The Background to Making Tax Digital

Making Tax Digital

Increasingly, businesses and agents see the benefits of digitisation. Consequently, millions are already banking, paying bills and interacting with customers or suppliers online.  Also, many are already using accounting software.

The background to Making Tax Digital

HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world. Making Tax Digital is making fundamental changes to the way the tax system works. HMRC hopes this will transform tax administration so that it is:

  • firstly, more effective
  • secondly, more efficient
  • thirdly, easier for taxpayers to get their tax right

The move to digital integration will eliminate many of the existing paper-based processes. Therefore, businesses and their agents will have more time to focus on business opportunities. As a result this will encourage growth and foster good financial planning.

Many businesses use an agent and MTD will allow agents to continue to provide a full service in supporting their clients.

The majority of customers want to get their tax right. However, the latest tax gap figures (2016 to 2017) show too many find this hard.  For example, avoidable mistakes cost the Exchequer over £9 billion a year. Digital records offer improved accuracy. Many software products offer built in help. Sending records directly to HMRC will reduce the amount of tax lost to avoidable errors.

What happens now?

VAT-registered businesses with a taxable turnover above the VAT threshold (£85,000) are mandated to keep digital VAT records and send returns using MTD-compatible software from 1 April 2019.

A small minority of VAT-registered businesses have more complex requirements.  HMRC have decided to defer mandation by 6 months for these. They will have sufficient time for them to test the service in the pilot before they are mandated to join.

These businesses will have to keep digital VAT records and send returns using MTD-compatible software from 1 October 2019.

What happens next?

The primary legislation for MTD relating to VAT and Income Tax is contained in the Finance (No.2) Act 2017. This provides certainty about the broad framework in which MTD will operate. Secondary legislation for VAT laid in February 2018 comes into force from April 2019.  See this post for details of the Making Tax Digital Timetable.

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