Update on Making Tax Digital

What is Making Tax Digital (MTD)?

MTD is HM Revenue & Custom’s (HMRC’s) strategy to modernise the tax system. It involves a move to digital record keeping and reporting by taxpayers and improving HMRC’s own internal systems to collate relevant information into one digital tax account for each taxpayer.

Initially businesses exceeding the VAT threshold, and in the future most other businesses and landlords, will have new requirements for digital record keeping and reporting to HMRC. There will also be associated changes to HMRC’s compliance powers, new penalties, other administrative changes and updated accounting requirements.

Timetable

After consultation with agents and taxpayers, HMRC has deferred the original tight timetable for implementation. Now, only quarterly VAT reporting will be compulsory from April 2019.

HMRC has promised no further mandatory digital tax reporting until at least April 2020. This provides a window of opportunity for software to be developed and taxpayers to get their digital records in order. Cloud accounting and the associated apps are being developed to support this.

MTD – quarterly VAT reporting

There will be two key requirements for relevant businesses:

• to maintain digital records to provide an audit trail to support the VAT returns;
• to use MTD compatible software to report the quarterly VAT data to HMRC.

We are waiting for clarity on the exact information and requirements, including how spreadsheets can be used, which is expected to be published in VAT regulations no later than April 2018.

HMRC is providing information for third-party software providers to develop the software needed to transfer data between systems and for the report that will interact with HMRC’s systems.

MTD – Income tax and Corporation Tax

HMRC aims to continue developing the required software and systems. A pilot is already in progress and this is due to be widened over time. However, HMRC has committed not to make it mandatory until the system can be ‘shown to work’.

Digital reporting – in year and end of year

Business and landlords will have to report online quarterly, with an end of year (EOY) declaration to HMRC from the software. The reporting deadline is likely to be a month after the quarter end. Agents will be able to file on behalf of clients. Other information, usually on a self assessment return will need to be submitted in due course through the same channel, with the same deadlines as now.

Current progress

For individuals, HMRC has provided access to Personal Tax Accounts (PTA). These show in one online place some of an individual’s tax and NIC information that HMRC holds. There is already a useful record of NIC contributions and expected state pension entitlement.

HMRC’s aim is to pre-populate the PTAs with items such as pay and tax/NICs deductions, bank interest and tax credits. More information will be shown as HMRC develops the systems, gradually removing the individual’s requirement to submit data automatically gathered from third-parties.

Although this may save some time in collecting and reporting information, the details will need checking. Please contact your Meston Reid & Co adviser to deal with any inaccuracies you spot in your PTA or if you think you are entitled to a repayment – as we may have already dealt with this.

Working with you

HMRC is working with third party providers to develop the necessary software to facilitate MTD. We are also trialling software to enable clients’ data to map directly from their systems to our systems. We will provide further updates as this area progresses.

HMRC has begun a pilot aimed at small businesses, and will expand this as MTD progresses. If you are interested in participating in any of the pilots once they are launched, or in developing a new accounting system so as to be ready for MTD, please let your Meston Reid & Co contact know and we can put you in touch with our appropriate specialists.