New electronic tax system for businesses a 'potential disaster'

A new tax system designed for businesses risks becoming a "disaster" with "collateral damage", the Treasury committee has warned.

Almost all companies will be forced to carry out accounting in a specific electronic format and submit quarterly updates under new government plans.

The new system, making tax digital (MTD) is set to be phased in from April 2017, but the committee found a number of "serious shortcomings" with the proposals.

It warned that reforms are being introduced too quickly and lacking quality consultation with businesses.

The costs of the scheme risk putting extremely small firms out of business or forcing them into the "hidden economy".

Treasury committee chairman Andrew Tyrie said: Without sufficient care, MTD could be a disaster.

"Implemented carefully, with long transitional arrangements where necessary, and, having drawn on information from fully inclusive pilots, Making Tax Digital could be designed for the benefit both of the economy and of the tax yield.

"But with a rushed introduction, it will benefit neither."

Credit: PA

The reforms are expected to affect between 2.5 and 5 million taxpayers.

MPs said they were "very concerned" about the costs to businesses, adding that the start date was "wholly unrealistic".

"It is extremely unlikely that the vast majority of businesses will be capable of adapting to that start date at reasonable cost", the committee said.

It urged the government to delay the roll-out until at least 2019, and to run pilot schemes.

Mr Tyrie said: "The collateral damage could be large. If the Government gets it wrong, the culture of mutual trust and goodwill between HMRC and the vast majority of taxpayers - which still exists in the UK and which helps to keep the tax gap down - could be jeopardised.

"This is not a minor matter. These reforms will affect millions of taxpayers. Their co-operation and trust are both hard won and easily dissipated. Without them, more of the yield could be at risk than any putative extra revenue from MTD."

An HMRC spokesman said that the committee's recommendations would be carefully considered.

"We've consulted business at every step and have already made changes as a result to exempt the smallest businesses and pilot the programme with hundreds of thousands before it is rolled out," the spokesman said.