The government has announced plans to create a fully modernised digital tax system to boost national productivity, make it easier to pay tax, and reduce errors and fraud. In this article, we look at HMRC’s plans to extend its Making Tax Digital programme.
The government says avoidable mistakes cost the Treasury around £8.5bn a year. HMRC’s view is that some of this lost revenue can be reduced by taxpayers keeping digital records as they are more accurate, the software often has built-in help that can reduce errors, and the fact the information is sent directly to HMRC avoids transposition mistakes.
Making Tax Digital for VAT (MTD) was introduced on 1 April 2019 for VAT-registered businesses with a turnover of more than £85,000. MTD requires these businesses to keep digital records and provide VAT returns through software such as Xero, Sage, QuickBooks and several others. Since its introduction, more than 1.4 million businesses have joined the scheme.
From April 2022, MTD will be extended to all VAT registered businesses with a turnover below £85,000. And, from April 2023, it will apply to taxpayers who file income tax self-assessment returns for business or property income of over £10,000 a year.
Making Tax Digital for VAT
The new rules mean that MTD will apply to all VAT-registered businesses, who will need to use appropriate software that can send the relevant information direct to HMRC. The deadline for sending VAT returns will not change, and the information submitted to HMRC will be the same as on the current VAT return.
This seems a positive step, but not everyone is happy about it. The Institute of Chartered Accountants in England and Wales (ICAEW) says: “ICAEW has always believed that mandating digital record keeping should not be necessary, but businesses should be able to choose the best way to keep their accounting records. It has also repeatedly argued that the right moment to digitalise should be driven by the business case and not legislation.”
Making Tax Digital for income tax
MTD for income tax (MTD for ITSA) will apply from April 2023 for unincorporated businesses and landlords with annual gross income above £10,000. They will need to use suitable software to submit a quarterly return setting out their business income and expenses.
This will enable taxpayers to receive an estimated tax calculation to help them budget for their tax. Adjustments can be made at the end of the financial year for items such as employee income, interest, dividends, pension contributions, etc. The aim is to replace the self-assessment tax return for those with no other income.
The government announcement said: “The long lead-in time will allow businesses, landlords and agents time to plan. It also gives software providers enough notice to bring a range of new products to market, including free software for businesses with the simplest tax affairs.”
It also said that “the COVID-19 pandemic has highlighted the need for a more flexible, resilient and responsive tax system that provides businesses and HMRC with more up-to-date information on businesses and their finances, and enables easier identification and better targeting of taxpayer support”.
In addition, the government quoted research from the Enterprise Research Centre, which shows that micro-businesses who use software to manage their accounts have over 10% higher productivity.
MTD for corporation tax
The government has said it will consult in the autumn on extending Making Tax Digital to incorporated businesses with corporation tax obligations. No further details are available at present, but we will update you more information about this as and when a further announcement is made.
If you would like to discuss MTD or any other tax matter, please do not hesitate to get in contact.
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Warning: The above is merely general guidance and should not be relied upon as formal advice. The advice we give to each client will depend on their specific circumstances. We suggest you take professional advice before taking any action in relation to the issues discussed above.