15th June 2017

There has been much noise and media interest surrounding the Making Tax Digital (MTD) project since its initial announcement two years ago and the digital initiative continues to trigger controversy, with industry wrangles over timelines, costs to companies and a disturbing number of businesses seemingly unaware of exactly what is involved.

The last development to MTD was that it was removed from the Finance Bill in a direct response to the calling of a general election. However, this does not mean that the project has gone away, and it will likely be reintroduced shortly now that the election is over, with some 400,000 businesses due to go live in April 2018 in line with the current timetable.

In preparation for the resurrection of MTD we are taking the time to explain what is known so far about the project, its current progress and if there is anything that businesses should be doing now to prepare.

What is the Making Tax Digital (MTD) project?

MTD is a project that aims to transform HMRC into “one of the most digitally-advanced tax administrations in the world” (David Gauke, December 2015) through the introduction of a fully automated system for the submission and handling of individual and corporate accounts and tax returns. It sets out the following four key objectives:

  1. Tax simplified

Digital tax accounts will allow taxpayers to view information held by HMRC, with taxpayers able to check the completeness and accuracy of the data at any time. The system will also remove the need for taxpayers to provide HMRC with information already collected by the tax authority, or information accessible from elsewhere, such as banks, employers, and other government departments.

  1. Making tax digital for businesses

Information will be collected and processed by HMRC in real time so that businesses will no longer have to wait until the end of the tax year to find out how much tax is due. From April 2018, some businesses and property owners will have to update the tax authority at least once a quarter on their main source of income, or a secondary source, if applicable.

  1. Tax in one place

Taxpayers will be able to view their “complete financial picture” in their digital tax account by 2020, including their liabilities and entitlements. Taxpayers will also have the ability to offset an overpayment of one tax with the underpayment of another.

  1. Making tax digital for individual taxpayers

Digital tax accounts can now be accessed by individual taxpayers. Individuals will also be able to communicate digitally with HMRC through webchat and secure messaging.

What are the timelines for MTD?

The government has started with small businesses, as this is where they think the most gains can be made in reducing administration, given that the majority of large businesses will already use accounting software and keep digital records.

Take-up of the scheme is staggered and the first phase requires all unincorporated businesses and landlords with turnover above the VAT threshold to participate by April 2018. This will be followed by those under the VAT threshold in April 2019 and, finally, incorporated businesses will take part in the scheme by April 2020. *

Below is a diagram showing the timeline for required take-up:
making tax digital after the election

*There is an exemption from participation in the scheme for any business with an annual turnover of less than £10,000.

The Pilot

A pilot of MTD is currently underway. It is hoped that real insight will be gained from this that will go into defining the legislation and realistic implementation costs and timelines. With less than 100 businesses and fewer than 10 agents in the pilot however, it is still at very early stages.

How has MTD been received?

In general, the MTD project is supported by individuals, agents and software providers, in that it will streamline administration time for businesses and improve accuracy of and access to tax records.

Improved Business Insight and Streamlining
MTD has the potential not only to reduce business administration and book-keeping time but also to improve financial planning. The introduction of electronic software will allow for forecasting, cashflow predictions, and the use of data to improve business efficiency, and it should also have the added benefit of improving accuracy of record-keeping and tax returns, as well as removing some of the confusion linked to accounting.

However, the MTD project has been plagued by criticism and negative feeling for its lack of consultation and commitment to what are seen as unrealistic deadlines and cost estimates.

Despite an exhaustive consultation process, with some 3,000 responses, the government was widely panned for only introducing appropriate consultation at stage 2 of the process, when ideas for progression had largely been decided. The consultation also raised a number of concerns that are still to be investigated:

  • Pace of change
  • Capability of the smallest businesses and those businesses who struggle with technology
  • Burdens on businesses
  • Agents’ access to digital services to support clients
  • Data security when using third party software

There is still a great deal of uncertainty over what exactly will be involved in implementing and operating MTD, both for the government, software providers and businesses themselves. It is anticipated that businesses will be expected to invest in some sort of software for electronic record-keeping and HMRC’s estimates of £280 average cost per business have been found to be widely disbelieved by most small businesses. There is an assumption from HMRC that small businesses will submit their own quarterly updates and use free software but this seems unlikely in many cases and poses a significant challenge for the smaller business. The Administrative Burdens Advisory Board (ABAB) has stated that, without the detailed legislation and products to test, all estimates are shooting in the dark.

In addition to this, HMRC has been asked to consider that it is not just the cost of implementation but also the cost associated with the time it takes for businesses and people to learn new software and accustom themselves to a new way of working.   The Government has pledged to support people in this respect with free general digital skills training for any adult.

What is the impact of MTD’s removal from the Finance Bill?

A delay in the MTD project could be a positive thing as it gives an opportunity to revisit timelines, which have been widely criticised for being too ambitious. It also gives an opportunity to re-examine the proposals and provide more detail on the legislation which, to date, has been quite basic.

Software developers such as Sage, Quickbooks and Xero, who will play a large part in delivering the software required for the project, will also benefit from a period of extra time to familiarise themselves with HMRC’s application program interfaces (APIs).

The delay also means that time can be given to properly analyse and understand the results of the pilot and use this insight to develop a better and more comprehensive set of legislation.

Furthermore, an extended timescale would give more opportunity for correct and appropriate communication, which has been lacking to date. As plans have developed, there has been increased confusion as to what MTD really means and the implications for businesses. A fresh “start” gives HMRC the chance to revisit its communication plan and ensure concise and clear messaging.

However, it remains to be seen if the government will, indeed, incorporate this additional delay to the project, or if it will continue to work to the proposed deadlines when the project is reinstated.

In a recent interview, David Truman, tax partner at Menzies, said: “The government’s decision to defer this legislation could be very good news. However, it is unclear if this is a temporary deferral pending a second finance bill after the election or whether it will be more permanent. If this is a temporary deferral, those affected will have even less time to prepare for the legislation and will be left floundering in an information vacuum. It would be far preferable if the government had set a timescale for the deferral – a minimum of one year.”

What should you be doing now?

Regardless of any potential delay to MTD, it is almost certain that it will return with gusto now the election is over. If you are a business owner that will be impacted, particularly if you sit in the first tranche of those over the VAT threshold who must comply by April 2018, then there are some areas where you can get a step ahead.

Adopt electronic record-keeping now
If you don’t already use electronic software for your record-keeping, then you can start now to give yourself more time for familiarisation. We are fully trained and can offer advice across a range of accounting software, including Sage, Xero and Freeagent, using our knowledge to recommend the best solution for your business.

Build your digital skills
If you have little digital experience then you will benefit from expert professional business and tax advice to plan your way forward. Lack of digital experience is a business risk that can be managed, and is best faced now.  We can advise you on the support and resources that are available to help you transition.

Watch this space!
We await further information, which should be made available shortly now that the general election is over.

We will continue to publish information as soon as it’s available to ensure that our clients remain up to date with their obligations.

david cook ttr barnes

Chartered Accountants in Sunderland, offering expertise on everything from Tax and Business Planning,
to Accounts and VAT.