ABAB ‚ HMRC and FSB estimates of MTD costs both valid, but flawed
The committee‚ s report on Making Tax Digital was published in January and the Government‚ s response was reported in the April 24th political review. Following the taking of oral evidence, committee chairman Andrew Tyrie wrote to the Federation of Small Business and the Financial Secretary to the Treasury asking them to give more details about their very different assessments of the cost to small businesses of adhering to obligations in Making Tax Digital. He sent their responses to the Administrative Burdens Advisory Board (ABAB) asking them to form an independent view on them because the figures are so different.
Alongside the Financial Secretary‚ s reply in March the committee published an Updated Impact Assessment on Making Tax Digital for Business, from HMRC.
The committee has now published the response it received from ABAB chair Teresa Graham. This states that both approaches (the FSB‚ s and HMRC‚ s) are in principle valid but each also has flaws. It is perhaps slightly more critical of the FSB‚ s figures than of HMRC‚ s, though both are challenged. Central points of ABAB‚ s analysis and criticisms are as set out below.
HMRC have done an internal analysis using their standard cost model (SCM) approach to estimate costs and have done so in careful stages. The FSB have surveyed members and asked for views on current costs from those who will have to do the compliance and who are currently doing the necessary compliance under the current system.
HMRC's costings assume that products will be available as planned; that they will operate in such a way as to require no or minimal intervention from businesses or advisers. The FSB implicitly challenge this (we have some sympathy with this: ABAB remain to be convinced that this will be the effect) and so expect considerably more human intervention.
ABAB side with HMRC‚ s view that producing four updates a year will not each require similar effort to that currently expended on tax returns. They argue that the FSB has overestimated the costs here (even though they have used a multiplier of three rather than four). However, they think that HMRC has underestimated the amount of checking that business will want to do - either themselves or through their agents - for the MTD submissions. ABAB think that businesses will want their agents to do more checking of data submissions than HMRC anticipate, as least in the early stages of MTD.
ABAB wonder if either FSB or HMRC have given sufficient consideration to the fifth submission (the 'end of period return'). It will be a challenge to reduce the time for this as HMRC envisage; they also note that a sixth submission (the 'final declaration', which could be a sort of residual annual tax return) will be needed; this should be a simple procedure but will still take time. ABAB also note that if businesses decide to use a bank feed for accounting (to save time), banks usually charge a fee for this.
ABAB note that HMRC think that there are over 100 obligations connected with the tax return process and that over 80 will either ' ... remove, reduce [or] otherwise [be] affect[ed] .' ABA regard this as laudable but say we do not yet have the detail to enable them to say whether this will be true.
Rather than averaging across the whole business population, it might be more appropriate for HMRC to say ‚ Businesses which need to acquire equipment and software to comply with MTD are likely to incur costs of £X; we estimate this to be Y% of the small business population‚ and ‚ Businesses which already have the appropriate equipment but need to upgrade software are likely to incur costs of £A; we estimate this to be B% of the small business population‚ .
ABAB cannot say either paper represents the true picture of MTD costs, HMRC's analysis is more scientific and structured, but ABAB want them to apply more granularity to the numbers thereby placing less reliance on the SCM model which they believe results in too much optimism. HMRC have given themselves a target to deliver against. They and the FSB should commit to monitoring the costs as MTD is implemented and the government should commit to a full post-implementation review (PIR) of MTD in the light of the first couple of years' experience.
The full letter can be read here.