The Making Tax Digital revolution has begun

While Rishi Sunak, the Chancellor of the Exchequer, recently announced a one-year delay in the introduction of Making Tax Digital (MTD), the revolution has already begun.

Making Tax Digital, landlords, businesses and taxpayers

Even though Rishi Sunak recently announced a one-year delay in introducing Making Tax Digital (MTD), this needs to be addressed sooner rather than later. While many companies and individuals are already familiar with online reporting, MTD is a whole different process. The new deadline date of April 2024 for those that currently lodge annual self-assessments may seem some time away, but these things have a habit of creeping up on us!

What is the theory behind MTD?

The term, Making Tax Digital, is something you will hear of more and more in the coming months. The idea behind MTD is relatively simple, transforming tax administration so that it is:-

More effective
More efficient
Reduces the number of errors

At first glance, many people may automatically assume this is similar to the current HMRC online accounts. Unfortunately, MTD is very different and will require the use of software compatible with the HMRC system. It is still possible to use bridging software that will incorporate many existing business spreadsheets. However, research into those already using MTD, VAT and complex business systems suggests there may be more challenges with bridging software. This is something to discuss with your accountant, whether you incorporate existing spreadsheets and bridging software or switch to a new HMRC MTD compatible software package.

What areas will MTD cover?

The fact many people are blissfully unaware that MTD has already been introduced for VAT registered businesses and “more complex” companies is a testament to the relatively smooth transfer. Those parties which will be obliged to use MTD in the future include:-

VAT registered businesses with a taxable turnover above the VAT threshold
More complex businesses such as trusts, not-for-profit organisations, VAT divisions, VAT groups and public sector entities
Businesses with a turnover below the VAT threshold
Taxpayers who file income tax self-assessments for business
Landlords with property income of more than £10,000 a year

Over time, the existing HMRC system, paper returns and online accounts will be phased out and eventually withdrawn. Those with concerns about the switch to MTD will be relieved to learn of the highly successful Australian model, already fully operational. Can the UK authorities follow suit?

What are the deadlines for introducing MTD?

As we touched on above, Chancellor of the Exchequer Rishi Sunak recently announced a one-year extension for landlords and those who file income tax self-assessments for business. The historical and future deadlines for switching to MTD are as follows:-

April 2019: VAT registered businesses with turnover above the VAT threshold
October 2019: More complex businesses, including trusts, not-for-profit organisations, etc
April 2022: Businesses with a turnover below the £85,000 VAT threshold
April 2024: Taxpayers who file income tax self-assessments for business
April 2024: Landlords with property income of more than £10,000 a year

As you can see, the MTD rollout began well before the Covid pandemic, but the authorities have used common sense. Originally the plan was for those filing tax self-assessments for businesses, and landlords with income exceeding £10,000 a year, to switch to MTD in April 2023. So while the one-year extension is welcome, it is essential not to take your foot off the gas. Time has a habit of catching up very quickly!

How will MTD impact landlords?

The theory behind MTD is far-reaching, but for many, it is a welcome change. Rather than experiencing the annual rush to get your self-assessment paperwork together, you can update your MTD account in real-time. Indeed, the use of mobile app MTD compatible software effectively allows you to update your account “on the go”. So what are the legal obligations under MTD? Under the MTD system, those filing self-assessment tax returns will be required to submit quarterly updates of income and expenses. The following table provides details of the reporting periods and filing deadlines.

	Dates Covered	Filing Deadline
Update 1	6 April to 5 July	5 August
Update 2	6 July to 5 October	5 November
Update 3	6 October to 5 January	5 February
Update 4	6 January to 5 April	5 May

This information must be submitted within one month of the end of each quarter. The final annual return must be signed off by January 31 following the end of the tax year in question. The quarterly returns allow you to keep a live update of your income, expenses, profits and tax position. The extended period up to 31 January allows for any edits or amendments to be made.

Real-time accounting

In theory, those who update their MTD account each time they incur an expense or receive income will have an “up-to-date” summary of their business. The ability to note expenses and income, together with any tax allowance adjustments, on an ongoing basis should reduce errors. It is estimated that avoidable mistakes with self-assessment tax returns cost the Exchequer £8.5 billion in the 2018/19 tax year. Real-time digital accounting has many benefits, which include:-

Monitoring the health of your business in real-time
Quarterly tax assessments should avoid annual tax liability shocks
Helping to identify areas of potential cost savings
Digital records will assist with the potential sale of a business

Of course, the information that your MTD account will provide in the future is only as good as the information furnished. Consequently, it is still essential to take advice from your accountant to ensure that you are utilising all of your tax allowances and not paying excessive taxation.

MTD penalty points

While we await confirmation, it will be no surprise to learn that the authorities are currently considering a new penalty points system for those missing MTD deadlines. In a similar fashion to points on your driving licence, the following system is under review:-

First penalty points if filing date is missed by more than 15 days
Late payment penalties will begin after 15 days, doubling after 30 days with daily interest added
After two years, penalty points are removed from your records

Thankfully, it looks as though there will be a grace period for at least the first 12 months with no penalty points handed out.

Summary

Many people will be surprised to learn that MTD is already an integral part of VAT registered companies and “more complex” businesses. In all honesty, standardised digital tax returns have been in the pipeline for some time. The primary purpose of MTD is to ensure that the tax authorities maximise their income. Avoidable mistakes are said to have cost the Exchequer £8.5 billion in the 2018/19 tax year. However, the MTD system has several benefits for businesses and individuals. If the UK authorities can replicate the introduction of MTD by their Australian counterparts, that would be a great relief. The one-year extension for taxpayers/landlords to join the MTD revolution has been welcomed, especially with the ongoing pandemic challenges. However, it is essential to discuss your switch to MTD with your accountant to ensure that everything is in order before the deadline.