is introduced on April 1st, particularly with Brexit taking place three days earlier. The government must delay its introduction.”

'Failed to listen'

He accused the government of having “failed to listen to the warnings” sounded in the committee’s previous report.

The chair appealed: “[The government] must slow down its Making Tax Digital programme and listen carefully to the concerns raised by this committee, small businesses and accountants.”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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