Making Tax Digital

With permission, I would like to make a statement on making tax digital for business.

It has never been more important for businesses to be able to seize the opportunities that digital technology offers. Making tax digital helps them to do just that, and I am pleased to update the House today on Her Majesty’s Revenue and Customs’ progress in delivering this important modernisation of the UK tax system. Businesses that are registered for VAT and whose taxable turnover exceeds the VAT registration threshold of £85,000 will be required to use digital tools to keep their business records and to file their VAT returns for periods from 1 April.

It is important to be clear that MTD is not changing what businesses do for VAT—the frequency of reporting and tax rules remain unchanged; rather MTD is about making it easier for businesses to get their tax right by transforming how businesses keep their records and send their information to HMRC. Under the changes, those who do not already keep their records digitally will be required to start doing so, but the process of then sending returns to HMRC will become more straightforward, with their VAT returns generated and sent direct from the software they are using to keep their records.

In my last update to the House in July 2017, I announced that I was slowing the pace of the roll-out of MTD to give businesses, particularly small businesses, more time to prepare. I set out then that the start date for MTD would be April 2019, that it would be limited to VAT at that time and that the smallest VAT-registered businesses would not initially be required to use it. The extra time that these changes provided has been well spent. The pilot for the MTD VAT service has been running successfully since April 2018 and was opened up to the public in October. I can announce today that over 16,500 businesses are now signed up to the service, and I would encourage all those businesses that will be mandated to use MTD from April to sign up now and get used to the new service.

Businesses such as the oldest family business in Britain, R J Balson & Son, a butchers based in Bridport, Dorset established in 1515, just six years into the reign of Henry VIII, are already making the switch from keeping paper records, and prior to that no doubt records on parchment. The benefits to those moving to MTD are clear: it gives businesses more control over their finances, allowing them to spend their time focusing on innovation, growth and the creation of jobs. Indeed, the Enterprise Research Centre in 2018 found that, for microbusinesses, web-based accounting software delivered productivity increases of 11.8%.

In a world where businesses are already banking, paying bills and shopping online, it is important that the tax system keeps pace, but MTD is not just about providing a modern, digital service for businesses but about helping them get their tax right. We know that keeping records on paper and submitting VAT returns to HMRC manually results in errors. In a recent YouGov poll, 61% of businesses said they had previously lost receipts, and errors can also occur in the manual transposition of data or manual calculations. Some £9.2 billion of the UK tax gap is attributable to errors just like these. MTD will be a step change in addressing this, closing the tax gap by around £1.2 billion to 2023-24. The service builds on the way in which many UK businesses already operate and they have seen the benefits that digitising will bring. Starting a business and taking control of its future will now be easier than ever.

Some have questioned HMRC’s decision not to produce its own software for businesses, but I make no apology for overseeing the development of a diverse software-supplier marketplace that caters to a variety of needs, ensuring that businesses have the tools that they need to succeed. Software developers have responded positively by producing software at a range of price points, including free products, and offering different levels of functionality. That includes bridging software for those who want to continue to use spreadsheets for record-keeping, as well as fully integrated accounting software that provides additional functionality to help users to better understand and plan for their business.

More than 160 software products are already listed on HMRC’s software choices page as part of the MTD VAT pilot, and I know of many others that are currently being developed. Our approach to the provision of software means that businesses will be able to choose a product that suits both their budget and their needs. That includes some products which have been developed specifically to support different types of sector, such as specialist products for farmers.

However, it is not just HMRC and the software industry that are getting ready. HMRC’s latest research, which I can now share with the House, shows that in December 2018, 81% of the mandated population were aware of MTD, and 83% of those had started to make the necessary preparations. HMRC will have written directly to every business that is mandated to join MTD by the end of this month to signpost them to the help and support that they need in order to prepare. Now that the January self-assessment peak is over and HMRC is expanding its communications activity, we are confident that awareness and take-up will increase still further.

HMRC wants to ensure that MTD lands well and that customers feel supported throughout their transition. The first stagger of businesses that file quarterly will not need to submit their first VAT return through the new service until August this year. We will continue to listen to our customers to ensure that the right support is available to businesses as they become familiar with the new requirements of MTD. I must make clear that during the first year of mandation, penalties will not be issued for late filing but only for late payment. There will, of course, be a process to claim an exemption from MTD on the basis of digital exclusion owing to factors such as disability or problems with access to broadband, or on religious grounds. Any business that is already exempt from online filing for VAT will remain so under MTD without having to reapply.

Some have questioned the timing of these changes, and, in particular, have mentioned the proximity to the date on which the UK will leave the European Union. I can reassure the House that MTD is designed to enable businesses to meet their UK tax obligations as simply as possible, regardless of the outcome of EU exit discussions, and is designed to complement other business tax obligations. We will continue to work closely with the software industry and with business over the coming weeks to ensure that that happens.

