At the end of April chair Andrew Tyrie wrote to David Gauke, financial secretary to the Treasury, saying: ‘The extra burden placed on small businesses by MTD was already a source of considerable concern. It now appears that large businesses could also be affected, if their software and systems are not compatible with HMRC’s requirements. This would make early implementation all the more unacceptable.’

In his letter, Tyrie highlighted the fact that many businesses, particularly small companies, had believed they would be able to submit data using their existing systems, including Excel, which HMRC would then transfer into its own systems.

However, he said evidence given to committee suggested HMRC planned to require companies to use ‘designated software packages’ to ensure data was delivered in a format which could be used directly by HMRC’s own systems.  Tyrie said the change to a ‘digital prescribed format’ would add to the cost burden of MTD for large businesses, while some small businesses did not use computers at all and so faced both cost and implementation challenges.

Gauke’s reply has now been published, in which he describes the current approach to filing tax returns as ‘an outdated system designed for a world of paper and not fit for the 21st century.’

By adopting MTD, Gauke said that ‘the software will do much of the work to provide HMRC with the required information for the quarterly updates, so submitting an update will feel very light touch.’

Gauke refuted Tyrie’s claim that HMRC has only recently revealed new information about MTD, saying that the government has been clear since the first announcement at Autumn Statement 2015 that the reforms would involve both digital record keeping and quarterly updates.

He also said that an earlier letter to the select committee, on 12 January, explicitly stated that ‘businesses keeping paper records will need to switch to digital tools, for example an app on a smartphone, to record their income and expenditure.’

On the question of the requirement for a prescribed digital format, Gauke said that in September 2015 HMRC published its third party software and application programming interface (API) strategy, which aims to ensure that software providers supply products which are compatible with HMRC systems.

As regards the impact on MTD submissions, he wrote: ‘For those businesses already using record keeping software (including those you have highlighted), we are exploring to what extent anything new will be necessary or whether existing software packages will be sufficient with the aim of minimal disruption.’

Gauke conceded that MTD ‘will require a behaviour shift for many smaller businesses’, but pointed to research showing 97% of small businesses and 92% of micro businesses had access to the internet at work.

He said: ‘HMRC will ensure that compatible software products are available to suit the budgets and needs of all businesses, including some free products for those small businesses with the simplest affairs.

‘Of those businesses not currently using software, HMRC will provide additional support to build their confidence in using digital tools for their business, simplifying their affairs and integrating tax into their ordinary day to day activity.’

Gauke did not address directly the issue of the costs to business of adopting new software packages for MTD submissions. He confirmed that HMRC will publish an initial assessment of the impacts of the new requirements for businesses alongside an overview of the potential costs and savings for businesses as part of the planned consultations this year.

Andrew Tyrie’s letter to David Gauke is here.
Gauke’s response to Tyrie is here.