Tax reforms may harm small firms, peers warn

Lords report adds to criticism of digital tax plan

The smallest companies and many self-employed people should be exempt from proposals to digitise tax records, a House of Lords committee has warned, as it accused the government of rushing through a poorly conceived overhaul of the tax system.

Implementation of the “making tax digital” plans, which will force millions of businesses to update the taxman four times a year instead of once, should also be delayed until 2020 for all businesses, according to a report by peers on the economic affairs committee.

Their comments add to criticism of making tax digital from MPs and business groups.

It is likely to prompt more questions of the government’s treatment of entrepreneurs and the self-employed, after the chancellor’s embarrassing U-turn over increasing national insurance on Wednesday.

The making tax digital plan was announced in the March 2015 budget and is due to come into force in April 2018. The proposals affect an estimated 1.6 million companies, 2.4 million self-employed, and 900,000 residential landlords.

The government says the move will modernise the tax system and tackle errors that cost the Treasury £8 billion in lost revenue every year.

However, peers said they were concerned the plans would harm small companies, that tax officials’ planning has been inadequate, and that the systems that companies would need to use to comply with the new rules were not ready.

They said the government was “wrong not in the principle but in the transitional arrangements”, the treatment of companies with poor internet access, and the threshold for inclusion.

“We are sceptical of the benefits to small businesses of regular digital reporting,” the committee said.

It warned that a planned pilot of the policy by Revenue & Customs to identify and iron out problems, was “too short and limited” to work.

Lord Hollick, Labour chairman of the economic affairs committee, called on the government to further delay implementing the plans

The government has produced a “widely disbelieved assessment of costs and benefits of the introduction of making tax digital”, the report said, adding that even HMRC’s estimate shows that it would take more than ten years for businesses to recoup their initial outlay.

Software providers have not been given enough detail to develop systems that will allow companies to comply with the demand, the committee said. The changes will cost the average small company an extra £2,770 a year, in addition to the £3,600 already spent on tax advice, the Federation of Small Businesses claimed.

The government has disputed this estimate, saying that it will initially cost companies £280.

In last week’s budget, Philip Hammond responded to criticism of making tax digital by delaying its implementation for businesses with a turnover of less than £83,000, the VAT threshold, until April 2019.

Lord Hollick, chairman of the economic affairs committee, said: “This does not go nearly far enough and [the government] needs to further delay the scheme’s implementation, and take a more incremental and gradual approach based upon the evidence.”