As part of the Legislation Day announcements on 21 July, the government set out its roadmap for the further roll out of Making Tax Digital (MTD). The announcement covers: VAT, income tax, and corporation tax.
This roadmap widens the net so that other taxes will be reported on, similar to the way VAT is reported. While this will be familiar to VAT registered businesses it will require a significant change to the way records are maintained for small businesses and landlords.
MTD for VAT will be extended to all VAT-registered businesses from April 2022, with income tax quarterly reporting applying from April 2023. Corporation tax will be consulted on later this year.
MTD for VAT
Since April 2019, the vast majority of VAT-registered businesses with taxable turnover above the VAT threshold of £85,000, have been mandated to keep digital VAT records and to submit their VAT returns using MTD compatible software.
From April 2022, compulsory MTD for VAT will be extended to all VAT-registered businesses.
ICAEW has always believed that mandating digital record keeping should not be necessary, but businesses should be able to choose the best way to keep their accounting records. It has also repeatedly argued that the right moment to digitalise should be driven by the business case and not legislation.
The government’s view is that digital records are more accurate and avoidable mistakes cost the Exchequer around £8.5bn a year. HMRC considers that the amount of tax lost to these avoidable errors is reduced, but not necessarily eliminated, via:
What MTD for VAT means
From April 2022, all VAT-registered businesses will be mandated to keep VAT records in digital form. Businesses may use dedicated record-keeping software, a combination of software packages or spreadsheets. If spreadsheets are used, the software must be capable of taking the relevant information from the spreadsheet electronically and sending it direct to HMRC without further manual adjustment. Many businesses rely on bridging products to fulfil this function.
The deadlines for sending VAT returns and making payments have not changed.
The information submitted to HMRC is the same as on the nine boxes of the current VAT return, (although as the UK leaves the EU, these boxes may change). Details of individual transactions are not submitted to HMRC.
MTD for income tax
MTD for income tax will apply from April 2023 for unincorporated businesses and landlords with total gross income above £10,000. Businesses and landlords who join MTD for income tax will need to submit a quarterly summary of their business income and expenses to HMRC using MTD-compatible software.
The government observes that this information would have been very useful during the development of support packages for business during the recent COVID-19 crisis, when HMRC found that the most recent taxpayer income data held for the overall population of self-employed taxpayers was from 2018/19 tax returns.
The existing small pilot of MTD for income tax will be extended to allow more taxpayers to test and familiarise themselves with the system in good time before mandation.
The intention is that having made quarterly submissions of income and expenses, taxpayers will receive an estimated tax calculation based on the information provided to help them budget for their tax. At the end of the year, they will be able to add any non-business information and finalise their tax affairs using MTD-compatible software. This includes information about employment income, bank and building society interest, dividends, pension contributions, student loan repayments etc, and the goal is for this to replace the need for a self assessment tax return.
Software developers will need to build this additional functionality into their products as MTD for income tax continues to develop.
More frequent reporting may also lead to more frequent payment of tax in due course, but that is not the intention at this stage.
More information on who is eligible and how to join the MTD for income tax pilot is available on gov.uk (Sign up your business for Making Tax Digital for Income Tax). HMRC will widen eligibility over time and the pilot will support most sole traders and landlords by April 2021.
The government has announced it will consult in the Autumn on the detail of extending MTD to companies. Currently large companies report their Corporation tax liabilities quarterly and pay that liability, similar to how VAT currently works. It is envisaged that Corporation tax for small and medium companies will be required to do the same in the near future.