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Making tax digital: update

The replacement of the annual tax return with an online tax account is imminent. Are we ready for it?

Be honest, how many of you have heard of the Making Tax Digital (MTD) project and, of those who have, can you honestly say that you know what it entails and how it will impact upon you personally?

By way of recap, MTD is an on going project to move away from the current system of taxpayers preparing and submitting an annual (paper) tax return towards every taxpayer having an online digital tax account. The idea is that the online tax account will be pre-populated with information that HMRC already holds and will simply need to be reviewed and updated by the taxpayer, in most cases on a quarterly basis. The aim is to try and use technology to streamline the tax filing (and, let’s face it, tax collection) process, but the scale of the changes represent a huge technical and logistical challenge and there are mounting concerns that the timetable is unrealistic.

It is proposed that the new online tax accounts will be phased in, with income tax returns being the first to transition starting in 2018, followed by VAT returns in 2019 and corporation tax in 2020.

Micro-businesses, self-employed individuals and landlords whose annual turnover is less that £10,000 are to be exempted (although they can choose to move across to the new system if they wish to do so). Unincorporated businesses and landlords with turnover below the VAT registration threshold (currently £85,000) have also been given a one-year moratorium before moving across to the new system in April 2019, giving them time to prepare and put in place the new accounting software that will be required.

Recent political upheavals (including the general election, which has resulted in a deferral of the introduction of the relevant legislation to implement MTD), coupled with delays in the pilot testing by HMRC of the systems and software required to support the transition, have resulted in increased calls for the timetable to be revisited.

Whilst there are undoubtedly some benefits of moving towards an online tax account (allowing taxpayers to be able to see all their tax payments in one place and potentially offset overpayments against outstanding liabilities, much like transferring between online accounts at your bank) as with the move to real time reporting of PAYE information it will, at least initially, increase the compliance burden. The costs to businesses of managing the transition are unclear at this time but HMRC have committed to making free software products available for those businesses who do not already have access to appropriate software packages.

As corporation tax is the last to transition, there is not necessarily any immediate issue for companies but MTD is going to affect all of us in one way or another and it is therefore important to keep abreast of developments in order to assess how they may impact your business and to ensure you are prepared for the transition.