Making Tax Digital - Key Points

What is Making Tax Digital?

Making Tax Digital is a HMRC initiative announced in the 2015 Budget that aims to simplify and modernise the tax system for both individuals and businesses. The Making Tax Digital roadmap sets out an ambitious vision on how the tax system will be transformed for the digital age.

When will Making Tax Digital be implemented?

The first stage of the Making Tax Digital (MTD) rollout was completed in 2022 as all VAT registered businesses were mandated to keep digital records and file using a recognised MTD accounting system such as QuickFile.

The second phase of the MTD rollout will cover Income Tax and Self Assessment (ITSA) and is scheduled to go live in April 2024. This will bring into scope self employed businesses and private landlords.

Who would Making Tax Digital apply to?

Making Tax Digital will eventually apply to sole traders, partnerships and limited companies, although at the time of writing the current proposals only cover sole traders and partnerships. We expect to see more clarity on the scope of MTD for incorporated companies in due course.

We know at this stage that the proposals will only apply to sole traders and landlords with an annual income or turnover in excess of £10,000. There is also an allowance for businesses that are marginally over this threshold (up to a limit, yet to be specified) that will have an extra year to comply with the MTD rules.

Making Tax Digital key points?

Here are the key points in regards to how MTD will work.

Businesses will be required to file ‘Summary Data’ on a quarterly basis, this is not as complex as a full tax return and something more akin to a VAT return.

The Summary Data will consist of total income and total expenditure divided into categories, e.g. advertising, rent, travel etc.

Businesses will be required to use digital tools such as QuickFile to maintain records of their income and expenditure. HMRC will not be providing their own software.

Businesses will have the option to report more than quarterly if they choose to do so.

An ‘End of Year Declaration’ will be filed 9 months following the year end date.

Businesses that are VAT registered will eventually be able to file just one report with their VAT figures and summary data combined.

How and when will tax payments be made?

HMRC do not currently plan to change the way in which payments are made, although with MTD a business may be able to make voluntary payments towards their tax liabilities. Such voluntary payments may be made at the discretion of the business and at intervals of their choosing.

Exemptions

Certain exemptions may be made for a small minority of taxpayers who are unable to use digital tools due to their religion, age or a disability. There is also likely to be an exemption for those who are affected by low internet speeds (Under 2 mb/s).

What about Penalties?

The new MTD rules will bring in a “points based system” for late filing. A financial penalty is then levied when a business acquires a specific number of points (currently 4 points). Any accumulated points will be removed following a 24 month period from the last points received.

The new penalty regime will not likely be fully enforced until a 1 year grace period has passed following implementation of MTD.

Response from consultation

Through various consultations HMRC have reached out to industry professionals and businesses to seek opinion on the exact nature of MTD. In November 2016 HMRC confirmed that over 3,000 tax advisers had responded to the consultation.

Here are some of the points raised:

Rushed implementation - many respondents felt that the timetable was insufficient for such a bold initiative. A number said that their clients would struggle to keep pace with the change.

Entry threshold too low - many respondents suggested that the entry threshold of £10,000 for unincorporated businesses and landlords was too low and a logical starting point would be the personal allowance limit of £11,000 (set to rise to £11,500 in 2017). It was suggested by some that the threshold should be somewhat closer to the current VAT threshold.

Policy uncertainty around Brexit - In light of the June referendum result, many felt that hardening policy around MTD will be extremely difficult given the degree of uncertainty that prevails. MTD was expected to be fully phased in by 2020, however this is highly dependent on the UK’s new political arrangements post-Brexit.