The continuing evolution of MTD

Friday, August 25, 2017

Making Tax Digital has seen an interesting few months, where something and nothing has changed. Once lauded by former Chancellor, George Osborne, as a “revolutionary simplification of tax”, we are now a couple of years down the line and the reforms have struggled to fully gain industry confidence, lost some of their grandeur, and have been pushed further and further back. Here, we look at the most recent announcements concerning MTD and what the future now holds.

As reported in June, there was an ominous silence surrounding MTD during the election. HMRC went into purdah, the election manifestos forgot it, and the Finance Bill side-stepped it; MTD took a backseat for a while. New faces in Government departments following the snap election also took its toll on the pace of progress. As a result, the original timetable for MTD adoption looked optimistic at best.

In July, newly appointed HM Treasury Paymaster General, Mel Stride MP, announced that the quarterly reporting requirements for MTD were being pared back to only cover VAT. Only businesses with a turnover above the VAT registration threshold will need to keep digital records, and only for VAT. Given quarterly VAT returns are already order of the day for them, it isn’t something particularly new or onerous to adopt and shouldn’t increase the amount of information needed by HMRC.

The timetable shifted to the following:

  • VAT registered businesses will need to adopt quarterly reporting for VAT for the accounting period starting April 2019
  • These businesses and landlords will not need to submit income tax and NICs via MTD until at least 2020
  • Smaller firms in the £10,000-£85,000 bracket will not need to keep and submit quarterly digital records for other taxes until 2020 at the earliest
  • They will also be able to choose whether, and when, to move to the new digital system and file on a voluntary basis
  • No company will need to file corporation tax through MTD until at least 2020.

The revised dates provide much needed breathing space for practitioners and businesses alike. This timetable will only work, however, if there is a working digital system to move to. MTD for VAT submissions goes to a public test early next year, giving around a year until the biggest businesses in the country are expected to file their returns using MTD-compatible software.

Fast forward to this month, and the Government included legislation allowing the introduction of MTD for VAT within the Finance Bill. It then released draft regulations for MTD, specifically focusing on income tax and VAT. Read ‘Making Tax Digital for VAT: legislation overview’ here and should you have any comments you wish to submit about it, you have until 10th November 2017 to send them to makingtaxdigital.consultations@hmrc.gsi.gov.uk. The CPAA’s Making Tax Digital Working Group is already working on a response to the consultation, which will set out the Association’s position on behalf of its members.

The origins of the draft legislation follow August 2016’s consultation papers and the subsequent industry responses to those in January 2017. HMRC commented that, “the responses to the consultations, together with ongoing informal consultation with stakeholders, have helped inform the ongoing development of the policy and draft legislation, culminating in the latest changes announced by the Government.” Industry feedback has clearly helped shaped the direction of the legislation, which can only be a good thing.

The primary legislation – clause 62 – begins to spell out the regulations that businesses will need to meet as they “keep and preserve certain records digitally.” Clause 62 amends the current powers surrounding the administration and enforcement of VAT, which will allow HMRC to bring in new regulations. It also amends the current legislation that allows the right to appeal against HMRC Commissioners – including appeals relating to any penalties imposed. In HMRC’s own words, clause 62:

  • Gives the commissioners of HMRC powers to make regulations requiring the submission of information relating to VAT
  • Gives the commissioners of HMRC powers to make regulations that specify the form in which records are kept and preserved
  • Where regulations are made that require records to be kept and preserved digitally, gives the commissioners of HMRC the powers to specify how digital records are kept and the conditions that must be complied with
  • Where these powers are used to require records to be kept and preserved in a digital format, provides an exemption for businesses with a turnover below the VAT registration threshold
  • Ensures that, once a business is required to keep digital records, this requirement remains in place even if that businesses turnover falls below the threshold and that person remains registered for VAT
  • Gives the commissioners of HMRC the power to vary the exemption provisions, in the case of transfers of a going concern, and add further exemptions in the future
  • Gives a right of appeal against HMRC decisions about the application of regulations relating to VAT requiring the use of digital communications or digital record-keeping
  • Ensures that regulations providing for digital record keeping can’t come into force before April 2019
  • Provides exemptions for taxpayers genuinely unable to make an electronic return because of disabilities, religion or geography. They will be exempt from digital record keeping and an alternative will be provided.

For many, the most recent announcements on MTD will be welcome – the new timetable especially. For others, the changes simply don’t go far enough. Is the VAT threshold a high enough starting point to let small businesses ‘off the hook’ from MTD? Could staging dates have been introduced – as with auto-enrolment – to enable large corporates, with the resources to better handle the burden, to start MTD, with SMEs coming on board once any issues had been ironed out? Are HMRC still expecting too much of practitioners to shoulder another administrative burden and educate countless clients on MTD?

The Government has pledged not to widen the scope of MTD beyond VAT before it works effectively, and the inevitable teething problems are dealt with. This will be the case until April 2020 at the very earliest, which is a decent period of adjustment and gives room for HMRC to collaborate with the accounting profession and business community to refine future plans. The CPAA’s Making Tax Digital Working Group will continue to monitor issues pertinent to members and liaise with HMRC, communicating members’ interests and concerns. 

Bruce Mummery of the CPAA’s Making Tax Digital Working Group commented: “The postponement of the introduction of MTD provides a welcome breathing space, but it is essential that the extra preparation time be used wisely. It is all too easy to put the issue on the shelf, and only return to it as time gets shorter; early preparation will be a key to success.

“We also need to remember that MTD is already with us, in the form of MTD for Individuals. Dynamic Coding is in place, and taxpayers whose circumstances change during the year (e.g. changing the company car or starting to receive a pension) can expect the change to be reflected in a change in their PAYE code in the current year.

“The CPAA will continue to put forward the views of accountants in practice through regular meetings of HMRC’s Agent Strategy Group and MTD Forum, and we will continue to keep our members informed as plans and processes develop.”

Making Tax Digital has certainly evolved extensively since its inception, and significantly over the last few months too. The vision that accounting for businesses would become a paperless utopia for all businesses by 2018 may have been a tad too ambitious, but as the digital revolution gathers pace across all aspects of life, it is inevitable that we will get there eventually.