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The ‘digital exclusion’ exemption for MTD: Its origin and scope

Of the recommendations of the recent Report on Making Tax Digital for VAT: Treating small businesses fairly by the House of Lords Economic Affairs Committee (Finance Bill Sub-Committee), one in particular was aimed at the digitally excluded:

‘We recommend that HMRC develops guidance on the practicalities of claiming digital exemption with the representative bodies and publishes it as a matter of urgency. HMRC should notify taxpayers in writing of its guidance and claims process for digital exemptions when it invites them to join the pilot.’

The scope of the exemption for the digitally excluded is wider than HMRC sometimes acknowledge. It is available to those for whom it is not reasonably practicable to keep electronic records or make a return under Making Tax Digital because of age, disability, remoteness of location or any other reason (see VAT Regulations 1995 (SI 1995/2518), reg 25A(6)(c); also reg 25A(2A) and 32B(1)(c), inserted by VAT (Amendment) Regulations 2018, SI 2018/261).

The exemption from electronic filing in reg 25A(6)(c) was added with effect from 1 July 2014 to the existing exemptions for practising members of a religious society whose beliefs are incompatible with the use of electronic communications, and insolvent businesses. That amendment had an interesting history behind it. In LH Bishop Electric Co Ltd & Others v HMRC Commissioners [2013] UKFTT 522 (TC), the First-tier Tribunal found that, in respect of three of the four appellants before it, the VAT Regulations as they then stood were ‘unlawful because of their disproportionate application to people who were computer illiterate due to their age, or who had a disability which made using a computer accurately very difficult or painful, or those who lived too remotely for a reliable internet connection’.

The regulations were held to be an unjustified interference with those people’s rights under the European Convention on Human Rights (ECHR), Article 1 of Protocol 1 (protection of property) and Article 8 (right to respect for private and family life), combined with Article 14 (prohibition of discrimination).

To their credit, HMRC did not appeal against that Tribunal decision, but instituted a public consultation about amending the regulations so they were human rights-compatible. Reg 25A(6)(c) accurately reflected the outcome of that consultation, as (subsequently) did reg 32B(1)(c).

The question now arises, as their Lordships observed, how in practical terms do those who are eligible secure the benefit of the exemption? HMRC have yet to make that clear; but for now, the important thing for practitioners and VAT traders is to note who may qualify for it, and on what grounds.

The Committee’s report focused on two areas of digital exclusion: age, and insufficiency of broadband connection. In the latter context, the evidence from the NFU stated:

‘Findings from the NFU’s annual digital infrastructure survey in 2017 found that 73% of respondents had upload speeds of 2mbps or less.’

According to HMRC, 2mbps is sufficient to send a quarterly update under MTD although the Committee’s earlier report in March 2017 (para 129) recommended that those who experience broadband speeds of less than the government’s Universal Service Obligation minimum of 10mbps should qualify for exemption. Although many small businesses in rural locations would seem to qualify on that basis, HMRC have not yet responded to their Lordships’ earlier recommendation.

Age is another exempt category. During the hearings in Bishop, there was some debate about what age a taxpayer should be to qualify for the MTD exemption. The judge (Barbara Mosedale) responded:

‘I think the argument sterile:  the ‘other status’ [for the purposes of Article 14 of the ECHR] is “age”.  A measure which discriminated against a person because of his age (young, old or in the middle) is potentially unlawful under Article 14. . . I have found that the evidence shows that there is less internet usage amongst the elderly. I have found that the elderly are less likely to know how to the use a computer. I have found that it would require some significant investment in time to learn how to use a computer and they will find it harder to learn than younger persons. And they are less likely to own a computer.’

A final point about the digital exclusion exemption: Note the concluding words of the regulation: ‘...or any other reason’. It is not essential for a person to be old, disabled or a rural dweller in order to qualify for the exemption. In a sense it doesn’t matter what grounds they put forward, so long as they can argue successfully on those grounds that it is not reasonably practicable for them to comply. Ultimately, HMRC’s decision on whether or not a person can claim exemption is not final; VATA 1994, section 83(1)(zc) gives a right of appeal.

Robin Williamson MBE CTA (Fellow) is an author and commentator on tax, welfare and public policy, and a part-time senior policy adviser at the Office of Tax Simplification. He was technical director of the CIOT’s Low Incomes Tax Reform Group from 2003 to 2018.

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