Making Tax Digital (MTD) is a government initiative to ‘transform the tax system and see the end of the tax return.
One of the main aims of Making Tax Digital is to give every taxpayer better access to the information HMRC hold about their business in order to encourage better tax compliance.
Whilst it’s recognised that the majority of taxpayers want to pay the right tax, HMRC estimate that the amount of tax not collected due to avoidable taxpayer errors and carelessness has risen to over £8bn a year. In addition, because of the penalties imposed, taxpayers can often feel punished unfairly for lack of compliance.
The roll out of Making Tax Digital has already started with taxpayers (both businesses and individuals) having access to a digital tax account to check their records and manage their details.
Making Tax Digital: The Main Changes Explained
The Making Tax Digital initiative involves both businesses and landlords and the major changes for those businesses are:
In order to simplify the requirements for a lot of small businesses, HMRC have drastically increased the number of businesses who can use cash reporting.
Making Tax Digital: Quarterly Reporting
The requirement for businesses and landlords to report their figures quarterly is one of the most radical changes to tax in a generation.
Going forward any business reporting under Making Tax Digital will need to use digital tools (eg software or apps) to record their income and expenditure.
If you currently use spreadsheets to record your income and expenditure, you can continue to do so as long as these meet HMRC’s requirements.
HMRC have said they won’t provide their own software but will make sure that basic apps and software are available for the most straight-forward businesses. How this will work in practice is still under review - you can read more about this here.
Many businesses will probably look to use commercial software in the same way as a lot of businesses currently use software for quarterly VAT reporting.
HMRC are aware that a small minority of taxpayers will not be able to use digital tools and exemptions to this requirement will be allowed based on age, religion, disability or remoteness of location. HMRC have stated they will consider exemptions on a case by case basis.
Making Tax Digital: The Benefits
Whilst there are concerns from the wider community regarding Making Tax Digital (HMRC aren’t known for their successful and stream-lined IT implementations), if Making Tax Digital is implemented correctly then there could be many benefits such as:
Being able to plan more effectively as your tax will be calculated in real-time
Having a full picture of your tax affairs in one account
Less hassle as you can interact with HMRC digitally (HMRC already have Webchat available for most taxes)
For those who are more cynical about the reasons for the implementation of Making Tax Digital, HMRC have produced a ‘MTD: Myth-Buster’.
Making Tax Digital: The Timescale
Making Tax Digital was due to go live from April 2018, however the scope of this project has been reduced and the deadlines have been extended.
The current timescale is as follows:
If you run a VAT registered business with turnover over the VAT threshold then you’ll be incorporated into the Making Tax Digital reporting system with effect from April 2019 – however only for VAT. We’re not sure how this will work with the current quarterly VAT returns – which usually have to be filed electronically – or whether it will replace the current VAT return.
If you’re a Property landlord or a small business trading below the VAT threshold then you’ll join Making Tax Digital from April 2020 (instead of 2018 as originally proposed). However, there is the option to join Making Tax Digital earlier should you wish to do so.
If you run a company, the future is uncertain as far as Making Tax Digital is concerned. There is no current news on what is proposed for companies – although it is suggested that the government is currently looking at a reform of corporation tax.
Making Tax Digital: Exemption threshold
HMRC have confirmed that landlords and unincorporated businesses with a gross income of less than £10k will be exempt from the quarterly reporting requirements.
Please contact us for further guidance.