Making Tax Digital: What It Means

Making Tax Digital: An Overview

Making Tax Digital (MTD) is a government initiative to ‘transform the tax system and see the end of the tax return by 2020’.

The changes were first proposed in the MTD roadmap published in December 2015 based on what HMRC call the ‘Four Foundations of MTD’.

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 (see more about this here).

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:

• Businesses will need to report their information quarterly to HMRC using software or apps
• HMRC will improve its business tax portal so that business have better visibility of their tax affairs

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 such as FreeAgent or Xero (the two software packages we recommend for our clients) 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: Improved taxpayer portal

Along with quarterly reporting, HMRC recognise the need for taxpayers to have better visibility of their tax affairs and the information which HMRC hold.  

So by 2020 taxpayers will have a single digital account where they can see all their liabilities in one place.  They will also be able to offset overpayments in one tax with underpayments in another. 

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

The current timescale is as follows:

• April 2017 – HMRC will be trialling the new Making Tax Digital requirements with a very small number of businesses
• April 2018 – Self-employed and landlords turning over more than the VAT threshold will begin reporting quarterly
• April 2019 – Most other self-employed and landlords will begin reporting quarterly and VAT will get combined with quarterly reporting into a single reporting requirement
• April 2020 – Limited companies start quarterly reporting

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.

Our eBooks cover this and many other topics.  Check them out here.

And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].

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