Professor Richard Murphy gave evidence from analysis of HMRC plans to House of Lords sub-committee.
Published (Updated )
The tax expert discussed his findings in Parliament when he gave evidence to the House of Lords’ Economic Affairs Finance Bill Sub-Committee.
Professor Murphy, of the Department of International Politics, says his conclusions challenge HM Revenue & Customs’ claim that its Making Tax Digital programme will save UK businesses £100 million a year.
His work on the issue forms part of COFFERS, a major new research project that aims to expose the scale of tax avoidance within the European Union.
He said: “HMRC assume that the maximum additional cost small business will pay to comply with the Making Tax Digital programme will be £170 million, including software costs.
“Stripping out the smallest estimate I could make of those software costs left just £103 million to cover the cost of 5.9 million businesses submitting four extra sets of accounting data a year, each of which will have to be right if penalties are avoided. Simple division suggests each will cost £4.36 in HMRC's view in that case."
Professor Murphy says the Making Tax Digital programme, which will also ask firms to update their accounting figures four times a year, will cost those businesses an average of £305 for each of the 5.9 million businesses it could affect.
He added: "HMRC's estimate suggests they think a person paid the UK minimum wage should be able to prepare and submit quarterly accounts for a UK small business in just 35 minutes. That is, of course, impossible.
“In my evidence to the Lords, I have suggested the tasks involved. I estimate an average one-person business might take half a day to do this. Based on annual average self-employed earnings that represents a cost of £108 a year.
“However about two thirds of all small businesses and 78 per cent of companies seek help with their tax returns. If they do that with Making Tax Digital returns, as seems likely, I think their costs will vary from £300 to £600 a year. Only small landlords might get away with additional costs of no more than £100 a year. That's how I come to an estimate of £1.8 billion including software costs."
Professor Murphy also says that the current plan will not help HMRC collect more tax, arguing that errors in tax returns from small businesses are to blame for only half of missing tax. He also says quarterly deadlines will increase the number of errors.
He said: “There's a much greater chance that time pressure alone, coupled with resentment and an inclination to make estimates to get returns in on time to avoid penalties will in fact considerably increase the error rate in small business accounts and so the UK tax gap.”