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Making Tax Digital

Published Monday, December 24, 2018

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.

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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).[1]  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 consultation, in the 2017 Budget the Government set out plans to roll-out digital tax returns from April 2018. 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.[2] The Government anticipated that this new system for tax returns would substantially reduce the scale of taxpayer errors in record keeping, raising significant extra Exchequer receipts,[3] although some commentators expressed scepticism as to this claim, and have argued that the compliance burden on smaller businesses will be considerable. Many stakeholders also raised concerns about the potential impact of digital tax returns for taxpayers who might be digitally excluded or have limited experience of using computers for their financial record keeping.

The first tranche of legislation to establish Making Tax Digital was included in the Finance Bill published after the 2017 Budget, on 14 March.[4]  However, 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 2017. 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.[5]

However, on 13 July 2017 Treasury Minister Mel Stride announced that the timetable for implementing MTD would be substantially amended:

  • Under the new timetable:
    • only businesses with a 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
    • 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. This 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. As VAT already requires quarterly returns, no business will need to provide information to HMRC more regularly during this initial phase than they do now. All businesses and landlords will have at least two years to adapt to the changes before being asked to keep digital records for other taxes.[6]

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.”[7] In turn this second Finance Bill was published on 6 September 2017, and these provisions now form ss60-62 of the Finance (No.2) Act 2017.[8]

In the Autumn 2017 Budget HMRC published an updated impact assessment, which put the cost of the new timetable at around £1.4 billion over 2019-2023,[9] while MTD is anticipated to raise about £1 billion for the Exchequer by 2022/23. About 1.2m businesses, both unincorporated and incorporated, will be required to comply with MTD for VAT.[10]  At this time the revised timetable was welcomed by stakeholder groups, such as the Chartered Institute of Taxation and the Low Incomes Tax Reform Group,[11] although Members have continued to raise concerns as to the potential impact on taxpayers, especially smaller businesses.[12]

In July 2018 HMRC published a stakeholder communications pack on MTD, which is the best, first source for taxpayers with guidance on the roll out of this new system of tax returns; this was updated in October.[13] In November 2018 the House of Lords Economic Affairs Committee published a report on MTD for VAT, in which it argued that many businesses were not prepared for its roll-out, and recommended that the Government should defer the introduction of mandatory MTD for VAT “by at least one year, while encouraging businesses to join voluntarily.”[14] The Government has not published a full response to the Committee’s report to date, but has stated that, despite these concerns, the preparations for introducing MTD for VAT in April 2019 “are progressing well.”[15]

Notes : 

[1]    HMRC, Making Tax Digital, December 2015 (see, Timeline, at pp11-12)

[2]    Budget 2017, HC 1025, March 2017 para 3.39.  The report also confirmed that the VAT registration threshold would be increased from £83,000 to £85,000 from 1 April 2017 (para 3.36).

[3]    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).

[4]    specifically clauses 120-122, see the Explanatory Notes to the Bill (Bill 156-EN 2016/17).

[5]    HC Deb 25 April 2017 c1013

[6]    HM Treasury press notice, Next steps on the Finance Bill and Making Tax Digital, 13 July 2017

[7]    Finance Bill: Written Statement, HCWS47, 13 July 2017

[8]    These provisions were debated, and agreed without amendment, on division, at the Committee stage of the Bill: Public Bill Committee, Fifth Sitting, 24 October 2017 cc120-139

[9]    Autumn Budget 2017, HC587, November 2017 p30, Table 2.1 – item 67

[10]   HMRC, Making Tax Digital For Business – tax information & impact note, December 2017. See also, PQ127329, 26 February 2018.

[11]   CIOT press notice, Delayed digital start date will make for better implementation, & LITRG press notice, A more measured start to Making Tax Digital will better serve its aims, 13 July 2017

[12]   See, for example, PQ4473, 20 July 2017; PQ10125, 9 October 2017; PQ115587, 30 November 2017; and, PQ HL11710, 6 December 2018.

[13]   HMRC, Making Tax Digital for Business - stakeholder communications pack, 18 October 2018. The CIOT keeps track of developments at: https://www.tax.org.uk/policy-and-technical/making-tax-digital

[14]   Making Tax Digital for VAT: Treating Small Businesses Fairly, HL Paper 229, 22 November 2018 p2

[15]   PQ202086, 18 December 2018

Commons Briefing papers CBP-7949

Author: Antony Seely

Topic: Taxation

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