The government's landmark Making Tax Digital (MTD) initiative, which sees taxpayers move to a fully digital tax system, is to be gradually extended over the next three years.
The Treasury's roadmap for MTD is currently going through Parliament as part of this year's Finance Bill. New legislation will make MTD compulsory for all VAT registered businesses, including those with a turnover below the VAT threshold from April 2022. In April 2023 MTD will apply to taxpayers who file income tax self assessment tax returns for business or property income over £10,000 annually. Here, we look at MTD and what the extension means for small businesses and those filing self assessment returns.
What is MTD?
Making Tax Digital for Business was introduced in the 2015 Spring Budget. The government's 'Making Tax Easier' document was published shortly after, which outlined plans for the 'end of the tax return'. It also set out the government's vision to modernise the UK tax system, with digital tax accounts set to replace tax returns for ten million individuals and five million small businesses.
Under the rules, businesses with a turnover above the VAT threshold (currently £85,000) must keep digital records for VAT purposes and provide their VAT return information to HMRC using MTD functional compatible software. Since it was introduced in 2019, more than 1.4 million businesses have joined the programme, submitting over six million returns.
The advantages of MTD
According to the government, MTD only changes the way that taxes are reported, not the level of tax that is collected. It says MTD will help to minimise avoidable mistakes, saving the Treasury billions in lost taxes.
In addition, the government states that MTD makes it easier for businesses to keep on top of their tax affairs. It points to the 300,000 smaller VAT-registered businesses that are not yet required to use MTD, but have chosen to do so voluntarily because of the wider benefits the digital tools offer, including fewer errors and increased productivity.
Under MTD, self assessors will have to make quarterly submissions of income and expenses. HMRC says this will allow it to give taxpayers an estimated tax calculation based on the information provided to help them budget for their tax. At the end of the year, they will be able to add any non-business information and finalise their tax affairs using MTD-compatible software.
According to the government, the long lead-in time for the extension of MTD will allow businesses, landlords and agents time to plan. It will also give software providers enough notice to bring a range of new products to market, including free software for businesses with the simplest tax affairs.
Errors and costs
However, a survey of businesses and their advisers carried out by the Chartered Institute of Taxation (CIOT) and the Association of Taxation Technicians (ATT) revealed that nearly 90% of respondents said that Making Tax Digital for VAT (MTD for VAT) had not reduced errors and just 14% of respondents said there had been an increase in productivity in their organisation as a result of MTD for VAT.
The Low Incomes Tax Reform Group (LITRG) is urging HMRC to make effective use of the next three years, running full pilots and supporting taxpayers in making the transition to the new MTD system.
Using third party software and keeping digital records
Businesses must keep specified records in 'functional compatible software', which calculates the VAT return and submits it to HMRC via an Application Programming Interface (API).
HMRC acknowledges there are different ways to do this. However, the transfer of data to HMRC, from the mandatory digital records to the filing of the return, must be entirely digital.
Under MTD, the required digital records can be held within more than one piece of software, however there must be a digital link between them: the data cannot be transferred manually between software products. HMRC has confirmed that all businesses now have until their first VAT return period starting on or after 1 April 2021 to ensure digital links are in place.
A HMRC communications pack on Making Tax Digital can be found here.
How we can help
No matter if your business is big or small, MTD affects you. As your accountants, we can help you to stay compliant with the MTD rules and advise on suitable software packages for your business.
For more information, please contact us.