It’s been more than 2 years in the making, but next month marks the official launch of the Government’s Making Tax Digital (MTD) initiative. MTD is a UK government initiative set out to fundamentally transform the administration of the UK tax system. It will introduce a whole new method of interaction between individuals, businesses and HM Revenue and Customs (HMRC) which purports to make tax administration more effective, more efficient and simpler for taxpayers.
Who does Making Tax Digital apply to?
MTD is being introduced in phases with the first phase affecting those businesses with turnover above the VAT threshold (currently £85,000). From 6th April 2019 it will be mandatory for these businesses to keep their VAT records and submit their VAT returns in digital form online. For larger and more complex businesses such as those within VAT groups, a PLC, a trust or a local authority etc. the start date has been deferred by six months until 1st October 2019.
Longer term the initiative will apply to a wide range of taxpayers, including most businesses, self-employed and landlords, as well as individuals, trustees and executors with trading/property income. The next phase of MTD will be delayed to at least April 2020. The threshold for these early adopting businesses and individuals to ensure compliance with MTD requirements is an annual turnover of £10,000 or more from a relevant income source. There are currently no clear plans to roll out MTD to other relevant businesses and individuals who will not meet the HMRC criteria to be “early adopters”.
What does this mean for me?
Under MTD businesses, self-employed individuals and landlords will be required to update HMRC on a quarterly basis; providing their tax information in digital format instead of the current once a year requirement via a self-assessment tax return. This does not mean four tax returns are required each year, but you will have to provide financial updates more regularly than before.
These regular updates will introduce a real-time tax system where individuals and businesses will be able to see a real-time view of their tax affairs and liabilities through a digital online account. HMRC’s intention is to make the reporting of financial information more efficient and accurate, as well as saving HMRC time and resource in processing the information received via the MTD portal.
The transition to MTD may appear to be an additional administration burden and cost for businesses and individuals to ensure they are MTD compliant. However, if this is implemented correctly, it may offer some benefits to taxpayers as we will see below.
The Benefits of Making Tax Digital
HMRC have put forward various arguments around the benefits of complying with MTD. These include:
- Save time - as you will be updating your tax information throughout the year, you won’t have to spend substantial time organising your tax information at the end of the year as you tend to do with an annual tax return.
- Budget better – tax calculation carried out in real-time will mean and that you will have an up-to-date view of your tax liability and won’t have to wait until the end of the year to understand how much tax you may owe, allowing you to set plan and aside money throughout the year and make more accurate financial projections.
- Business performance – it is also an opportunity to keep on top of finances in general, regularly reviewing income, expenditure and cash flow on an ongoing basis, allowing you to plan, budget and forecast more effectively and ultimately improve business performance.
In reality it will be a question of time and practical experience before we will know whether MTD offers the benefits HMRC believes it will bring.
Overall, HMRC are firmly committed to the introduction of MTD, despite numerous delays, and believe it will have a beneficial impact on individuals and businesses. Any short-term disruption or initial issues that may accompany the changes should be more than offset by its positives such as the streamlined filing process, reduction in errors, up to date information on tax obligations and the ability to make better informed decisions.
It is too early to say whether HMRC’s predictions will prove to be accurate but, nonetheless, taxpayers will need to be aware of the changes which may affect them.
Turcan Connell can talk you through exactly what is required to bring your tax affairs up to speed and in line with the requirements of the initiative. Please contact a member of our Tax Department team on 0131 228 8111 or at firstname.lastname@example.org.