Making Tax Digital (MTD)
4 May 2018: Changing priorities at HMRC
Over the coming years, the government plans to phase in its landmark Making Tax Digital (MTD) initiative, which will see taxpayers move to a fully digital tax system. However HMRC has shared a statement about how they are prioritising change in the department and as a result, some parts of MTD will be delayed. HMRC has acknowledged the challenges in:
- exiting the EU and
- the ambition to become the world’s most digitally advanced tax authority.
While some of the finer details are still being decided, HMRC has announced that to achieve the above, some aspects of MTD are to be delayed. HMRC still plan to go ahead with MTD for VAT from April 2019. Information on some of the delayed projects is set out below:
Plans to introduce further digital services for individuals
There will be ‘halted progress’ on simple assessment and real-time tax code changes. Additional services in this area will only be added where they reduce phone or post contact or otherwise deliver ‘significant savings’.
Other digitalisation of services affecting fewer individuals
This includes Inheritance Tax payments, Tax-Advantaged Venture Capital Schemes applications and PAYE Settlement Agreements
Creation of the single digital account for all businesses
HMRC has confirmed this will now happen at a ‘slower pace’. HMRC has confirmed the single digital account remains an aim of the department and they stress it will not impact the delivery of Making Tax Digital.
Voluntary Making Tax Digital for Business service for income tax
HMRC has confirmed this will continue to be available for any sole trader wishing to make quarterly updates to HMRC.
Mandatory Making Tax Digital for VAT - still ‘on track’
HMRC stated that MTD for VAT is still on track. VAT registered businesses with a turnover in excess of the £85,000 VAT registration threshold, will be required to comply with the requirements of MTD for VAT for all VAT periods commencing on or after 1 April 2019.
In addition, the government has confirmed that it will not mandate any further MTD for Business changes before 2020, at the earliest.
12 October 2017: Making Tax Digital for Tax
The government have issued information on how Making Tax Digital for Business (MTDfB) is expected to work for VAT once the rules are introduced in April 2019.
Under the proposed rules, which have been issued subject to consultation, VAT registered businesses with turnover over the VAT registration threshold will be required to submit their VAT return digitally using software. Businesses with a turnover above the VAT threshold (currently £85,000) will have to:
• keep their records digitally (for VAT purposes only) and
• provide their VAT return information to HMRC through Making Tax Digital (MTD) functional compatible software.
This software will either be a software program or set of compatible software programs which can connect to HMRC systems via an Application Programming Interface (API). The functions of the compatible software include:
• keeping records in a specified digital form
• preserving digital records in a specified digital form
• creating a VAT return from the digital records and providing HMRC with this information digitally
• providing HMRC with VAT data on a voluntary basis and
• receiving information from HMRC via the API platform that the business has complied.
Businesses will need to preserve digital records in the software for up to six years. Further information on the required information can be found in Annex 1.
The government will make the final detailed requirements available to the software providers by April 2018 to allow time for the software to be developed and tested prior to the rules coming into effect from April 2019.
VAT is the first tax to be reportable under MTD and businesses within the scope of MTD will need to keep their records digitally, using approved MTD functional compatible software, from 1 April 2019. The software will create the return from the digital records and this will need to be submitted under MTD for return periods starting on or after 1 April 2019.
14 August 2017: New timetable for Making Tax Digital
The government has announced a revised timetable for the introduction of Making Tax Digital for Business (MTDfB).
MTDfB introduces extensive changes to how taxpayers record and report income to HMRC. Unincorporated businesses, including landlords, were expected to be the first to see significant changes in the recording and submission of business transactions but the government has announced a delay to the implementation of the new rules and some exceptions for smaller businesses.
The government had decided how the general principles of MTDfB will operate after receiving responses to their original ideas first published in August 2016. Some legislation was published in Finance Bill 2017 but this was removed due to the General Election.
Under MTDfB, businesses will be required to:
• maintain their records digitally, through software or apps
• report summary information to HMRC quarterly through their 'digital tax accounts' (DTAs)
• submit an 'End of Year' statement through their DTAs.
The new timetable is being introduced following concerns raised by the Treasury Select Committee, businesses and professional bodies about the implementation of the new rules and to hopefully ensure a smooth transition to a digital tax system.
Mel Stride, Financial Secretary to the Treasury and Paymaster General said:
‘Businesses agree that digitising the tax system is the right direction of travel. However, many have been worried about the scope and pace of reforms.
We have listened very carefully to their concerns and are making changes so that we can bring the tax system into the digital age in a way that is right for all businesses.’
