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HMRC commits to extended digital tax pilots and penalty reviews

Neil Merrett Published 31 January 2017

Further details have been set out by the department for its Making Tax Digital (MTD) plans to try and address Treasury committee concerns about introducing new technologies


HM Revenue and Customs (HMRC) has committed to piloting new digital systems designed to overhaul tax reporting with hundreds of thousands of businesses and providing free software to smaller companies in response to an 8 month consultation on its plans.

As part of its Making Tax Digital (MTD) strategy, the department has set out a number of additional commitments, including additional reviews, before introducing a mandatory requirement for businesses to switch to electronic record management.

Earlier this month, parliament’s Treasury committee urged more extensive testing of the proposed digital tax systems, while backing a prolonged rollout of all new technology beyond the current 2020 target to ensure industry and business owners are not adversely affected.

Having received over 3,000 responses to its consultation, the department has provided further information on how it hopes to help businesses to submit information online and move away from the annual tax return process.

Its commitments will include allowing the use of spreadsheets to record receipts and expenditure that will link up with software to automatically provide updates to HMRC in line with calls from the Treasury Select Committee. 

In addition, free software is also expected to be provided to “the majority of smallest businesses”, while ensuring that companies that cannot switch to digital systems will not have to do so.  Charities will also be exempt from having to update records digitally or provide quarterly updates.

HMRC has said that all customers will be provided with at least 12 months to ensure their familiarity with changes introduced under MTD before facing late submission penalties, with a new penalty model consultation expected to launch in the spring.

“HMRC will pilot these digital systems with hundreds of thousands of businesses before rolling them out to ensure the software is user friendly, and to give businesses and landlords time to prepare and adapt,” said the department.

Other key commitments will include:

  • Self employed businesses and landlords with annual turnover under £10,000 will not be required to keep tax digital records
  • Extension of option to account for income and expenditure through simplified “cash in, cash out”

Areas for future consideration as part of the intended digital tax reforms will include exemption thresholds and deferring changes, according to HMRC. Full legislation on the changes is intended to be introduced later in the current year.

HMRC’s director general for customer strategy and tax design, Jim Harra, said the commitments outlined under the MTD plans were designed to try and curb taxation error and the need for compliance checks.

“We are pleased that there was a broad welcome for the principle of Making Tax Digital and HMRC developing a transparent and accessible tax system fit for the digital age,” said Harra. “The appetite for digital services is growing and traditional paper-based processes make no sense in the 21st century where the vast majority use digital services.”

Parliament concerns

However, HMRC’s exact plans for testing reforms to be introduced under the MTD strategy were among a number of concerns highlighted by the Treasury Select Committee in its latest findings on the initiative.

The report backed changing the existing government approach to implementing digital tax services citing what it called “insufficient engagement” with UK businesses that will have to rely on the digital systems to ensure potential concerns are being addressed.

“At present, many of those on whom demands from MTD will be made – millions of small businesses up and down the country: the backbone of the economy - are ill equipped to handle the reporting requirements,” noted the findings.

Concerns were raised that businesses participating in these existing pilots had done so at the invitation of HMRC, meaning that the voices of other companies and potential experiences they might have with the technology will not be heard.  A wider scope for testing was therefore encouraged.

“The pilots need to be designed to gather information over the entire reporting cycle – four quarterly updates and an end of year reconciliation. These need to be evaluated before full implementation and parliament needs to see the evidence that this has been done,” said the findings.

Related articles:

Treasury committee urges more extensive digital tax pilots

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