A House of Lords report said the government must delay its proposed introduction of Making Tax Digital for VAT and start listening to the concerns of small businesses.

Published this week, the report - titled Making Tax Digital for VAT: Treating Small Businesses Fairly - criticised the government for not fully considering the challenges small businesses face in preparing for the new digital tax system.

It warned that small businesses will not be ready for the change by April 2019, particularly with Brexit due to take place just days earlier.

Who is affected by MTD?

From 1 April 2019, HMRC’s Making Tax Digital (MTD) scheme will require most VAT-registered companies to keep digital records for tax purposes and submit their returns via accounting software. However, as much as 40% of affected businesses have not yet heard of MTD, let alone started preparing for it.

Escalating costs

The House of Lords economic affairs committee said that it is unfair for the government to expect small businesses to be ready and it is not doing enough to support them. It added that businesses shouldn’t be forced to make choices about their accounting software without a better understanding of the future Making Tax Digital regime.

The new scheme is expected to be very costly to businesses too. In September, HMRC revealed that businesses could lose £37 million a year through the ongoing cost of compliance.

Key recommendations

The report recommends that the government takes the following action:

  • Defers the introduction of mandatory Making Tax Digital for VAT by at least one year, while encouraging businesses to join voluntarily
  • Plans a staged transition for businesses to join Making Tax Digital for VAT and future stages of Making Tax Digital which allows for businesses, not just HMRC, to be fully ready
  • Waits until at least April 2022 to implement the next stages of Making Tax Digital, to allow time to learn lessons from the implementation of Making Tax Digital for VAT
  • Publishes its plan for the long-term development of Making Tax Digital, to encourage businesses to choose digitalisation for productivity, efficiency and modernisation reasons rather than just tax compliance.

The committee shared its disappointment that the government had failed to listen to its previous report, published in 2017, and said more needs to be done to address its concerns. "In particular, they [the government and HMRC] must start listening to small businesses”, the report said. “Otherwise, the burdens on small businesses may outweigh any potential benefits of the Making Tax Digital programme. By failing to properly engage with small businesses, HMRC risks alienating them from any future modernisation of the tax system.”

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