In December 2015 HM Revenue & Customs published Making Tax Digital - its strategy to implement a new system of digital tax accounts to be used by businesses, the self-employed and landlords. Following a consultation exercise last year, in July 2017 the Government confirmed its plans to roll-out digital tax returns, but with an amended timetable in light of concerns about the potential impact on businesses. This paper discusses the background to this reform.Jump to full report >>
In December 2015 HM Revenue & Customs published Making Tax Digital - its strategy to implement a new system of digital tax accounts to be used by businesses, the self-employed and landlords. The Government proposed that the new system would be rolled out over two years, first applying to income tax returns (in 2018), and then extended to VAT (in 2019) and corporation tax (in 2020). Initially the Government anticipated that in the first phase from April 2018 businesses, self-employed people and landlords would be required to use digital accounts, updating HMRC on a quarterly basis; employees and pensioners would be exempt, unless they had secondary incomes of more than £10,000 per year from self-employment or property.
Following a consultation exercise last year, in the 2017 Budget the Government set out plans to roll-out digital tax returns from April 2018. To begin with unincorporated businesses and landlords would have to file income tax returns this way, if their annual turnover exceeded the VAT registration threshold – the point at which traders are requirement to account for VAT – although those with a turnover below this threshold would have another year to prepare. Businesses, self-employed people and landlords with turnovers under £10,000 would be exempt from these requirements.
The Government anticipate that this new system for tax returns will substantially reduce the scale of taxpayer errors in record keeping, raising significant extra revenue for the Exchequer, although some commentators have argued that the compliance burden on smaller businesses will be considerable.
Many stakeholders have also raised concerns about the potential impact of digital tax returns for taxpayers who may be digitally excluded, or have limited experience of using computers for their financial record keeping. HMRC’s tax information & impact note on this reform, published alongside the Budget, notes the following:
The Finance Bill 2017, which was published on 14 March, initially included the first tranche of legislation to establish Making Tax Digital - specifically clauses 120-122. Following the Prime Minister's announcement, on 18 April, of the Government's intention to call a General Election on 8 June, the House completed all of the remaining stages of the Bill in the Commons on Tuesday 25 April.
With cross-party support the Government removed a series of clauses from the Bill, with the intention of legislating for these at the start of the new Parliament, including these clauses. On this occasion Treasury Minister Jane Ellison said the following:
"The Bill is progressing on the basis of consensus and therefore, at the request of the Opposition, we are not proceeding with a number of clauses. However, there has been no policy change. These provisions will make a significant contribution to the public finances, and the Government will legislate for the remaining provisions at the earliest opportunity, at the start of the new Parliament.
The Government remain committed to the digital future of the tax system, a principle widely accepted on both sides of the House. We recognise the need for the House to consider such measures properly, as called for by my right hon. Friend the Member for Chichester (Mr Tyrie) and his Treasury Committee. That is why we have decided to pursue those measures in a Finance Bill in the next Parliament, in the light of the pressures on time that currently apply."
However, on 13 July the Financial Secretary to the Treasury, Mel Stride announced that the timetable for implementing MTD would be substantially amended:
At this time the Government confirmed that provisions for the MTD programme would be included in a Finance Bill to be introduced “as soon as possible after the summer recess.” In turn this second Finance Bill was published on 6 September, including these provisions.
While the revised timetable was welcomed by stakeholder groups, such as the Chartered Institute of Taxation, and the Low Incomes Tax Reform Group, Members have continued to raise concerns as to the potential impact on taxpayers, especially smaller businesses. Finally, it is likely that the decision to phase in MTD over a longer period will have implications for the revenue impact of this reform. The Government has stated that HMRC will publish an updated impact assessment later this year, at the Autumn Budget.
 The Budget report estimated the Exchequer gain at around £1.9 billion over the period 2018/19 to 2021/22 (op.cit. Table 2.1- item 17; Table 2.2 – item bb).
 HMRC, Making Tax Digital for business – tax information & impact note, March 2017
 Details were given in the Explanatory Notes to the Bill (Bill 156-EN 2016/17).
 HM Treasury press notice, Next steps on the Finance Bill and Making Tax Digital, 13 July 2017
 specifically clauses 60-62 of the Finance Bill 2017-19. For details see, Finance Bill 2017 - Explanatory Notes (Bill 102 – EN), September 2017 pp278-295
Commons Briefing papers CBP-7949
Author: Antony Seely