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UK Urged To Cushion Small Firms From 'Making Tax Digital' Reforms

by Jason Gorringe, Tax-News.com, London

01 November 2017


The Low Incomes Tax Reform Group has called on the UK Government to ease the penalties under the Making Tax Digital initiative and to launch a campaign to educate small businesses about the changes.

The comments follow the publication of enabling provisions in the Finance Bill 2017-2019.

Under the Making Tax Digital project, the UK Government was to introduce mandatory digital record-keeping from April 2018 by small businesses and landlords. In July 2017, the UK Government delayed record-keeping obligations concerning income tax until at least April 2020 and provided that, from 2019, only businesses with a turnover above the value-added tax (VAT) threshold, currently GBP85,000 (USD110,000), will have to keep digital records and only for VAT purposes.

Commenting on the regime, LITRG said: "We are generally supportive of HM Revenue and Customs's (HMRC's) digital strategy and recognize that there are potentially significant benefits for many taxpayers. However, we do not want to see a system rushed in without sufficient testing, which does not cater adequately for those who are less digitally capable or digitally excluded, and which imposes unrealistic obligations on businesses as a result of mandatory compliance."

It recommended two changes to the draft legislation. First, it called for the withdrawal of a clause allowing for a penalty of up to GBP3,000 for failing to comply with the record-keeping requirements, asking the Government to allow for such penalties to be considered more fully, given that there are consultations ongoing about penalties.

Second, it called for a change to wording concerning the imposition of penalties, to allow for late appeals in circumstances where an appeal cannot be made within the 30-day period currently stated, to include some wording similar to "or such other period as may be allowed by an Officer of HM Revenue and Customs or on appeal by the First Tier Tribunal."

Presently the paragraph allows for a penalty to be applied where there is a failure to comply with the regulations for any period. LITRG said the regulations should clarify what "a period" will be in this context, stating: "We trust they will not allow for a penalty to be applied for a periodic (for example, quarterly) reporting period. It would be excessive for four different penalties to be incurred for a record-keeping failure which affected four quarterly returns – or maybe more – in an accounting period."

"In this regard, it is noteworthy that the existing provisions for inadequate record-keeping are little used by HMRC – most likely because HMRC tend only to find out about failures in the event of a compliance check. If, during a compliance check, record-keeping failures are found to give rise to an understatement of tax, the penalty that then tends to arise is one of having filed an inaccurate return. HMRC do not tend to penalize the record keeping failures themselves."

"However, with HMRC receiving regular summary data from taxpayers under MTD, it is easy to foresee that penalizing record-keeping failures could become more commonplace. We therefore think the Government should remove [the relevant paragraph] to allow for proper consultation on the merits and demerits of such a clause, particularly in view of HMRC's consultation on penalties for late submission and late payment in the context of MTD earlier this year (to which any response has yet to be issued)."

In addition, LITRG called on HMRC to reverse its decision not to produce its own free software, calling on it to provide a basic package for small businesses and landlords. "This will be even more pertinent for MTD for VAT, as many small businesses currently use spreadsheets together with the HMRC online portal to complete their quarterly VAT returns, and so they will be in need of MTD compliant software. This must be available quickly, and sufficiently in advance of April 2019, to enable traders to be able to get used to any new systems and to get fully trained in their use," LITRG said.

Finally, LITRG said: "It is crucial that a good communications strategy is launched immediately by Government as the MTD program brings in a monumental change for most small businesses, most of whom remain blissfully unaware of its imminent arrival. They need as much notice as possible of what will be expected of them so they can prepare themselves as best they can for compliance. It might be helpful here for HMRC to draw on the experience of The Pensions Regulator, which has tracked carefully employers' awareness of their duties under auto enrollment."

TAGS: compliance | Finance | tax | small business | business | accounting | United Kingdom | legislation | regulation | penalties | trade | Pensions | Pensions | Tax

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