At a glance guide.

When does Making Tax Digital (MTD) apply? What does Making Tax Digital really mean? How will it affect you? Does MTD mean quarterly reporting? Is my business exempted from Making Tax Digital?

What's New?

July 2020: New Timeline announced for Making Tax Digital for Business

  • VAT-registered businesses with a taxable turnover below £85,000 will be required to follow Making Tax Digital rules for their first return starting on or after April 2022.
  • Self-employed businesses and landlords with business turnover above £10,000 will need to follow the rules for MTD for Income Tax from their (current or next account period) following April 2023.
  • Businesses that cannot go digital will not be required to do so.
  • Businesses can choose to use spreadsheets to both maintain digital records and perform tax calculations, provided the spreadsheets combine with some form of ‘bridging’ software that will allow their VAT return data to be sent to HMRC from the spreadsheet.
  • HMRC is going to consult in the Autumn on the detail of extending Making Tax Digital to incorporated businesses with Corporate Tax obligations.

March 2020

  • As a result of the Coronavirus (COVID-19) the “soft landing period” to implement Making Tax Digital for VAT digital links was extended to 31 March 2021.
  • Previously there were 2 start dates - from 1 April 2020, or 1 October 2020 for deferred businesses. Now all businesses will not be required to have digital links between software programs until their first VAT Return period starting on or after 1 April 2021.
  • See COVID-19 VAT payments

March 2019

  • Making Tax Digital for Business: the Chancellor confirmed in his Spring Statement that the government will not be mandating MTD for any new taxes or businesses in 2020. 

February 2019

  • It is currently proposed that VAT registered businesses trading above the VAT threshold are mandated into filing VAT returns by using functional compatible software from April 2019.
  • The MVD pilot continues to roll out, see MVD pilot: Who can join?
  • Agents are encouraged to open a new Agent Services Account. There is widespread confusion as the accounts don't apparently do anything yet.
  • Plans for Making Tax Digital for Self Assessment are on hold.

November 2018

  • HMRC commenced sending out MVD letters to VAT registered business encouraging them to take up MVD software and register with MVD.
  • Budget 2018: proposals to introduce a new late interest and late payment points-based penalties system for MVD have been postponed. They were omitted from Finance Bill 2019. It is now anticipated that the new system will be postponed until 2021.

October 2018

July 2018

HMRC published VAT Notice 700/22: Making Tax Digital for VAT

  • Highlights of the notice include the requirement to use 'functionally compatible software'.
  • From 2020 the use of 'copy and paste' is to be banned! Software must electronically link from other bookkeeping records such as spreadsheets into MTD software. This is to allow HMRC to interrogate the underlying records such as the spreadsheet.

Draft Finance Bill 2019 contained proposals for three new tax penalty systems which were dropped following budget 2018. HMRC have said that they will be included in a future finance bill.

The penalty proposals are:

HMRC also published policy papers and this follows consultations: MTD: Sanctions for late submission and payment and consultation, Making Tax Digital: Interest harmonisation and sanctions for late payment

MTD background

  • Provisions included in draft Finance Bill 2019 for new penalty systems were dropped in November 2018 and are to be included in a future finance bill.
  • HMRC consulted on draft secondary and tertiary MTD legislation together with draft guidance on Making Tax Digital for VAT. The consultation closed in November 2017. 
  • Finance (No2) Act 2017 allowed HMRC to introduce MTD via secondary legislation (statutory instrument). The significance is that this form of legislation is not scrutinised by parliament.
  • On 13 July 2017, the government announced that MTD would be delayed for business until 2020, with the exception of VAT. An updated timetable for MTD:
    • 2019: VAT registered businesses are mandated into MTD with the exception of the digitally excluded.
    • 2019/2020: all businesses may try MTD on a voluntary basis.
    • 2020: non-VAT registered unincorporated business and landlords join MTD.
    • 2020+ ?: Companies and Large Partnerships to join MTD.
    • Note that the digitally excluded and micro-businesses (t/o <£10,000) are excluded from MTD.
  • Consultation on new MTD penalties closed on 11 June 2017. The different tax bodies all hold different views of the proposed regimes, see MTD penalties responses compared.
  • May 2017: the MTD provisions were cut from the Finance (No 2) Bill 2017 due to the decision to call an early general election. 
  • March 2017: draft regulations on MTD to be published during summer 2017.
  • Andrew Tyrie, chair of the House of Common’s Treasury committee, wrote to the Administrative Burdens Advisory Board concerned that HMRC’s estimate on the cost to Making Tax Digital of £280 is unrealistic. The Federation of Small business estimates that the cost of adding four extra returns will be three times the annual cost for business.
  • HMRC commenced a small scale MTD pilot in April 2017.
  • The House of Lords Finance Bill sub-committee recommended that HMRC put the brakes on MTD for business: it's being rushed, there's little benefit to government and it creates unnecessary burdens on small business.
  • In the Spring Budget 2017, it was announced that MTD will be postponed by one year (i.e. to 2019) for those self-employed and landlords who have a turnover under the VAT threshold. 
  • MP Andrew Tyrie who sits on the Economic Committee of the House of Commons stood up following the budget speech to suggest that 'now that the door is ajar...[on MTD],' that perhaps other changes to HMRC's MTD plans could be now considered.

