Making Tax Digital (MTD)

What is MTD?

The core principles behind the concept of a digital tax system by 2020 were set out in December 2015 in HMRC’s MTD road map. HMRC referred to the four foundations of MTD:

  • Tax Simplified

The idea that if HMRC already hold tax information, such as P60s and annual interest statements, why should it be provided to them again by the taxpayer. Having digital tax accounts will enable taxpayers to see and check the income and tax information held by HMRC.

  • Tax in one place

Bringing together taxpayers’ information in one digital tax account. The idea is that, just like with online banking, any overpayment of one type of tax will be able to be set against the underpayment of another.

  • Making tax digital for businesses

Aiming for real time collection and processing of tax information, so that businesses will know much earlier than the end of the tax year how much tax they should pay.

  • Making tax digital for individual taxpayers

As with businesses, individuals will be able to interact with HMRC through their digital tax accounts, with webchat, prompts and secure messaging to assist individuals in managing their tax affairs more easily.

The four foundations have since been updated by HMRC and can be viewed here. However, the underlying principles have not changed.

Brief history of MTD

MTD was introduced as a concept by George Osborne in his March 2015 Budget speech. He referred to it as “a revolutionary simplification of tax collection” and hailed the end of the “complex, costly and time consuming” annual tax return. The expectation at that time was that 5 million small businesses and 10 million individuals would switch to the digital tax account in early 2016.

Since then there has been a considerable hive of activity (and possibly some confusion) between the profession and HMRC in seeking to understand how the ex-Chancellor’s goals would be turned into a reality. Early 2016 did not see the switch to digital reporting, but HMRC did publish 6 detailed consultations in August 2016, which covered the following areas:

  1. Bringing business tax into the digital age
  2. Business Income Tax: Simplifying tax for unincorporated businesses
  3. Business Income Tax: Simplified cash basis for unincorporated property businesses
  4. Voluntary pay as you go
  5. Tax administration
  6. Transforming the tax system through the better use of information

Click on the links for the January 2017 responses to each of these consultations.

Draft legislation was also published in January 2017 for inclusion in the first 2017 Finance Bill. This set out the timeframe for when taxpayers would be required to adopt MTD. The first group of taxpayers affected were income tax businesses and landlords with turnover above the VAT threshold (currently £85,000), who were due to comply with MTD from April 2018. Income tax businesses and landlords with turnover below the VAT threshold, as well as quarterly reporting for VAT purposes, were due to be brought within MTD in April 2019. Finally, taxpayers who file corporation tax returns and partnerships with turnover above £10m were due to comply from April 2020.

New Timetable announced

July 2017 saw a welcome announcement in relation to the MTD timetable:

  • April 2019 – VAT only. Businesses with turnover above the VAT threshold will have to keep digital records for VAT purposes only. The scope of MTD will not be widened beyond VAT until the system has been proven to work. A live pilot is planned for Spring 2018.
  • Businesses below the VAT threshold at that point may voluntarily keep digital records.
  • Businesses will not have to keep digital records (or report quarterly for other taxes such as income and corporation tax) until April 2020 at the earliest.

Keeping you informed

Despite the extensions to the timetable, MTD will become a reality for many taxpayers before too long and we shall be looking at ways we can assist our clients in preparing for the changes. We will be working closely with many of our individual and business tax clients to ensure that they are ready to embrace the new digital tax era.

The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice.  No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.