With Making Tax Digital (MTD), HM Revenue & Customs intends to modernise the tax system and bring it fully into the digital age. This is the biggest shake up of the UK tax regime in over 20 years with the aim of increasing tax revenues through the reduction of taxpayer errors whilst offering administrative savings.
Every taxpayer, including those currently outside the Self Assessment regime, will now have a Digital Tax Account, which is one of the cornerstones of MTD.
The key elements of MTD are:
The digital tax account is automatically populated with the information HMRC receives from third parties, for example:
- Employment income details.
- Pension income, including state pension.
- Bank and building society interest.
Taxpayers are required to confirm that the details are correct or otherwise contact HMRC or the third party to have the information corrected.
All types of tax affecting the taxpayer (for example income tax, VAT, PAYE) can be viewed in one place and overpayments under one heading can be offset against other liabilities.
Businesses and landlords are required to keep their records digitally.
- They are expected to submit updates of transactions to HMRC on at least a quarterly basis. The deadline for updates is 1 month after each quarter.
- A final declaration with accounting adjustments must be submitted within 10 months of the end of the accounting period (or by 31 January for landlords).
Dedicated software or mobile phone apps are now necessary to make the submissions to HMRC. HMRC are not providing any form of software but third party providers will be obliged to make free software available.
- Prompts and nudges are included in MTD compatible software to provide support and help eliminate any errors.
The digital tax account shows the estimated tax liability based on the quarterly submissions throughout the year.
A voluntary ‘pay as you go’ system enables taxpayers to plan their cashflows.
Timeline, MTD will be introduced in stages:
HMRC had originally stated that the first stage of MTD would come into effect for income tax purposes from April 2018 for unincorporated businesses and landlords with turnover in excess of the VAT threshold. This has since been postponed to at least 2020. However, the introduction of MTD for VAT is now in effect and applies to VAT return periods starting on or after 1 April 2019.
Exemptions
- Charities and Community Amateur Sports Clubs (but not their trading subsidiaries).
- Insolvent businesses.
- Those taxpayers unable to engage digitally on religious grounds or where it is not ‘reasonably’ practicable for reasons of disability, age, remoteness of location or any other reason.
- Very small businesses and landlords with turnover or gross rents not exceeding £10,000.
Simplification
As a part of the MTD regime, HMRC are seeking to simplify some of the tax rules for unincorporated businesses and landlords:
- Extension of the cash basis of accounting to businesses with a turnover of up to £150,000 (previously £83,000) from 6 April 2017.
- Extending the cash basis to landlords for the first time, again for those with gross rents up to £150,000, as the default basis from 6 April 2017.
- Reform of the rules which determine the tax year in which business profits are taxed.
- Simplification of the rules for determining whether expenditure is capital or revenue in nature.
Next steps
For further information you can view our introductory
Making Tax Digital webinar or talk to our experts.
