Making Tax Digital – An Overview

There is currently a lot of discussion on the topic of “Making Tax Digital” and we thought it may be useful to provide a brief overview of how HMRC intends for this to work.

At a glance:

  • Under MTD, HMRC aims to join up its internal systems and so create one account for each taxpayer, for all their different taxes within HMRC.

       o    Via their ‘digital account’, taxpayers will be able to view all their payments, and offset
overpayments in one tax against underpayments in others.

  • MTD imposes new quarterly filing and potential payment obligations for businesses and landlords.

o    The first phase of MTD affects small unincorporated businesses and landlords.

o    The second phase is for VAT

o    The third phase will affect companies, although not until 2020.

  • A new late filing and payment penalty system will apply to quarterly returns and annual declarations.
  •   Accounts and returns?

o    Although HMRC claims that the annual tax return will go, businesses will still need to prepare year end accounts in order to reconcile their quarterly payments, claim various reliefs and make accounting adjustments.

o    They will be required to file a year end declaration, instead of a Self-Assessment (SA) return/ Corporation Tax (CT) return.

o    The key difference between the year-end declaration and a tax return, other than in name, appears to be that HMRC will pre-populate some of the return figures, e.g. bank interest, income from employment, pensions, etc.

o    For the self-employed, it is assumed that HMRC might attempt to pre-populate the year-end declaration with data submitted in the quarterly return figures. This is unlikely just yet, and so as is already the case with VAT, a businesses will still need to reconcile their quarterly returns to their year-end accounts and so all must reconcile to the end of year declaration.

o    All taxpayers will need to check that pre-populated data is correct.

  •  HMRC is consulting on changing the way that tax assessments interact with accounting basis periods. Its systems may not cope, if say 5 million taxpayers are all pressing ‘send’ at once.

o    It is also reviewing simplification of cash accounting for both businesses and landlords.

  • Businesses that do not use smartphones, software or computers will be obliged to do so.

o    HMRC will not be providing free software.

o    MTD is likely to be expensive for many micro and small businesses. Some 2 million businesses are not represented by agents and they will have to learn the new systems. 

  • Some 1.3 Nano businesses (turnover below £10k) will be exempt from the new regime. 

o    They may be brought into the regime after a year.

  • HMRC expects that apps will ‘prompt’ taxpayers when they purchase goods and services so that taxpayers will learn the tax deduction rules on a day to day basis.
  • HMRC expects taxpayers to obtain their guidance online and not via the telephone: it will be developing online resources to reduce human interaction by telephone.

For further information from HMRC about this together with their proposed timeline, go to: