Making tax digital (MTD) was first announced by the government in 2015, as an initiative to improve the effectiveness and efficiency of the UK tax system and reduce its current complexity.
The government’s original goal was to transform the tax system by 2020 by introducing digital recordkeeping and quarterly updating for businesses, the self-employed and landlords for income tax self-assessments, value-added tax and corporation tax.
The original timeline set out by the government proposed a phased introduction of MTD between the 2018-19 and 2020-21 tax years.
Following consultation within the industry in July 2017, the government announced that it would delay the introduction to April 2019, where the scheme would then only apply to VAT. The initiative would be extended to taxes other than VAT by 2020 at the earliest.
So, what is required under MTD, and how will the initiative affect businesses? We ask accountants in Essex to explain.
Reasons for making tax digital
The government has said that one of the main reasons behind the MTD scheme is to help close the tax gap by helping businesses “get their tax right.” It’s estimated that over £9bn is lost annually as a result of tax errors and mistakes.
The government have also outlined some key benefits of the MTD scheme, including being able to access tax information online in one place and being able to work collaboratively with an agent.
What will change for businesses under making tax digital?
From April 2019, businesses that are registered for VAT and have turnover above the VAT registration threshold of £85,000 are required to keep digital records for VAT purposes and submit their VAT return to HMRC through MTD compatible software.
MTD for corporation tax will not come into effect until 2020 at the earliest. The scope of the initiative will not be widened outside of VAT until there has been sufficient time to test the system fully.
VAT-registered businesses and landlords with income about the £85,000 VAT threshold will need to report for VAT purposes only from April 2019.
Exemptions will apply to a number of businesses. These will include businesses that are unable to use electronic communications because of religious beliefs, insolvent businesses and businesses that cannot submit returns electronically because of disability, age or remoteness of location.
Penalties and interest
The system is likely to be a points-based model with taxpayers receiving a point for every time they fail to submit in time. The model will most likely be introduced for VAT in 2020, once tax payers in the April 2019 intake have become familiar with the system.