The government has confirmed that under the new timetable:
• only businesses with a turnover above the VAT threshold (currently £85,000) will have to keep digital records and only for VAT purposes
• they will only need to do so from 2019
• businesses will not be asked to keep digital records, or to update HMRC quarterly, for other taxes until at least 2020.
This means that businesses and landlords with a turnover below the VAT threshold will not have to move to the new digital system.
Ministers have also confirmed that the Finance Bill will be introduced as soon as possible after the summer recess and that all policies originally announced to start from April 2017 will be effective from that date.
The government has also confirmed that the proposed changes to VAT reporting will come into effect from April 2019. From that date, businesses trading above the VAT threshold will have to provide their VAT information to HMRC through Making Tax Digital software.
14 July 2017: Amended roll out dates for Making Tax Digital
The government has listened to concerns raised by parliamentarians, in particular the Treasury Select Committee, businesses and professional bodies about the pace of change and is taking steps to ensure a smooth transition to a digital tax system.
Making Tax Digital will help bring the tax system into the 21st century by providing businesses with a modern, streamlined system to keep their tax records and provide information to HMRC. Roll out for Making Tax Digital has been amended to ensure businesses have plenty of time to adapt to the changes.
Under the new timetable:
· only businesses with a turnover above the VAT threshold (currently £85,000) will have to keep digital records and only for VAT purposes
· they will only need to do so from 2019
· businesses will not be asked to keep digital records, or to update HMRC quarterly, for other taxes until at least 2020
Businesses will not now be mandated to use the Making Tax Digital system until April 2019 and then only to meet their VAT obligations. This will apply to businesses who have a turnover above the VAT threshold – the smallest businesses will not be required to use the system, although they can do so voluntarily.
The government has committed that it will not widen the scope of Making Tax Digital for Business beyond VAT before the system has been shown to work well, and not before April 2020 at the earliest. This will ensure that there is time to test the system fully and for digital record keeping to become more widespread.
26 April 2017: HMRC's Making Tax Digital plan dropped from Finance Bill
The government has dropped HM Revenue and Customs’ (HMRC) Making Tax Digital programme from the Finance Bill, which went through its remaining stages in the House of Commons on 25 April.
The scheme, which was due to hit large businesses from 2018 and small businesses from 2019 will be delayed by at least a year. It also raises the possibility that it could be scrapped altogether.
5 April 2017: Making Tax Digital update from the UK200Group’s Digitalisation Taskforce
Making Tax Digital has seen something of a flurry of movement in the last couple months, so it may be helpful to have a quick refresher of quite where we are.
HMRC consulted on some detailed proposals from August to November. The general view from business and the profession was that the core of MTD - the electronic sharing of information - is an excellent idea, but:
- HMRC is massively underestimating the cost of implementation
- They also seem a bit too optimistic about collecting more tax
- Quarterly reporting won’t contribute much to the tax return
- There is no clarity over who is exempt, or what it means
- Suitable software is not available, and won’t be until late 2017
- The whole thing is too rushed.
The Commons Treasury Committee (in January) and the Lords Finance Bill Sub-Committee (in March) have both published reports saying much the same. However, although HMRC’s formal response acknowledges most of the concerns, it largely rejects them. The current proposals are therefore largely the same as those published in August. So HMRC are pushing MTD through as announced, even though everyone else – businesses, the profession, and both Houses of Parliament – is urging a slowdown and a re-think. But what does this mean for businesses and their advisors?
Unfortunately, there are few clear answers, although some general principles emerge:
- MTD will come
- The first businesses will start it in April 2018
- At best, we will have 4-6 months from software being available to it being used in anger
- That includes peak tax return season, so advisors may be a little distracted
- No-one yet knows if they are exempt from MTD
- There will be no penalties for late filing in the first year.
A cynical approach might be to hold off on doing anything until at least mid-2018, on the basis that even if you are meant to act, you won’t be penalised for not doing so.
A more pragmatic approach would be to look to your accounting processes, and see about at least getting your book-keeping online.
9 March 2017 update:
The government has now announced a one year deferral from the mandating of MTDfB for unincorporated businesses and unincorporated landlords with turnovers below the VAT threshold. For those that have turnovers in excess of the VAT threshold the commencement date will be from the start of accounting periods which begin after 5 April 2018.
Summary: What is Making Tax Digital (MTD)?
