Making Tax Digital for VAT (Economic Affairs Committee Report) - Motion to Take Note

Part of the debate – in the House of Lords at 3:25 pm on 29th April 2019.

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Photo of Baroness Burt of Solihull Baroness Burt of Solihull Liberal Democrat 3:25 pm, 29th April 2019

My Lords, I thank the noble Lord, Lord Forsyth, for the tremendous work he and his colleagues on the sub-committee have done in producing these two reports. I am glad we are giving this discussion the time and space it deserves today and not trying to rush it through, as had been intended when it was to have been a precursor to weighty and important debates on Brexit.

Although I speak on small businesses for my party, I am no expert on tax—as will soon become painfully apparent. But even I could understand the sensible conclusions that the Making Tax Digital report draws, and I hope that the Government will listen to the words of the noble Lord, Lord Forsyth. I will leave it to my noble friend Lady Kramer to tread the fine line between the concepts of deliberate and contrived tax avoidance and uninformed or naive decisions—and, very importantly, the loan charge.

I hope we all agree that everyone in this country should pay their fair share of tax, so I will address my remarks to the first report, Making Tax Digital for VAT. Although I do not know a whole lot about business tax, either, I know about the challenges that small businesses face in ensuring that they fulfil HMRC tax requirements, having had my own small businesses in the past. I totally empathise with the hard-pressed entrepreneur, who has to multitask many of the roles in an organisation themselves, often including completing tax returns. Implementation of Making Tax Digital takes time, which cannot then be devoted to running and developing the business. It also takes money. The Federation of Small Businesses, to which I am indebted for its input, found that, excluding the opportunity costs I have just mentioned, putting MTD-compliant software in place this year will cost a small firm an average of £564—not £109 as HMRC estimated. The bigger the firm, the greater the cost.

MTD has the potential to improve the experience of tax compliance for small businesses, as well as facilitating the provision of business support, access to finance and tax credits. However, introducing it with the deadline of 1 April, which has already gone, is disastrous because small businesses are simply not ready. So I welcome the Economic Affairs Committee report. Its recommendations seem highly sensible. The first is deferring the mandatory introduction of Making Tax Digital for VAT by at least a year, while encouraging businesses to join voluntarily. This would have enabled HMRC to ensure a smooth transition, as well as helping business. Given the state of readiness of small business to achieve compliance, I am sorry that the Government have not seen fit to accept this recommendation.

The second recommendation was staging the transition to ensure that small businesses and HMRC are ready. I welcome the Government rowing back somewhat on their original intentions by requiring compulsory implementation only on VAT, and for companies above the VAT threshold. I also welcome the acceptance that sanctions will not be levied where companies can show that they have been doing their best to comply. The third recommendation was waiting until at least April 2022 to implement the next stage. This will allow time for lessons to be learned, and seems to have been accepted.

The Government may be rubbing their metaphorical hands in anticipation of increased tax revenue, but only one in 10 small firms responding to the FSB believes that MTD will have a positive impact on tax reporting and financial management processes, with more than a third believing that it will have a negative effect. However, I believe that, despite these considerations, the key problem is that small businesses are just not ready for this. Many small firms are still heavily reliant on offline accountancy methods and are not confident in their digital skills. Many live in areas without access to reliable broadband speeds. How does the Minister expect small businesses to overcome this problem, which is of the Government’s making because they have insufficiently improved the digital infrastructure? Nearly a third of small businesses use paper receipts and bank statements to keep track of their finances, and 37% use paper invoices. I can envisage the chaos that may at this moment be ensuing, as paper-based small businesses attempt compliance.

The fourth recommendation is to publish a plan for the long-term development of MTD, getting business to see the benefits rather than seeing it as just tax compliance. I totally accept that productivity, efficiency and modernisation are great benefits, and I am sure that many small businesses already realise this—but these are not the companies that I worry about. These incentives, and the long-term plan to promote them, should have been sold to them before, to persuade reluctant bosses to adopt the measures with a vestige of enthusiasm and not bury their heads in the sand, as they are now. Have the Government put the cart before the horse somewhat?

The FSB is calling for a full review of the rollout, and a guarantee that it will not be forced on those below the VAT threshold until at least the end of this Parliament—although they may need to be careful what they wish for. That date may not be too far in the future.