When evaluating the impact of MTD in its Initial Assessment, (Chapter 8 of the original consultation from August 2016), HMRC acknowledged:
“At Autumn Statement 2015, the Chancellor announced a target for HMRC to reduce the costs to business of tax administration by £400m by the end of 2019/20.”
It could be argued that, for many practitioners, the case for MTD ended with that one sentence. It is certainly stretching the bounds of credibility that a regime that forces businesses to “go digital” and then to make returns on a quarterly basis, rather than annually as now, might actually reduce costs. Nevertheless, HMRC’s initial assessments were that businesses would soon be saving somewhere between £85million and £250milion a year, thanks to MTD.
HMRC’s modelling was apparently based on its understanding of small unincorporated and incorporated businesses with ‘less’ (fewer) than 20 employees. Such entities of course make up the vast majority of the business taxpayer population, and the average practitioner’s client base.
I think it is a fair summary to say that businesses and agents were somewhat sceptical of HMRC’s arithmetic. As was the Treasury Select Committee, as noted in our May 2016 Month in a Minute edition (https://www.bloomsburyprofessionalonline.com/bpro/newsitem/1316/one-month-in-a-minute-april-2017) – particularly when it became clear that the “digital” part of “digital record-keeping” was going to be more prescriptive than previously thought – that businesses would effectively be tied to compliant/approved software packages.
The Federation of Small Businesses commissioned the Centre for Economics and Business Research to estimate the potential saving, and the CEBR came back with a cost of nearly £3,000 a year. HMRC published an updated Impact Assessment in January 2017, which now estimated the annual saving for businesses at £100million, and basically doubled its estimate of the resulting Exchequer “Tax Gap” saving from c£1billion to £2billion, and asserted that the average “one-off” transitional cost of moving to MTD would be £280 – not £280 a year, but £280 in total, from 2017/18 to 2020/21.
So that’s just an extra £70 a year, for the next four years, to cover the additional costs that HMRC has itself already recognised:
- Training and familiarisation time to include both new digital tools and the new cycle for updating HMRC;
- The purchase of new hardware or the upgrade of existing hardware;
- Additional agents’ or costs;
- To upgrade existing software, etc.
The original task, of cutting business’ administration costs by £400m by the end of 2019/20, is not mentioned in HMRC’s updated Impact Assessment.
The disagreement trundled on, with Andrew Tyrie, chairman of the Treasury Select Committee, observing that the estimates could not both be right and that, if the FSB’s estimate were correct, then the costs of MTD would be “crippling for many small businesses”. The Treasury Select Committee asked both the FSB and HMRC for more details on their respective estimates and then asked the Administrative Burdens Advisory Board (ABAB) for its opinion on those replies.
The ABAB has updated Mr. Tyrie, basically to say that it is as yet impossible to determine which is more likely to be correct, given that there were no products yet available to really use in modelling or testing, and that the exact requirements for filing are not yet set. The ABAB noted that HMRC had undertaken an internal analysis to estimate costs, while the FSB had surveyed its members – both equally valid, in principle.
While the ABAB may have found HMRC’s approach to be the more scientific of the two, HMRC’s model assumes that:
- Roughly 60% of small businesses (i.e., c2million out of c3.4million) will be able to use free MTD software, so will incur no direct software costs at all in moving to MTD (and see below)
- Businesses will not incur any further agents’ fees once they have moved to MTD
As an aside, the ABAB also pointed out that there were in fact potentially six submissions a year, under the MTD regime, being the four quarterly returns, a fifth ‘end of period return’ submission, and a ‘final declaration’ (albeit the last two might not require significant intervention, and might well be rolled into one).
What about Penalties?
One thing that seems to be missing from everyone’s costings is the attendant penalty regime: four times as many returns makes four times as many opportunities to end up paying a penalty – opportunities that HMRC seems unlikely to squander. It could perhaps be argued that penalties should be considered separately, but if it is true that many businesses consider tax simply a cost of doing business, then surely the penalties that arise therefrom are nothing more or less?
What’s the Answer?
HMRC is not a business, and is not in business, despite apparently having “customers”. But it is adamant that it knows better than real businesses, how much the new regime is going to cost; in fact, it is convinced that businesses will be better off, thanks to MTD, once the system has bedded in.
But if that were so, why then should it be necessary to force MTD on businesses? If MTD were really going to save businesses millions a year, then surely they would be queueing up to adopt MTD immediately, if not sooner?
And while HMRC reckons that 60% of small businesses will use free MTD software, the ICAEW reports that software companies have said they have “yet to identify a business model that will make free software a viable proposition” for them.
Making Tax Digital has been presented to the public as a cost-saving exercise. But many practitioners will also be aware that HMRC has another key priority, which is to make very substantial reductions in its own costs. It is difficult to say how that priority stands in relation to the potential cost to HMRC’s “customers”, as a direct consequence.
So, who is right? It is probably safest to say that – particularly with MTD still being something of a ‘moving target’ – it is too early to tell. But I am going to stick my neck out, and suggest that HMRC’s model is heroically optimistic, while the FSB’s estimate is a little on the heavy side. And I have no doubt that it will be a cost to businesses generally, even if it is in terms of time and distraction – opportunity cost.
From an accounting and reporting perspective, at least some activities that are currently performed only once a year will now be duplicated (or quadrupled). Some parties have suggested that the move to quarterly reporting will benefit agents, because clients will have to pay more as a result of the increased workload. Personally, I find few things more vexatious than having to pay for something I didn’t want in the first place – and I think it reasonable to assume that many clients will be of a similar mind. Perhaps MTD will buck that trend? We shall see.