Making Tax Digital (MTD) is the name of the new HMRC scheme to modernise the tax administration system by introducing digital services for tax. The aim is to make the system more effective, efficient and easier for taxpayers. There are three main strands to MTD. In summary:
- Digital Tax Accounts – Profiles created by HMRC for Individuals and Businesses, pre-populated with the income and tax details they already hold, that can be updated online.
- Quarterly digital reporting – by 2020 most businesses, self-employed people and landlords will be required to keep track of their tax affairs digitally and update HMRC at least quarterly through their digital tax accounts.
- Options for paying tax – HMRC has started using real-time PAYE data to reduce under and overpayments by changing tax codes in-year. They propose to extend this to personal tax accounts. On larger incomes, individuals will be advised of their tax liability and given options on how/when to pay. Businesses, self-employed people and landlords will be able to adopt ‘pay-as-you-go’ tax payments on a voluntary basis.
Benefits of Making Tax Digital
HMRC claims that MTD will provide several key benefits to taxpayers:
- Ease of Use – taxpayers can deal with HMRC digitally via the online Digital Tax Accounts (DTA). Some key information is automatically uploaded to HMRC
- Reduced Paperwork – duplication minimised as taxpayers won’t have to inform HMRC of information it already possesses
- Reduced Delays – as MTD will operate on a more ‘real time’ basis, participants should be up-to-date, in turn reducing missed deadlines, errors, penalties and debts
- Convenience – tax tasks, e.g. registration, filing, payment and information updates can be conducted whenever/wherever is convenient 24/7/365
The aim of Making Tax Digital is to make the system more effective, efficient and easier for taxpayers.
Who will MTD Affect?
MTD will impact a spectrum of taxpayers from individuals to self-employed persons, landlords and businesses. MTD will roll out to these different groups in stages over the coming months.
Making Tax Digital Timeline
HMRC published the initial policy papers in August 2016 and there followed a consultation period which ended in November 2016. Griffin Chapman, through its membership of the UK200Group, participated in the consultation and aired its thoughts and proposals. We continue to be involved in this process on behalf of our clients.
HMRC published their official consultation response in January 2017. In terms of next steps, we know that a pilot scheme will begin in April 2017 and that quarterly reporting for sole traders and landlords will commence in April 2018.
For greater detail, HMRC have outlined their Making Tax Digital Roadmap, although we anticipate that there is likely to be ‘flex’ in these timings.
Making Tax Digital: Additional Information
Details on the MTD scheme are emerging all the time, so please refer back to this page for the latest developments. In HMRC’s response to the consultation, they made a number of key decisions that are worth noting.
- Businesses will be able to continue to use spreadsheets for record keeping, but they must ensure that their spreadsheet meets the necessary requirements of Making Tax Digital for Business - this is likely to involve combining the spreadsheet with software
- Businesses eligible to use ‘three line accounts’ will be able to submit a quarterly update with only three lines of data (income, expenses and profit)
- Free software will be available to businesses with the most straightforward affairs
- The requirement to keep digital records does not mean that businesses have to make and store invoices and receipts digitally
- Activity at the end of the year must be concluded and provided by the sooner of 10 months after the last day of the period of account or 31 January of the year of assessment in which the profits for that period of account are chargeable to income tax (the existing self-assessment deadline)
- Charities (but not their trading subsidiaries) will not need to keep digital records for partnerships with a turnover above £10 million, Making Tax Digital for Business is deferred until 2020
The MTD consultations specifically explored the appropriate level of the initial exemption and deferral for the self-employed, landlords and businesses who will be in scope which has been proposed at £10,000. Given the range of views on this matter, the Government has decided to take more time to consider these issues and final decisions will be made before legislation is laid later this year.
This is a hotly-debated topic in the media, with many commentators asserting that the threshold is too low.
Griffin Chapman's View on Making Tax Digital
We agree with the aim of MTD to make tax affairs more effective, efficient and easier for taxpayers through the use of digital technology. It’s fair to say though at present, there are numerous issues and ‘unknowns’ that need working through to make the smooth implementation of the MTD scheme a success for all parties.
Through our membership of the key accountancy organisations, we’ll continue our constructive participation in the development of the scheme. Whilst many of our clients already use online systems, we appreciate that MTD will impact numerous others as the scheme rolls out. Communication is key.
We’ll monitor the situation closely and update this page regularly with the latest developments, as well as keeping you updated through our normal channels.
We encourage you to contact your client manager if you have any questions or concerns.
Whether you’re a business or an individual, if you’d like to discuss the potential implications of Making Tax Digital on your tax reporting, payments or software requirements, please contact us today.
Call us on 01206 842000
Email us at firstname.lastname@example.org