Making Tax Digital: Developments up to 2019

The Library briefing Making Tax Digital: Developments since 2020 covers more recent developments.

In December 2015 HM Revenue & Customs published Making Tax Digital - its strategy to implement a new system of digital tax accounts to be used by businesses, the self-employed and landlords. The Government proposed that the new system would be rolled out over two years, first applying to income tax returns (in 2018), and then extended to VAT (in 2019) and corporation tax (in 2020).[1] Initially the Government anticipated that in the first phase from April 2018 businesses, self-employed people and landlords would be required to use digital accounts, updating HMRC on a quarterly basis; employees and pensioners would be exempt, unless they had secondary incomes of more than £10,000 per year from self-employment or property.

Following consultation, in the 2017 Budget the Government set out plans to roll-out digital tax returns from April 2018. Unincorporated businesses and landlords would have to file income tax returns this way if their annual turnover exceeded the VAT registration threshold – the point at which traders are requirement to account for VAT – although those with a turnover below this threshold would have another year to prepare. Businesses, self-employed people and landlords with turnovers under £10,000 would be exempt from these requirements.[2] The Government anticipated that this new system for tax returns would substantially reduce the scale of taxpayer errors in record keeping, raising significant Exchequer receipts,[3] although some commentators expressed scepticism with this claim, and have argued that the compliance burden on smaller businesses would be considerable. Many stakeholders also raised concerns about the potential impact of digital tax returns for taxpayers who might be digitally excluded or have limited experience of using computers.

The first tranche of legislation to establish Making Tax Digital was included in the Finance Bill published after the 2017 Budget. Following the Prime Minister's announcement, on 18 April, of the Government's intention to call a General Election on 8 June, the House completed all of the remaining stages of the Bill in the Commons on Tuesday 25 April 2017. With cross-party support the Government removed a series of clauses from the Bill, with the intention of legislating for these at the start of the new Parliament, including these clauses.[4]

On 13 July 2017 Treasury Minister Mel Stride announced that the timetable for implementing MTD would be substantially amended:

• Under the new timetable:
  • only businesses with a turnover above the VAT threshold (currently £85,000) will have to keep digital records and only for VAT purposes
  • they will only need to do so from 2019
  • businesses will not be asked to keep digital records, or to update HMRC quarterly, for other taxes until at least 2020.
• Making Tax Digital will be available on a voluntary basis for the smallest businesses, and for other taxes. This means that businesses and landlords with a turnover below the VAT threshold will be able to choose when to move to the new digital system. As VAT already requires quarterly returns, no business will need to provide information to HMRC more regularly during this initial phase than they do now. All businesses and landlords will have at least two years to adapt to the changes before being asked to keep digital records for other taxes.[5]

At this time the Government confirmed that provisions for the MTD programme would be included in a Finance Bill to be introduced “as soon as possible after the summer recess.”[6] In turn this second Finance Bill was published on 6 September 2017, and these provisions now form ss60-62 of the Finance (No.2) Act 2017.[7]

In the Autumn 2017 Budget HMRC published an updated impact assessment, which put the cost of the new timetable at around £1.4 billion over 2019-2023,[8] while MTD is anticipated to raise about £1 billion for the Exchequer by 2022/23. About 1.2m businesses, both unincorporated and incorporated, will be required to comply with MTD for VAT.[9] At this time the revised timetable was welcomed by stakeholder groups, such as the Chartered Institute of Taxation and the Low Incomes Tax Reform Group,[10] although Members have continued to raise concerns as to the potential impact on taxpayers, especially smaller businesses.[11]

On 19 February 2019 Treasury Minister Mel Stride made a statement to the House on MTD for VAT, confirming the April 1 start date. The Minister underlined that, “during the first year of mandation, penalties will not be issued for late filing but only for late payment. There will, of course, be a process to claim an exemption from MTD on the basis of digital exclusion owing to factors such as disability or problems with access to broadband, or on religious grounds. Any business that is already exempt from online filing for VAT will remain so under MTD without having to reapply.”[12]

Following this, at the time of the Spring Statement the Chancellor Philip Hammond confirmed a change in the Government’s approach to the roll-out of MTD from 2020:

"Making Tax Digital (MTD) – Mandatory digital record keeping for VAT for businesses over the VAT threshold (with turnover over £85,000) comes into force from 1 April. This is an important first step in this modernisation of the tax system to which the government remains committed. The government can confirm a light touch approach to penalties in the first year of implementation. Where businesses are doing their best to comply, no filing or record keeping penalties will be issued. The focus will be on supporting businesses to transition and the government will therefore not be mandating MTD for any new taxes or businesses in 2020."[13]

In July 2018 HMRC published a stakeholder communications pack on MTD, which is the best, first source for taxpayers on the roll-out of this new system of tax returns.[14] Many of the 1.2 million businesses affected by the MTD rules will be required to submit their first quarterly VAT return to HMRC using software by 7 August 2019.[15]

Notes :

[1] HMRC, Making Tax Digital, December 2015 (see, Timeline, at pp11-12)

[2] Spring Budget 2017, HC 1025, March 2017 para 3.39. The report also confirmed that the VAT registration threshold would be increased from £83,000 to £85,000 from 1 April 2017 (para 3.36).

[3] The Budget report estimated the Exchequer gain at around £1.9 billion over the period 2018/19 to 2021/22 (op.cit. p26, p29; Table 2.1- item 17 & Table 2.2 – item bb).

[4] As then Treasury Minister Jane Ellison set out to the House at this time: HC Deb 25 April 2017 c1013.

[5] HM Treasury press notice, Next steps on the Finance Bill and Making Tax Digital, 13 July 2017

[6] Finance Bill: Written Statement, HCWS47, 13 July 2017

[7] These provisions were debated, and agreed without amendment, on division, at the Committee stage of the Bill: Public Bill Committee, Fifth Sitting, 24 October 2017 cc120-139

[8] Autumn Budget 2017, HC587, November 2017 p30, Table 2.1 – item 67

[9] HMRC, Making Tax Digital For Business – tax information & impact note, December 2017. See also, PQs220806-7, 18 February 2019 & HMRC, Making Tax Digital – Mythbusters, June 2019.

[10] CIOT press notice, Delayed digital start date will make for better implementation, & LITRG press notice, A more measured start to Making Tax Digital will better serve its aims, 13 July 2017

[11] See, for example, PQs220106-8, 18 February 2019; and, PQs HL14336-7, 21 March 2019.

[12] HC Deb 19 February 2019 cc1362-4

[13] Written Statement HCWS1407, 13 March 2019. see also, PQs 230714-6, 19 March 2019

[14] This has been updated several times: see, HMRC, Making Tax Digital for Business - stakeholder communications pack, updated 12 July 2019

[15] HMRC press notice, Businesses are being urged to register for Making Tax Digital before August, 11 July 2019