On 21 July 2020 the Treasury set out a first draft of the government’s ten-year plan to modernise the tax administration system. This includes restarting the making tax digital (MTD) programme which had ground to a halt in the face of Brexit and the coronavirus pandemic.
MTD filing is to be extended to all VAT-registered traders from April 2022 and to most self-employed traders and individual landlords from April 2023.
MTD for VAT
Currently the MTD regime is compulsory for VAT registered traders who are required to be VAT registered as they have taxable turnover of over £85,000. An estimated one million VAT registered businesses with lower annual turnover are not required to enter the MTD regime as they are automatically exempt on the basis of their low VATable sales level.
The Treasury has now confirmed that all VAT registered traders will have to use MTD compatible software to file their VAT returns with effect from VAT periods starting on and after 1 April 2022. They will also be required to keep their VAT records in a digital format.
Around 30% of these small VAT-registered businesses have already been using MTD software voluntarily. However, the strategy paper says, “there have also been lessons learned, which will be used to inform and shape the introduction of the next phases of digital implementation”.
MTD for income tax
The MTD programme was originally planned to start with quarterly reporting for income tax, but the focus switched to VAT as it was perceived to be an easier transition for businesses that were used to making at least quarterly returns.
The ten-year plan sets a goal of April 2023 for micro self-employed businesses and unincorporated landlords to commence quarterly reporting through MTD software, and to keep digital records. Around four million unincorporated businesses and landlords with annual turnover exceeding £10,000 per year will be drawn into MTD.
However, the roll-out may be different to that initially envisaged as HMRC says it will draw on everything that has been learned from the implementation of the VAT service to date, and responses to the MTD evaluation document, which was published in March.
MTD for corporation tax
We have been waiting nearly four years for a consultation document on MTD for corporation tax, and now we are promised such a paper will be published in the autumn. It will be interesting to see if the consultation paper squares the circle of corporation tax and income tax reporting by the same body.
Paying the right tax
The second strand of the tax administration strategy is to explore the timing and frequency of tax payments, to make them more “real time” to align with the reporting of tax information. It admits that the technology infrastructure will have to be changed to support such tax payments. However, real time tax reporting under MTD can be introduced without changing tax payments.
HMRC says it wants to make it as easy as possible for people to pay the right amount of tax and make it harder for taxpayers to avoid paying tax. The government argues that using digital technologies, which permit HMRC to make interventions earlier, will prevent tax loss and reduce the tax gap although there is, as yet, no evidence that this will be the case.
The third part of the strategic plan addresses the UK’s creaking tax administration framework, much of which is over 50 years old, going as far back as the Taxes Management Act 1970. The government will publish a call for evidence later in the year to help identify a range of reforms to include:
- Obligations of taxpayers and HMRC
- Penalties and sanctions for failing to comply with obligations
- Taxpayers rights and safeguards
- How taxpayers are identified and register with HMRC
- How tax liabilities are identified amended and assessed.
The plan says, “Taxpayers should be able to view their tax position and tell HMRC anything it needs to know through a single online account.” This implies that the personal tax account and business tax account will be merged which is long overdue.