Time for Ministers to delay and then phase-in MTD?

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After the March 2017 Budget HMRC must have breathed a sigh of relief, for at long last Making Tax Digital (MTD), its bold initiative to turn the UK into one of the most digitally advanced tax administrations in the world, was seemingly cleared to fly.

On 3 April beta-testing started, with businesses being able to join an MTD pilot. At the time HMRC hoped for a small number to join (on-board) their “controlled-go-live launch” on a daily basis. As the department’s confidence grew, it was expected that the roll-out would be ramped up until around 400,000 businesses had on-boarded by April 2018.

Another major set back

Then, out of nowhere, on 18 April Theresa May called a snap General Election.

Within a few days HMRC, like the rest of the Civil Service, went into election purdah. This meant that for the duration of the election period the only aspects of MTD that HMRC could take forward were those that were already considered to be business-as-usual.

While HMRC has been able to continue with its initial test-and-learn phase, it has not been able to expand from its controlled-go-live testing as it had originally envisaged. By now the controlled testing, which initially involved businesses registering on line to join the MTD pilot, had been expected to have expanded significantly in number. Furthermore, those on the pilot should have been able to start filing updates for their first period of MTD accounting.

Annus Horribillis

I thought 2016 with its series of delays, caused by successive periods of purdah and the outcome of the EU Referendum, was MTD’s Annus Horribilis. That was until the outcome of the 2017 election.

Now with less than ten months to the start of MTD, HMRC finds itself facing a protracted period of quasi-purdah while the Government, due to the result of a hung parliament, seeks to do a deal with the Democratic Unionist Party.

While negotiations continue, the Civil Service cannot emerge from purdah and MTD continues to slip further and further behind schedule.

HMRC must be wondering what more can it do to keep the planned 2018 launch of MTD on track. Despite the department’s best endeavours, it has been constantly beset by problems outside of its control.

To paraphrase Oscar Wilde

The damage to the roll-out of MTD caused by the current hiatus is further compounded by the loss of the two Treasury Ministers most intimately acquainted with HMRC’s MTD plans. To paraphrase Oscar Wilde, “The loss of one minister may be regarded as misfortune, but to lose two looks like carelessness.”

The failure of Jane Ellison, the former MP for Battersea and First Secretary to the Treasury (FST) to get re-elected is a blow to MTD, but the move of David Gauke from Chief Secretary to the Treasury to the Department of Work and Pension is a far greater loss.

Too early to evaluate the damage to MTD

Without a shadow of a doubt, during his seven years as a Treasury Minister David was seen as a safe pair of hands.  A by-product of his well-deserved promotion is that HMRC have lost their staunchest ally, the person in government with the widest understanding of MTD.

David’s replacement is Liz Truss,  moved in what is considered as a demotion, from Justice Secretary to the role of Chief Secretary to the Treasury. The new FST is Mel Stride, the MP for Central Devon.

It is too early to evaluate the damage the previous Ministers’ departures will inflict and it is dependent on how hands-on Chancellor Philip Hammond might be. I am, nevertheless, concerned for HMRC that the introduction of two new ministers, from outside of the Treasury, will lead to further delays to the roll out of MTD just as HMRC emerges from purdah while they get up to speed with their new portfolios.

If this turns out to be the case, the argument for a phased implementation of MTD becomes ever more persuasive.

Earlier in the year, Paul Aplin, Vice President of ICAEW observed, “[the] level of awareness [around MTD] is shockingly low.” He also wrote, “The pilot [beta testing] will allow processes to be refined and adapted, and critically provide an evidence base against which to measure expectations on error reduction, yield and costs. It will build confidence in a live system rather than a theoretical one, and provide the opportunity for a genuinely collaborative approach to making Making Tax Digital a reality.”

While I believe levels of awareness have increased, the period for beta testing is becoming ever shorter. As a result, there is grave danger that despite HMRC’s desire to keep MTD on track, the time for the department to capture, evaluate sufficient data and to adapt their design of MTD in any meaningful way is becoming too short.

Knowing what I know about HMRC and the dedication and commitment of its staff, I have no doubt MTD can be delivered next April…but at what cost?

Ideal opportunity to switch to a phased implementation

The newly appointed Ministers should use the post-election period of uncertainty as an ideal opportunity to gradually phase in MTD over a three-year period starting in April 2019. This would afford HMRC a more appropriate test-and-learn period, the time to fully evaluate the data arising from testing and to implement any changes deemed necessary.

It would also give the accountancy and software professions vital time to help HMRC in getting the message out to taxpayers and educate them into the new ways of working, as required by MTD.

MTD is the way forward

Many industry pundits are agreed that MTD is the way forward. After all, if it achieves its objectives, the way that we all interact with HMRC will be moved irrevocably into the digital age.

John Cullinane, CIOT’s tax policy director said in a recent interview:

“Nobody is seriously challenging the move to digitalisation of the tax system, but the timetable remains extremely challenging. The many complexities of tax still need to be translated into functioning software, and the diverse nature of businesses accommodated, not to mention how their agents can support them. This is an opportunity to reconsider whether so many businesses need to be compelled to adopt the system in such a short timescale.”

As John points out, it should not be forgotten that the underpinning legislation is not currently in place.

While I appreciate that much of the argument for haste is around the closing of the tax gap, surely the battle for taxpayers’ hearts and minds should not be overlooked and could be best achieved through the introduction of a three year phased implementation as follows:

2019                 Those with net turnover over the VAT threshold (currently £85k),

2020                 Those with net turnover over £33,500

2021                 Those with net turnover above the personal allowance

The holy grail

At some point, MTD is set to deliver on its promise to free taxpayers from the compliance-drudgery of the current self-assessment tax regime, to a land where they can focus on the added-value features afforded to them through real-time record keeping. The benefits to UK plc., such as increased productivity, are far more wide reaching than just closing the tax-gap.

I only hope that Ministers use recent delays and uncertainty as an opportunity to give HMRC and the taxpaying public the break that they rightly deserve through a one year delay and gradual implementation programme starting in April 2019.

Brian Palmer , former tax policy adviser for AAT..

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