So what is Making Tax Digital?
What is Making Tax Digital (MTD) all about?
Hopefully by now everyone will have heard of MTD, and have a rough idea of what this means. This article serves to provide a bit more information on the subject, and to raise awareness for those who need to take action.
I recall the first I heard of it was one morning more than 3 years ago when the radio news bulletin announced the end of the tax return. The plan was by April 2018, MTD would be implemented and a Digital Tax Account would replace the self assessment tax return. All businesses (including landlords), grossing over £10,000 would have to keep their records in digital format, and make quarterly submissions of this information to HMRC. The Government claimed this would give the UK the most sophisticated tax system in the world.
The Government’s motives for doing this were perfectly understandable. There are a lot of small businesses in the UK. At the moment, the deadline for these businesses to submit their records and pay the resulting tax and national insurance liabilities could be as much as 21 months after their year end. If the records are not compiled until near the relevant deadline, a lot of time will have passed by, and inevitably documents will have gone missing and crucial facts forgotten. Ultimately this means the information that is eventually submitted invariably will not be completely accurate. Human nature being what it is, the suspicion is that if a taxpayer estimates information, these estimates would be in their favour. The Government’s think tank believes this lax approach to tax compliance has contributed to a massive tax shortfall.
Beyond this as well, it was also hoped that by introducing a more sophisticated tax system, information relating to those who are not in self assessment could be automatically collated and assessed. If tax was owed on modest amount of investment income for example, the digitalisation of tax would mean that this could automatically happen.
What has happened?
I think it is fair to say that progress in implementing MTD has not gone anywhere near as well as the Government had hoped. Perhaps the outcome of the June 2016 referendum has not helped. Maybe their decision to target the tax treatment of IT experts operating through personal service companies has had an impact. What we know is that we ate now past April 2018, and nothing much has changed.
What is expected to happen?
At the moment, MTD remains most relevant to businesses whose taxable turnover exceeds the VAT threshold. From April 2019 such businesses will no longer be able to keep manual records. Digital records must be maintained in functional compatible software, which is able to connect to HMRC via an Application Programming Interface (API). Quarterly VAT returns will then have to be submitted directly from the software, and not by entering figures directly onto HMRC’s own portal. Any VAT registered business that is not using already using compatible software should urgently consider doing so before it becomes mandatory.
But will it?
The latest update form my Institute included the following line – ‘April 2019 remains a challenging time frame, particularly as the software trials are currently in a very early stage and on a very small scale’, which at the very least suggests it is unlikely to be an easy and smooth process. More delays are possible, but the Government is also very committed to making sure this happens.
And beyond April 2019…
The overall plan remains for MTD to in some way involve all UK taxpayers. It is a huge project, but for the reasons mentioned above the expectation is that ultimately MTD will benefit the Treasury. Expect the following to happen;
- MTD will be extended for VAT registered business to cover income and corporation tax, perhaps from April 2020.
- This is likely to be linked to a creating a mechanism to help pay tax in real time based upon accurate up to date data.
- Once MTD works for these businesses, it will be extended to non VAT registered business, including landlords.
- The Personal Digital Account in then likely to replace the tax return.
Clearly not everyone will be able to comply with this. Exemptions will be granted to those with incompatible religious beliefs, or those who are technologically excluded (due to age, disability or remoteness of location).
Change is inevitable. Accepting this and embracing inevitable changes in digital accounting sooner rather than later will make life easier in the long run. For this reason I would recommend that all businesses start to make use of an online accounting package (such as Xero, Quickbooks, Sage etc) as soon as possible. Individuals should also access their Personal Digital Account with HMRC, and watch this space for further updates!