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Making tax digital: timetable remains challenging

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On 31 January, HMRC published its response to the making tax digital (MTD) consultation. HMRC received more than 3,000 responses and has taken on board a number of the points made, but some key concerns remain.
The news that businesses will be able to continue to use spreadsheets is welcome. There is however a ‘but’, which is that spreadsheets will have to integrate with MTD compliant software (which the business will still therefore need). Linking spreadsheets to accounting software may be routine for the digitally proficient, but many affected businesses will not be. Such users will be reliant upon software suppliers automating the process or will need assistance.
The penalty soft landing – a lesson learned from RTI – is also a welcome and pragmatic move. The commitment to provide free software for ‘the majority of the smallest businesses’ being ‘those with the most straightforward affairs’ remains, but the question is what exactly does ‘most straightforward’ mean? I suspect that the answer will only be known as the pilot progresses and the range and granularity of small business transactions and records becomes clearer.
The impact assessment now recognises that there will be ongoing as well as transitional costs, but we will only really understand the impact when the pilot has been running for long enough to have reached a steady state and to be yielding reliable data. Scepticism will remain about there being net savings until clear and compelling evidence from the pilot is to hand.
The draft legislation gives HMRC very wide-ranging authority to make regulations specifying the electronic records that a business must maintain and in what form, as well as specifying the information to be provided to HMRC.
Perhaps the key announcement was the fact that ministers are still considering the initial exemption threshold and deferring the changes for some businesses. This may be due at least in part to the fact that in mid-January the House of Commons Treasury Committee published its own report on MTD. That report echoed what many respondents to the consultation said: the timetable is extremely challenging and the need for a thorough pilot programme is paramount. The committee added a powerful voice to those calling for ministers to exempt businesses with turnover below the VAT threshold.
I remain firmly of the view that MTD can deliver a radical modernisation of tax administration, but I fully support the Treasury Committee’s view that it should not be mandatory for the smallest businesses.
The way forward, as the committee says, is to pilot the technology thoroughly and prove that it works as intended. The more extensive the pilot and the wider the range of businesses, apps and software products it covers, the better. It must demonstrate clearly that MTD is achieving the expected reduction in error rates and the claimed steady-state cost savings. If it can, then businesses will sign up readily. ITSA e-filing proves that if a system works well, people will use it voluntarily.
So there have been some positive steps forward, but the timetable remains incredibly challenging. Accommodating a full and effective pilot run, covering a wide variety of businesses, software products and apps, and then analysing the results and building in the lessons learned will be an enormously difficult – but essential – task.
The key question of the entry threshold is still to be resolved. The answer that respondents to the consultation – as well as the Treasury Committee – have suggested is very clear. The paramount thing is to build a system that demonstrably works for all and that businesses therefore want to use.