Overview: what is MTD?

  • Under MTD HMRC aim to join up its internal systems and so create one account for each taxpayer for all their different taxes within HMRC.
  • Via their 'digital account' taxpayers will be able to view all their payments and offset overpayments in one tax account against underpayments in others.
  • MTD imposes new quarterly filing and potentially payment obligations for businesses and landlords.
  • The first phase of MTD is for VAT.
  • The second phase affects small unincorporated businesses and landlords.
  • The third phase will affect companies, although not until at least 2020.
  • A new late filing and payment penalty system will eventually apply to quarterly returns and annual declarations.
  • Accounts and returns?
    • Although HMRC claims that the annual tax return will go, businesses will still need to prepare year-end accounts in order to reconcile their quarterly payments and claim various reliefs and make accounting adjustments.
    • They will be required to file a year-end declaration, instead of a Self Assessment (SA) return/Corporation Tax (CT) return.
    • The key difference between the year-end declaration and a tax return, other than in name, appears to be that HMRC will pre-populate some of the return figures e.g. bank interest, income from employment, pensions, etc.
    • For the self-employed, it is assumed that HMRC might attempt to pre-populate the year-end declaration with data submitted in the quarterly return figures. This is unlikely just yet, as is already the case with VAT, a business will still need to reconcile their quarterly returns to their year-end accounts and so all must reconcile to the end of year declaration.
    • All taxpayers will need to check that pre-populated data are correct.
  • HMRC is consulting on changing the way that tax assessments interact with accounting basis periods. Its systems may not cope if say five million taxpayers all pressing 'send' at once.
    • It is also reviewing the simplification of cash accounting for both businesses and landlords.
  • Businesses that do not use smartphones, software or computers may be obliged to do so.
    • HMRC will be providing free software.
    • MTD is likely to be expensive for many micro and small businesses. Some two million businesses are not represented by agents and they will have to learn the new systems.
  • Exemptions to be announced: it is already indicated that some nano businesses (turnover below £10k) will be exempt from the new regime. They may be brought into the regime later.
  • HMRC expects that apps will 'prompt' taxpayers when they purchase goods and services so that taxpayers will learn the tax deduction rules on a day-to-day basis.
  • HMRC expects taxpayers to obtain their guidance online and not via the telephone. It will be developing online resources to reduce human interaction by telephone.

Links

MTD: Toolkit for Accountants & Advisers 
Summarising the new legislation as it affects you and your clients as it unfolds

MTD: Survival guide for the self-employed
Client guide to MTD

MTD: Index & timeline
The current MTD timetable links to consultations, responses, proposed legislation and our guides and summaries. Warning: Update in progress!

MTD: Let's simplify further
Comment: our practical and cost-effective suggestions as to how HMRC can improve its quarterly reporting requirement.

MTD: Alternative truths and myths
HMRC published a 'myth-buster' on MTD in 2016. It has turned out to be about as reliable as a 'Trump 4 am tweet'. This table busts the myths. The truth is out there.

MTD: HMRC responds
Responses to the six consultations. Quarterly reporting, simplified three line reporting, re-think on penalties, cash accounting for landlords, some simplification for other businesses. Smartphone no longer mandatory.

Lords call for evidence
The House of Lords has made a call for evidence as to the benefits of MTD ahead of HMRC's publication of draft clauses in FB2017 on MTD. They are focusing on administration, clarification and simplification.

Making Tax Digital: Changes needed
The Treasury Committee is recommending that HMRC make radical changes their approach to Making Tax Digital (MTD), including delaying implementation, raising the exemption threshold, running a pilot the covers the full reporting cycle and waiting for the software market to catch up. 

External links

MTD: Written evidence to the House of Lords
Our submission to the House of Lords sub-committee on Finance Bill 2016.

MTD: Links to evidence submitted to the House of Lords
Oral and written evidence on MTD ahead of Finance Bill 2016

 

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