Making Tax Digital: How much will it cost business?

Making Tax Digital: How much will it cost business?

HMRC’s estimate of the cost to business of MTD has come under considerable scrutiny of late.

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The Government’s business case behind Making Tax Digital (MTD) was set out in the main consultation document published by HMRC back in August 2016. It included an investment of £1.3bn, which would then produce a reduction in the tax gap and around £1bn in extra revenue by 2020/21. MTD was also expected to relieve administrative burdens for businesses, and lead to ongoing savings of between £85m and £250m per year, helping meet HMRC’s target of saving a burden of £400m for businesses by the end of 2019/20. However, on the thorny question of transitional costs for business, the main consultation document was silent - additional evidence was required but a figure would be forthcoming at a later date.

The consultation period

Some of the figures behind the business case came in for criticism during the consultation period, with many questioning how MTD could save businesses money. This even led to Jim Harra, HMRC’s Tax Assurance Commissioner, hearing delegates’ thoughts first hand at the annual ICAEW Hardman lecture.

The Treasury Select Committee

Around the same time, the Treasury Select Committee (TSC) started to receive evidence on MTD as part of its inquiry into UK Tax Policy and the Tax Base. What it heard concerned the Committee to such an extent that it took the unusual step of publishing a standalone report on a small part of a bigger inquiry, which included the comment that “the business case for the investment [by HMRC] looks weak, because the benefits to HMRC will not outweigh the costs to business”.

This comment was largely underpinned by the evidence presented by many industry bodies on what they felt would be the cost to business of MTD.

The Government’s response

At the end of January, the Government published its response to the consultation. In it, the figures behind the business case for MTD were amended as follows:

  • HMRC revised up the contribution to the Exchequer from £1bn by 2020/21 to £2bn by 2021/22;
  • On-going savings of £85m to £250m became on-going savings for business of £100m per year;
  • The transitional costs for business were estimated to be £1bn over 2017/18 to 2020/21 (or £280 per business for the four years).

The House of Lords – Economic Affairs Finance Bill Sub-Committee

On 6 and 8 February, the Economic Affairs Finance Bill Sub-Committee (EAFBSC) heard evidence from tax stakeholders on MTD. Again, there were questions over HMRC’s new estimates for the cost to business arising from MTD, with John Whiting from the OTS giving evidence that “Most of us have some doubts that it will be cheaper.” 

HMRC officials are now due to appear before the Sub-Committee later this month and they are likely to face some difficult questions on their estimates.

The Treasury Select Committee Pt II

The day after the EAFBSC’s second hearing, the TSC wrote to both the Federation of Small Business (FSB) and Jane Ellison MP (Financial Secretary to the Treasury) asking them to supply the supporting documents for both the FSB’s and HMRC’s estimates.

Conclusion

The pilot for MTD is due to start in six weeks and HMRC are hoping that pilot will scale up to include 400,000 businesses before the system ‘goes live’ in April 2018.

But clearly there are some serious questions being asked about the economics behind MTD as a whole. Most people seem to agree that MTD is the future but believe that the existing timescale is too tight for an orderly and sensible transition.

A way forward could be to relax the timeframe and make it voluntary for the next few years. This will allow businesses to prepare and budget for the transitional costs and if MTD delivers the on-going savings that HMRC say it will, then business will automatically transition across on their own. To mix a few modern idioms: if it does what it says on the tin, build it and they will come.

 

For further information please contact :

Seamus Murphy

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