HMRC estimates that on average, businesses will incur about £280 in the year of transition, although the transition process is spread as businesses will join at different points during the period. However, the FSB believe it is more than this and estimates the cost to be £2,770 per business in the first year.

Tyrie has therefore called for a widespread pilot of Making Tax Digital to estimate to true costs to businesses before mandatory rollout in 2018.

Tyrie said: ‘There are huge differences between the FSB and HMRC about the administrative burden of Making Tax Digital. This is the heart of the matter. The FSB think that with MTD, businesses might spend three times as much time on their tax obligations as they currently do. This could cost them around £3,000 a year in time, salaries and accountants’ fees. HMRC think that they will spend less time, leading to a small net saving. A comprehensive pilot should shed some light on which assumption is closer to reality.

‘This serves to illustrate the need for the implementation of one of the Committee’s recommendations that a comprehensive pilot is needed to establish the facts, and before mandatory roll out of the digital regime. I have written to the Administrative Burdens Advisory Board to ask for a view on the basis of their members’ extensive business and accountancy practice networks.’

HMRC believes that by 2021-22, after implementation, there will be a saving of £240m across all small businesses. However, transitional costs are estimated to cost £870m across all small businesses, of which there are expected to be 3.4 million.

Mike Cherry, national chairman of the FSB, in his letter to Tyrie said: ‘The average cost of tax reporting was around £252 per quarter for UK businesses, or £84 per month. Over a year, a business will therefore spend £1,008 on average on tax reporting. The Centre for Economics & Business Research (CEBR) estimated that businesses would spend three times as long on their tax reporting each year under Making Tax Digital. They based this multiple of three on the assumption that, although reporting will be completed four times as often, the government’s literature makes a point of the simplification of the digital process, and they estimated that this would decrease the time spent on the reporting.

‘Therefore, our figure of £2,770 is a scalable one subject to further information from HMRC being published. This additional time spent is scalable from the previously identified cost of annual tax reporting (£1,008).’

FSB’s letter to Tyrie is available here.  fsb_to_tyrie.pdf

HMRC’s Making Tax digital impact assessment is available here.  hmrc_-_mtd_updated_impact_assessment.pdf