Earlier this week (21 July 2020), The UK government released their corporate report titled “Building a trusted, modern tax administration system” which highlighted the next steps of HMRC’s Making Tax Digital programme while also lauding its benefits and success so far.
Published by Rt Hon Jesse Norman MP, Financial Secretary to the Treasury, the corporate report sets out the vision for the future of tax administration in the United Kingdom, designed to improve resilience, effectiveness and support for taxpayers.
Where is Making Tax Digital (MTD) at now?
HMRC reported that since 2019 over 1.4 million businesses have started using Making Tax Digital for their VAT, submitting over 6 million returns. Over 30% of smaller VAT-registered businesses, who are not yet required to use Making Tax Digital, have chosen to do so voluntarily. But there have also been lessons learned, which will be used to inform and shape introduction of the next phases of digital implementation. For many businesses, MTD is a natural extension of the way they already operate. Businesses operating MTD are already reporting wider productivity gains and reductions in input errors.
The Next Steps for HMRC’s Making Tax Digital
The government said in the report that it believes that now is the right time to plan the extension of MTD and laid out the following steps:
- from April 2022 MTD will apply to all VAT-registered business for their VAT obligations.
- from April 2023, businesses and landlords with business income over £10,000 per annum which are liable for Income Tax will need to keep digital records and use software to update HMRC quarterly through MTD.
- to ensure that the Making Tax Digital approach also evolves for those businesses that have incorporated to become companies, the government will be consulting later this year on the design of what the system should look like for Corporation Tax (source).
The Benefits for Businesses of Making Tax Digital
HMRC heavily advocated the benefits of Making Tax Digital for businesses and particularly highlighted it’s ease and advantages for small businesses in particular. It cited a case study from the Making Tax Digital review published in March 2020 Budget. The case study portrays two salt-of-earth small and remote businesses who increased efficiency by implementing Making Tax Digital:
“from a teashop in Orkney who moved from manual accounts to Making Tax Digital reporting that “Going digital has made an immense difference to the amount of time that [they] have free” to a farm secretary in Basingstoke that updated their software for Making Tax Digital saying “Making Tax Digital for VAT has been nothing but straightforward […] the whole process could not have been easier”.
Transparency & Resilience
“With Making Tax Digital for Income Tax in place, HMRC will have access to up-to-date business information no more than 4 months old for up to 4 million small businesses and landlords. This allows for better-targeted policy responses and makes the tax administration system more resilient and effective in responding to future crises.”
The extension of MTD does not create any additional tax liabilities for businesses, nor will it change when tax is paid for any businesses or landlords in scope of the extension. However, the government recognises that these are important steps forward and in taking these next steps of MTD, HMRC will engage widely with the businesses affected, and ensure that implementation plans are well designed to support the transition. This work will draw on everything that has been learned from implementation of the VAT service to date, and responses to the evaluation document published earlier this year.
HMRC anticipate more will make the transition to fuller web-based accounting software to tap into the wider productivity benefits available to the most digitally engaged.
What will MTD Cost Your business?
Initial estimates are that the average transitional cost will be about £175 for each affected business, with an additional annual cost of about £20 each; this includes the efficiency gains in tax administration but does not take account of the productivity benefits of going digital.
These are the representative additional costs of basic compliance with MTD requirements. Costs will vary according to business size and circumstances, and some businesses will choose to go further than the minimum requirements for the benefit of their business. As with MTD for VAT, HMRC will work with the software industry to ensure that businesses needing to update their accounting systems have access to affordable software products and transitional costs are kept to a minimum.
Is “Bridging” Software Sustainable?
There are a wide range of MTD software products available already. We’re proud to say that Vatglobal provides one of them ensuring MTD compliance. The report stated that the roll-out of MTD for VAT has shown that some businesses have utilised ‘bridging’ software as an initial cost-effective option to provide a secure link between spreadsheets or legacy software, allowing them to comply with MTD requirements without the need to modify well-established business processes which feedback suggests can sometimes cause concern for a small minority. As businesses using bridging software start to experience some of the benefits digital record-keeping has to offer, HMRC anticipates more will make the transition to fuller web-based accounting software to tap into the wider productivity benefits available to the most digitally engaged.