Making Tax Digital – the next instalment

The Government has announced plans for the next stage of its Making Tax Digital (MTD) Strategy, part of its wider initiative to ensure that the tax system is fit for the digital age.

The next phase will see an extension of the MTD for VAT rules to include all VAT registered businesses including those not currently within the system because their taxable sales are below the VAT threshold. This extension will take effect from April 2022. A year later we will see the introduction of MTD for Income Tax which is currently intended to apply to all unincorporated businesses and landlords with annual revenue in excess of £10,000.

What is Making Tax Ditigal?

Making Tax Digital is a broad based Government initiative to digitise the tax system. Business who are compulsorily VAT registered because their VATable sales are above the VAT registration threshold will already be familiar with MTD which was first introduced in 2019. At its most basic level the current MTD for VAT system requires businesses within its scope to file their VAT returns electronically using MTD compatible software – either directly from their compatible accounts system or using bridging software to extract the information and transmit it into the VAT return.

Why Make Tax Digital?

Before its introduction there were many rumours to the effect the software would allow HM Revenue and Customs direct access to a business’ accounting information, allowing them to search for discrepancies and start enquiries. While this may ultimately come, MTD at the moment is simply part of the Government’s strategy to force businesses to digitise their record keeping. The logic is that with digital records using compatible accounting software such as Xero the degree of manual intervention by a real person is significantly reduced, and as a consequence the scope for human error in entering and transmitting data is also significantly reduced.

At its heart MTD is aimed at increasing the accuracy of a business’ accounting records and returns to HMRC. In its latest analysis HMRC believes that up to £8.5 billion of tax revenues were lost to the Exchequer in the 2018/19 tax year as a result of avoidable mistakes in preparing returns. It is this lost revenue which is the target of MTD.

Which businesses will be affected by the extension of MTD for VAT?

As noted above, currently only those businesses which are required to register for VAT because their turnover exceeds the VAT threshold fall within MTD. Many other businesses are VAT registered but do not fall within MTD, generally because they have registered voluntarily, perhaps to allow them to recover VAT on expenses. From April 2022 these businesses will fall within MTD and will be required to file their VAT returns using MTD compatible software. VAT return and payment due dates will not change but the way in which a business files its VAT returns will.

What is MTD for income tax?

When it is introduced in April 2023 MTD for income tax will apply to all unincorporated businesses and landlords whose total income (importantly this refers to turnover not profit) exceeds £10,000 per year. Individual taxpayers who fall with MTD for income tax will be required to file quarterly estimates of their business income and expenses to HMRC using MTD compatible software. HMRC will then provide them with an estimate of their income tax liability for the year based on those estimates, allowing businesses to budget for future tax liabilities.

At the end of the year the business will then be expected to use its MTD compliant software to add in the additional information required (non-business income and expenses) and file their final reconciliation for the year, again using MTD compliant software. This replaces the self-assessment income tax return for the year. As for MTD for VAT, dates for filing and payment of tax will not change – as currently designed businesses will not be required to make payments based on the estimated tax liabilities calculated on their quarterly returns.

What next for Making Tax Digital?

Further information will become available over time which will put more flesh on the bones of the announcements made to date. HMRC are allowing taxpayers to join a pilot system for MTD for income tax which we understand should be available to all eligible businesses and landlords by April 2021.

WR Comment

These changes have been expected for a while and it is positive that we now have clear timelines for businesses and landlords to work to. The reality is that this trend towards digitisation in all aspects of a person’s dealings with Government is now gathering momentum and there can be no doubt that it will continue – there will absolutely be no going back from here. The current exceptions from the MTD system are very narrow indeed and heavily policed by HMRC – the expectation must be that the same will apply to the broader MTD system. The clear expectation must be that taxpayers with all but the simplest of tax affairs will have no option but to be MTD compliant by April 2023.

WR working to assist you with this digital transformation

This of course reflects the wider drive towards digitisation in all aspects of modern life. At WR we see it as a key part of our service to our clients to support them in being ready and able to operate in a digital environment, while at the same time ensuring they meet their compliance obligations in an accurate and efficient way. The steps we are already taking in this direction will stand our clients in good stead as the Government’s digital agenda continue to gather pace. Although the changes may appear to be some way off the time will race by and now is the moment to start preparing. Businesses which see this as an opportunity to improve and enhance their record keeping and embrace the changes will reap the rewards.

We already have considerable experience of helping numerous clients to transition to an MTD compliant way of working and we will use this experience to provide help and support to all of those clients who will fall within either the extended MTD for VAT or MTD for income tax. From our experience, while it is possible to use bridging software to extract information from non-MTD compliant systems and transfer it into the appropriate HMRC site, those businesses which adopt MTD compliant cloud accounting packages such as Xero are not just able to handle the compliance requirements in an efficient way but also benefit from the ease of access and ability to interrogate accounting data that such packages provide.

Cloud based packages also allow WR, as advisers to our clients, to provide insights and advice to clients on a real time basis, helping them to grow and develop their businesses, identifying and dealing with challenges as they arise and maximising opportunities. These packages allow us not only to help our clients to understand their past financial performance but also to help shape the success of their business into the future. We will be developing our strategy to assist clients through these changes over the coming weeks. Contact us and one of our tax advice specialists will be happy to reach out to you.