Peers to HMRC: Digital tax reforms 3 days after Brexit? Hold your horses, how 'bout 3 years...

Updated HMRC's digital tax reforms to VAT – due to launch just three days after Brexit – will hit small businesses hard and should be delayed, peers have said.

HMRC is alone in its confidence that all one million businesses will be ready for Making Tax Digital for VAT in April 2019...

In a report (PDF) published today, the members of the House of Lords Economic Affairs Committee called on the UK's taxman to push back the introduction of a VAT phase of its Making Tax Digital plans.

The programme, which is being phased in over the coming years for various aspects of tax, will require businesses to keep digital records and file quarterly reports with HMRC. This will mean – among other things – companies will have to update or buy in new, compatible software.

One of the first parts of the rollout is Making Tax Digital for VAT, which the government intends to mandate for businesses with taxable turnover of more than £85,000 from 1 April 2019. It is expected to affect 1.2 million businesses.

However, the peers said that 40 per cent of these businesses haven't heard of the programme, let alone started preparing for the change to their accounting processes.

"HMRC is alone in its confidence that all one million businesses will be ready for Making Tax Digital for VAT in April 2019," the committee said.

Meanwhile, the government has failed to provide them with sufficient information on the wider programme – making it harder for them to upgrade or purchase accounting software.

There are also concerns about the cost burden it will place on firms. The committee said HMRC had underestimated the impact it would have, especially on smaller companies.

One practitioner told the committee that software and support costs for existing cloud users would be between £100 and £500, for desktop users £800-£1,600 and for paper records users, £1,300 to £2,600.

At the start of 2017, HMRC execs had dangled the prospect of free software for the smallest companies, suggesting this might come from providers. However, this has not transpired.

"The software industry is, unsurprisingly, responding to the commercial opportunity of Making Tax Digital for VAT. We have seen no evidence that any free software products will be offered," the committee said.

"We question the logic of requiring taxpayers to spend additional money to pay their tax. Since a free option has not emerged from the software industry, the Government should consider again the case for providing a basic, free software option."

The committee also noted a lack of a market for customers that need "bridging software" to act as a link between spreadsheets and HMRC's systems – brought in as recognition of the fact vast numbers of businesses rely on spreadsheets. Since this market has failed to emerge, this group will be less well supported.

Beyond this, the peers argued it was "unfair" to expect businesses to make a decision about how to spend their cash "without a better understanding of the future Making Tax Digital regime".

The committee also pointed out that some public sector bodies had been granted a six-month deferral, but that this hadn't been extended to smaller businesses, even if they have fewer resources.

Committee chairman Lord Forsyth added that, with Brexit taking place just three days earlier, it was even more unlikely that businesses would be ready for the target date.

As such, the committee said HMRC should wait "at least" a year before making the VAT reforms mandatory, and that even then businesses should be moved on to the new system in stages, so they can join when they're ready.

More broadly, the committee expresses scepticism about the case for the reforms, saying it is "unconvinced by HMRC's claims that the new system will narrow the tax gap by reducing errors in submissions". In 2017, the government also had to revise the contribution of the programme, from over £3bn to just over £1bn by 2022-23.

Compounding this is the clear frustration that both this committee and many other parliamentary committees and trade groups have warned for some time the government needs to up its engagement and possibly slow down the rate of change.

"The Committee urges the Government and HMRC to start listening, particularly to small businesses. The Committee recommends that the next stage of Making Tax Digital is not implemented until 2022 at the earliest, to allow time to learn and act on lessons from Making Tax Digital for VAT." ®

Updated to add

A HMRC spokesman got in touch to defend the department and its approach to the programme – and insisted it had contacted 200,000 businesses already (so just another million to go then?).

"We are disappointed that the committee's report doesn't reflect HMRC's wide and significant engagement on Making Tax Digital (MTD) over the last 3 years, nor the changes made as a result for small businesses," the spokesman said.

"In response to previous feedback from businesses, representative groups and Parliament, we made changes to the scope and timetable for MTD in July 2017 to ensure businesses, particularly the smallest, have more time to prepare.

"HMRC has already written to 200,000 businesses and will be writing to every other mandated business in the coming weeks to ensure they know about the changes and how to prepare."