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Making Tax Digital

Published Wednesday, February 28, 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 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.[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 revenue for the Exchequer,[3] 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 government recognises that many people with disabilities use digital technology and are able to interact online using assistive technology. HMRC will ensure that available software will be compatible with forms of assistive technology and that those that are willing to operate Making Tax Digital for Business (MTDfB) are able to do so.
  • Ofcom’s 2016 statistics indicate that 59% of homes now own a tablet device and 71% of UK adults now have a smartphone. 97% of small and medium-sized businesses have access to online services. Although it is expected that the digitally excluded population will be relatively small, some of the segments impacted by the changes may be disproportionately represented within this population.
  • Individuals with protected characteristics under the Equality Act who fall within the current legislative definitions of ‘digitally excluded’ will be exempted from the digital record-keeping and update requirements and HMRC will provide non-digital alternative channels to them … The government recognises by their very make-up that [the group of small and micro businesses] includes businesses which are likely to be more affected by one-off transitional costs and digital capability issues, and may therefore find it more difficult to move to the new digital requirements.
  • In the consultation the government said that it wanted to consult further on financial support to help some businesses make the transition to the new arrangements. It sought views on the support required and what form this should take ... The number of businesses and individuals affected and the impacts on them will be reviewed throughout 2017 as large scale piloting takes place in advance of MTDfB’s mandatory introduction.[4]

The Finance Bill 2017, which was published on 14 March, initially included the first tranche of legislation to establish Making Tax Digital.[5]  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."[6]

However, on 13 July the Financial Secretary to the Treasury, 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.[7]

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.”[8] In turn this second Finance Bill was published on 6 September, and these provisions now form ss60-62 of the Finance (No.2) Act 2017.[9]

Subsequently at the time of the Autumn 2017 Budget HMRC published an updated impact assessment, which put the Exchequer cost of the new timetable at around £1.4 billion over 2019-2023.[10] HMRC now estimate that MTD will raise about £1 billion for the Exchequer by 2022/23.[11]

The revised timetable was welcomed by stakeholder groups, such as the Chartered Institute of Taxation, and the Low Incomes Tax Reform Group, though Members have continued to raise concerns as to the potential impact on taxpayers, especially smaller businesses.[12]

Notes : 

[1]     HMRC, Making Tax Digital – the roadmap, 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]     HMRC, Making Tax Digital for business – tax information & impact note, March 2017

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

[6]     HC Deb 25 April 2017 c1013

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

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

[9]     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

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

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

[12]    See, for example, PQ4473, 20 July 2017; PQ10125, 9 October 2017; PQ115587, 30 November 2017

Commons Briefing papers CBP-7949

Author: Antony Seely

Topic: Taxation

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