This note provides a revised statement of impacts for the Making Tax Digital for Business programme, reflecting the changed scale and scope of the mandatory elements announced in the government’s Written Ministerial Statement of 13 July 2017.
Background
At Budget 2015, the government set out its vision for a transformed tax system, and in December 2015 it published the Making Tax Digital roadmap. This set out the government’s plans to make fundamental changes to the tax system – transforming tax administration by 2020 so it is more effective, more efficient, and simpler for taxpayers.
The original Making Tax Digital proposals phased in the implementation of digital record keeping and quarterly updating by businesses, the self-employed and landlords for Income Tax Self-Assessment (ITSA), Value Added Tax (VAT) and Corporation Tax (CT) between tax years 2018/19 and 2020/21.
Following representations about the scope and pace of the reforms, the government announced by Written Ministerial Statement, on 13 July 2017, that businesses would not be mandated to use the Making Tax Digital system until April 2019 and then only to meet their VAT obligations. This will apply to businesses with turnover above the VAT threshold (currently £85,000). Businesses with turnover below the VAT threshold will not be required to use the system but can choose to do so. Businesses will also be able opt in for other taxes, benefitting from a streamlined, digital experience.
The government will not widen the scope of Making Tax Digital beyond VAT before the system has been shown to work, 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. The changes mean that the smallest businesses and landlords will be able to move to keeping digital records for tax at a pace that is right for them.
For more information go to the Written Ministerial Statement.
Who will be affected and when do the changes come into force?
The Making Tax Digital requirements will apply to all VAT registered businesses for their VAT obligations from April 2019 where their turnovers are in excess of the VAT threshold (currently £85,000). There is no change to the previous assessment that Making Tax Digital is not expected to impact on family formation, stability or breakdown.
What does Making Tax Digital mean for businesses?
The government recognises that the majority of businesses want to get their tax right, but the latest tax gap figures published by HM Revenue and Customs (HMRC) show that too many otherwise compliant businesses find this hard, even some who use an agent to help them. Errors and mistakes, which contribute to this tax gap, are found in every sector with over £9 billion lost annually in tax.
Making Tax Digital will provide a more modern, digital service which will help businesses get their tax right, with technology making it easier for them to do so. We are confident that businesses will be able to use Making Tax Digital successfully, with the reforms making it easier for businesses to get their tax right the first time, not only reducing the tax gap, but also reducing the cost, uncertainty and worry that businesses face when HMRC is forced to intervene to put things right.
For Income Tax, businesses (including self-employed and landlords) will be able to keep records of their income and expenditure digitally, and send summary updates quarterly to HMRC from their software (or app) from April 2018 if they choose to do so.
From April 2019, VAT registered businesses (including self-employed and landlords) with turnover above the VAT registration threshold (currently £85,000) will have to:
- keep their records digitally (for VAT purposes only)
- provide their VAT return information to HMRC through Making Tax Digital compatible software
HMRC recognises that the business population that will be affected by the mandatory changes from April 2019 is diverse. Making Tax Digital will be available on a voluntary basis to other businesses, for VAT, Income Tax and National Insurance contributions.
These digital reforms will bring the tax system in line with what businesses and individuals now expect from other online service providers: a modern digital experience that helps them get their tax right first time. HMRC anticipates that many businesses that are not mandated from April 2019 will choose to move to the new service.
Keeping records digitally will result in more timely and accurate record-keeping, helping to prevent errors associated with manual processes. Quarterly updates direct from records will help prevent errors that can happen when businesses undertake manual calculations or transcribe information from one format into another.
The nudges and prompts that will be incorporated into the Making Tax Digital compatible software developed by third party software providers will help eliminate common errors, giving businesses greater certainty that they’ve got their tax right first time, reducing the need for unwelcome compliance interventions which are expensive and burdensome for both HMRC and its customers.
Whether part of the mandated VAT population or participating voluntarily, we expect Making Tax Digital to deliver benefits for businesses. Software will help businesses to stay on top of their record keeping, allowing them and those who represent them to understand better how their business is performing. Key benefits include:
- always knowing where you stand when it comes to tax
- having access to tax information online in a single place
- being able to work online collaboratively with an agent
- being able to plan and budget more effectively
Making Tax Digital will allow businesses to integrate tax into their day-to-day business record-keeping, and have the confidence that they have got it right.
The ability to keep on top of their financial affairs, closer to real-time, will help businesses and their agents to free up time for more productive, higher value business activities – both should be able to work collaboratively to use this better, closer to real time picture of their affairs to deliver improvements in business performance. There is increasing recognition from agents about the opportunities afforded by Making Tax Digital to increase their focus on advisory services rather than compliance.
We also believe that Making Tax Digital will enable businesses to remain competitive, boost productivity and take advantage of the broader benefits and cost-efficiencies that going digital gives to them. The productivity, cost and efficiency benefits for businesses in moving to digital from manual or paper based recoding systems are well recognised, but not costed here, and Making Tax Digital will help drive the adoption of digital tools amongst UK business.