HMRC has made good progress in preparing for MTD. The pilots have progressed well and the full functionality of MTD has been tested with a wide range of different businesses, including some below the VAT threshold which have chosen to take part voluntarily. HMRC is ready, the software market is ready, and hundreds more businesses are getting ready every day by joining the pilot. MTD will help unlock the potential of UK businesses, putting them on a stronger footing to compete internationally, maximising productivity and simplifying business processes.

I commend my statement to the House.

I thank the Financial Secretary for providing a copy of his statement in advance, and for his reference to Henry VIII. I must say that the Government are obsessed with Henry VIII, and with all the powers that they are using in that connection.

As has been recognised by the Federation of Small Businesses, the Labour party has consistently called on the Government to rethink their making tax digital policy, not least because our manifesto commits us to scrapping quarterly reporting for companies under the VAT threshold. The Opposition’s concerns are therefore well versed. We have raised them during numerous debates in relation to numerous pieces of legislation, announcements, delays and, indeed, U-turns. Unfortunately, we are here again today, addressing the Government’s absolute failure to handle the digital transition—a failure that has serious consequences for businesses throughout the country.

Let me make it clear that we fully support digitalised tax reporting, which we all agree has the potential to drastically reduce the time that individuals and business owners have to spend filling out long and complicated tax returns. We are also aware of the productivity gains that it will bring, to which the Financial Secretary referred. If handled correctly, it could make positive changes in the way in which people report their tax position for decades to come. However, the stakeholders to whom we have spoken in the business sector and the tax community continue to raise deep concerns about their ability to be ready for digital VAT reporting, and they have expressed those concerns to the Treasury Committee.

Owners of small and medium-sized businesses are already worried about the stark changes that they will have to make in 2019 to prepare for Brexit. They are worried about the possibility of a no-deal scenario and the overnight effect that it would have on costs and supply chains. There is also the potential introduction of tariffs and the impact on staff who are EU citizens. The Government have continuously failed to provide the certainty that is needed, so it is little wonder that business confidence is pretty low.

I thank the hon. Gentleman for his response to my statement. I am pleased that he, like me, recognises the value of the digital processing of tax returns. Indeed, he made a specific and welcome reference to its productivity advantages. However, he also referred to what I think he suggested were serious failings in our approach, suggesting that it was not the right approach. I could not disagree more. In my statement, I was at pains to emphasise the proportionate and measured way in which we had approached these matters. I said that when I first became Financial Secretary to the Treasury, I decided to delay the roll-out of MTD so that it related only to VAT-registered businesses by 2019, and carved out the very smallest businesses and individuals from these measures. Indeed, I gave reassurances to the House and the business community that nothing will be introduced in terms of income tax and corporation tax any earlier than 2020 and that we would see how the roll-out of the VAT MTD went before we took any further decisions in that respect.

The hon. Gentleman raised several specific questions, which I will address in turn. He asked whether there will be any additional costs as a result of today’s announcements to those businesses in scope of MTD, and the answer to that is most certainly not. He might be familiar with the estimates already produced that suggest that on average a business in the UK that is in the scope of these measures will face additional costs of some 60p per week, and that does not take into account the efficiency gains that can be expected or indeed the fact that in many cases those costs will be able to be written off against taxation.

The hon. Gentleman referred to the continuing estate transformation work and asked whether there was any link between that and MTD. I think there is in the sense that we have a clear drive to make sure that HMRC is a lean and efficient organisation itself in the 21st century and that its estate is not scattered across the country in numerous offices, some employing fewer than 10 staff, but is in state-of-the-art hubs where digital and IT approaches can be maximised.

I think we can all agree that the digitisation of tax is to be welcomed, as is companies paying the correct amounts and the tax gap being reduced, but I want to pick up where the Financial Secretary left off and ask what happens for smaller companies if this goes wrong or if they make errors in their filings. The shadow Front Bencher is correct in the sense that many businesses and business organisations are very unconvinced by this roll-out. The Financial Secretary said in his statement that penalties will not be issued for late filing in the first year, only for late payments, but of course for many businesses it is all very well giving HMRC the money but getting it out of HMRC and getting HMRC to deal with queries can be very difficult. Does the Financial Secretary agree that overall a system of generous forbearance would be very welcome if he wants to continue with this system?

I thank my right hon. Friend for her questions and also for her work: she and her Committee have focused on this important matter. I can reassure her that we have no intention of being heavy-handed in any way in terms of businesses that might not quite be ready perhaps through no fault of their own or because they are not used to the new requirements. But there is an important point to make here: some 98% of businesses, including the small and medium-sized enterprises to which my right hon. Friend referred, are already filing their VAT digitally. I can reassure her that I will make sure, as the Minister responsible, that we take a proportionate and light-touch approach to the penalty regime in this matter.

There is a lot going on in HMRC just now: MTD, the incredible number of additional staff being put in to deal with Brexit, and the downsizing and changing of HMRC offices. It is interesting that the Minister says he is not in favour of centralisation in the provision of software but is in favour of centralisation in relation to closing all the offices so that there are only super-offices, not local ones.

