A House of Lords Committee has warned that many businesses will not be ready for the VAT element of HM Revenue & Customs’ (HMRC) Making Tax Digital when it is due to come into force next April.
The Economic Affairs Committee has urged the department to give businesses at least a year before making the digital channel mandatory, and transitioning in stages to allow them to join when they are ready.
Making Tax Digital is the flagship programme of HMRC, aimed at shifting most transactions for tax payments to digital channels. Its schedule requires that most VAT registered businesses will keep their records and submit returns digitally from April of next year.
The Government has already delayed the introduction of the system by year, but last month it launched a pilot for businesses to try out the channel in advance of it becoming mandatory.
The committee has published a report on how the plan will affect small businesses, which says HMRC has not sufficiently considered their needs. So far they have not been given a deferral in line with the six months granted to some organisations in the public sector and there is evidence that many will struggle to manage the transition.
It is also unconvinced by the department’s claims that the new system will narrow the tax gap by reducing errors in submissions.
The committee’s concerns about the prospects for small businesses reflect its wider range of anxieties about the programme. One derives from the absence of any free software to deal with Making Tax Digital, which the report points out creates an extra cost for taxpayers, and prompts a call for the Government to consider developing a free software option.
It also warns that the costs to business will be higher than those outlined in HMRC’s impact assessment, and that it is not taking risks to implementation seriously enough.
As a result, it calls on HMRC to delay implementation plans for other elements of the programme until 2022 at the earliest, so it can learn from the lessons in introducing the VAT element.
Other recommendations include the publication of plans for HMRC’s communications and support systems to meet the needs of taxpayers and agents, along with the plan for the long term development of Making Tax Digital, and the creation of fairer regime covering penalties for late payments.
Chair of the committee Lord Forsyth of Drumlean 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 1 April, particularly with Brexit taking place three days earlier. The Government must delay its introduction.
"The Government has failed to listen to the warnings in our previous report. It must slow down its Making Tax Digital programme and listen carefully to the concerns raised by this committee, small businesses and accountants."