Making Tax Digital – what you need to know

Making tax digital (MTD) is the most fundamental change to the administration of the tax system for a generation. When implemented, most businesses will be required to maintain their accounting records digitally and to submit quarterly updates to HMRC. This summer the government announced a new timetable for MTD, with a delay and rephasing of the original plans.

The new timetable means businesses will not be required to maintain digital accounting records until at least April 2019. From April 2019, businesses with turnover above the VAT threshold will be required to maintain digital accounting records and to use these digital records to meet their VAT-filing obligations. The current online VAT return will cease to be an option for businesses with turnover above the VAT threshold. Business who have voluntarily registered for VAT will not be required to use MTD to comply with their VAT obligations until at least 2020.

This is welcome news: the government has listened to both business and the profession. The Institute of Chartered Accountants in England and Wales (ICAEW) has said all along that it supports the move to digital in principle, but it should not be mandatory or impose unreasonable admin burdens, and its introduction should allow enough time to ensure the system works. Removing mandation for the smallest businesses until at least 2020 is a welcome step forward and one less regulatory burden for SMEs to worry about.

Under the new timetable:

  • initially, only businesses with turnover above the VAT threshold (currently £85,000) will have to keep digital records, and only for VAT purposes;
  • they will only need to do so from 2019; and
  • businesses will not be asked to keep digital records, or to update HMRC quarterly, for other taxes until at least 2020

Making Tax Digital will be available on a voluntary basis for the smallest businesses and for other taxes such as income tax. We will need to see what this means in practice, but for now this is a great step forward which means that businesses and landlords with a turnover below the VAT threshold will be able to choose when to move to the new digital system. If the new system is good, businesses will be encouraged to use it without the need for mandation.

The government has given assurances that it will not widen the scope of MTD beyond VAT before the system has been shown to work well, and not before April 2020 at the earliest. This will ensure that there is time to test the system fully and for digital record-keeping to become more widespread.

Making Tax Digital (MTD) has had a spotted history. It was first announced in the March Budget 2015, when it was to be about making tax simpler. Within a year it had become clear that this was a much larger project that concerned the digitalisation of the entire tax system. The proposed changes are the most significant to the operation of the tax system since self-assessment was introduced in the 1990s, and it is expected that most businesses will, in the future, be required to keep their accounting records digitally using software or an app and to submit quarterly reports to HMRC. The introduction of a modern tax system using digital technology, which will make it easier for businesses to comply with their tax obligations, is good news, but many of the actual details are yet to be confirmed.

The new timetable will allow more time for software to be designed and tested and for the necessary communication and training to take place. It will also allow for the gathering of data on the impact, including the cost to businesses and the impact on the tax gap. The government expects better record-keeping under MTD to reduce the tax gap attributable to error. It may also result in fewer receipts for expenses being lost and not recorded, and lower tax bills for businesses.

The results of an ICAEW survey of businesses last year showed that only 25 per cent of UK businesses maintain electronic accounting records, so there is a huge amount to be done by businesses, HMRC and the software industry.

Businesses who want to use MTD can start to plan for the changes now. If they already use software, they should approach their supplier to ask when their new MTD-compliant updates will be released. Not all software companies will be making the switch, and if a business is looking to invest in something new, it will be important to choose a product which will have longevity.

Above all, speak to your accountant, who will be able to help you through the changing system as details are released in the coming months.

Anita Monteith is Technical Manager at the ICAEW Tax Faculty


This article was published in our Business Reporter Online: Unshackle yourself from tax.