HMRC has not yet provided even the most basic information that taxpayers will require in order to take part in MTD. Some have received a letter—an overly complicated and fairly cursory letter—telling them of the start date, but they have not received information on their specific queries about how to sign up to MTD and how it will work for them. It would be useful for the Minister to provide more information around what HMRC is doing on that.

The Minister said 81% of the businesses that are expected to sign up by April are aware of MTD. It is a damning indictment that only 81% are aware of it; HMRC and the Government should be doing a better job of making sure these businesses are aware of it, because 19% are not aware, and in fact a significant number of businesses are hearing about this potentially for the first time today.

Because there is no one approved software provider recommended by HMRC, I am concerned that 160 choices is a baffling array that businesses will have to decide between with no idea which of these software choices will work, which will work well and which will suit their business. It is not helpful to have that many software choices.

On penalties on businesses, I understand that when businesses sign up to MTD, their previous records are transferred from the old system to the new one and are lost from the old system. Can the Minister confirm that businesses that hold out until later than April but before their filing date will not be penalised for holding out in order for them to make sure the system is working properly and to make appropriate software choices before they make that switch, and potentially lose all their old records?

I thank the hon. Lady for her various questions and will deal with them in turn. She referred to the matter of awareness and the 81% figure. We would expect that figure to rise through time quite strongly, not least because of our communications programme. We will be writing by the end of this month to the 1.2 million businesses and individuals in scope of this measure. We of course have our VAT helpline for where there are queries, and there is a huge amount of information available on gov.uk.

The hon. Lady made a pertinent and perfectly reasonable point about how businesses and individuals will navigate their way around the various software suppliers and the 160 different products. First, all that information is available on gov.uk, and, secondly, we will shortly be releasing further information that will allow businesses to put in their requirements and then reduce that number of products to a subset that is particularly relevant to their needs.

The hon. Lady asked about the resources put into MTD compared with those put into our Brexit preparations. That of course probably begs several other questions as to what aspects of our preparation for Brexit she wishes to make for that particular comparison, and I would be very happy to discuss that with her in further detail after this statement.

Is there a short and comprehensible guide for small businesses in my constituency that are worried about this but have been concentrating on serving their customers, because it is not necessarily their first priority to get alongside this? They now know they have got to do it, however, and they need something short and simple so they do not have to waste too much time fiddling around with how to comply with the tax authorities.

The short answer is yes; it can be found on gov.uk. Indeed we have also produced a partnership pack for intermediaries, which sets out in very clear language exactly what is involved and what will be expected of those businesses and individuals.

I do not know whether the Minister is familiar with young children’s literature, but Roger Hargreaves is a popular choice as the inventor of the Mr Men. I am not accusing the Minister of being Mr Tickle or Mr Silly, but perhaps today he is Mr Smug. The fact is that small and medium-sized enterprises in my constituency and around the country have been knocked sideways by the changes in the training levy, which relates to how they get their people skilled and trained. They have not yet digested that, but now we have another onslaught with digitisation. Is he aware that many of my constituents are going to be forced into the hands of so-called professional people—accountants—who will charge them a great deal of money to do this process for them?

I am indeed familiar with the work of Roger Hargreaves. I am not sure whether there was a Mr Cautious or a Mr Sensible, but I think they would be more appropriate than Mr Tickle or Mr Silly. To answer the hon. Gentleman’s question, in terms of navigating around the various options, we are providing clear guidance that is very easy to follow, and 98% of those businesses and individuals that will be impacted are already filing their VAT returns digitally. Among the software products available, there is bridging software that allows companies to continue to make use of spreadsheets while using the software, some of which is free, to make their submission to HMRC.

I welcome this statement. One of the barriers to creating a coherent strategy to encourage more female entrepreneurs is a lack of gender-disaggregated data to enable us to understand not just how many there are but what sectors they are in. Does my right hon. Friend agree that this platform could provide a way to resolve this?

First, I should like to thank my hon. Friend for all the good work he does through the women and enterprise all-party parliamentary group to promote women in the world of work. This Government have of course presided over almost a record number of women being active in the workplace. I know that his all-party group will shortly produce a report on the point that he has raised, and I will look at that carefully to see whether something might be done. I shall remain mindful of the important point made by many others that we do not want to over-complicate or clutter up forms by seeking additional information, but I will look carefully at the recommendations he makes.

On the one hand, the Minister says that he wants to simplify and digitise the tax system, while on the other, exporters are being threatened with masses of red tape as a result of the Government’s refusal to rule out a no-deal Brexit. Why are we rushing this through at this point, when companies are already facing such flux and uncertainty because of Government policy?

I think our preparations for Brexit are probably slightly outside the scope of this statement, but I can reassure the hon. Lady that every step that has been taken in preparing for MTD—indeed, its roll-out was delayed to ensure that we were prepared—will ensure that the 1.2 million companies and individuals are in the best possible position to go forward with something that will actually be a help to their own productivity.

One of the problems areas in my constituency is the farming industry, which seems to be having enormous problems with this. The Minister mentioned this in his statement, but can he tell me what is doing specifically to help the farming industry?