New electronic tax system for businesses could be a disaster, warns committee

A new tax system for businesses is at risk of being a "disaster" with widespread "collateral damage", an influential committee has warned.

Almost all firms will be forced to carry out their accounting in a set electronic format and submit quarterly updates to the taxman under Government plans.

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

It warned the reforms are being introduced too quickly and without enough consultation with businesses.

The costs of the scheme risk putting very 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."

The reforms are expected to affect at least two-and-a-half million taxpayers but could reach as many as five million.

MPs said they were "very concerned" about the costs to businesses, including accountants' fees, and said 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 called on the Government to delay the start of the roll-out until at least 2019/20 as well as run comprehensive 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 they would consider the committee's recommendations carefully.

"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.