HMRC – Making Tax Digital (MTD)

This is to update all our clients as to the initiative originally announced by the Government back in March 2015 to modernise the UK tax system. It was claimed that MTD would make it easier for individuals and businesses to get their tax right and keep on top of their affairs – meaning the end of the annual tax return for millions. As of 31st January 2017 every individual and business now has access to their own personalised digital tax account with the promise that these are being regularly expanded and improved. Currently MTD applies to sole traders and partnerships but it is expected that it will be fully up and running for all taxpayers by 2020.

In August 2016 HMRC published six consultations setting out more detail of what the move to MTD would look like in practice and on 31st January 2017 the Government released their response to those consultations. In summary it should be noted that:

The Government is committed to bringing business tax into the digital age

  • However MTD shall only apply to businesses with £10,000 annual income or turnover and for the small minority who genuinely cannot use digital tools they will also be exempt.
  • Although businesses will be able to continue to use spreadsheets for record keeping, they must ensure that their spreadsheet meets the necessary requirements of MTD – this is likely to involve combining the spreadsheet with software. The importance of retaining the ability to keep records in this way was requested by a wide range of stakeholders, particularly small businesses.
  • Businesses eligible for three line accounts will now be able to submit a quarterly update with only three lines of data (income, expenses and profit).
  • Free software will be available to businesses with the most straightforward affairs.
  • The requirement to keep digital records does not mean that businesses have to make and store invoices and receipts digital.
  • Activity at the end of the year must now be concluded and sent either by ten months after the last day of the period of account or 31 January, whichever is sooner.
  • Charities (but not their trading subsidiaries) will not need to keep digital records.
  • For partnerships with a turnover above £10 million, MTD is deferred until 2020.

Tax administration

In order to support customers during the transition to making tax digital , business customers will be given a period of at least 12 months before they are charged for any late submission penalties.

Simplifying tax for unincorporated businesses

The entry threshold for the cash basis will be increased to £150,000.

A simplification of rules on capital and revenue expenditure within the cash basis.

Simplified cash basis for unincorporated property businesses:

Cash basis accounting will be allowable for all property businesses under a maximum rental income threshold of £150,000.

Voluntary pay as you go

Voluntary payments will be easily and speedily repayable, and repayment will not be repayable shortly before a liability becomes due only if the customer failed to pay on time in the previous 12 months.

Voluntary payments will be allocated against tax liabilities as they arise and will ensure that robust allocation rules are in place and publicly available.

Transforming the tax system through the better use of information

In 2017 HMRC will start to use PAYE information during the tax year to calculate whether the right tax is being paid. In the short term customers will still receive letters directing them to their digital account to check this, but in future, customers will be prompted digitally to check their accounts.

HMRC have been working with third party information providers and individual customers on co designing a process for resolving queries when a customer believes the information provided by a third party is incorrect.