Yesterday the Government finally announced what many, including AAT, had recommended – a more realistic timetable for Making Tax Digital (MTD).
As the Government has often stated, MTD will help bring the tax system into the 21st century by providing businesses with a modern, streamlined system to keep their tax records and provide information to HMRC.
The timetable for implementing MTD has been amended to ensure businesses have more time to adapt to the changes.
Under the new timetable only businesses with a turnover above the VAT threshold (currently £85,000) will have to keep digital records and only for VAT purposes – and they will only need to do so from 2019. Furthermore, businesses with a turnover below the VAT threshold will not be asked to keep digital records, or to update HMRC quarterly, for other taxes until 2020 at the earliest.
The above is very much in line with recommendations first made by AAT back in the summer of 2016, the only real distinction being that we had suggested a three-year phased implementation programme rather than the two-year programme announced yesterday.
With the changes announced earlier this year – a temporary increase in the £10,000 threshold to the VAT threshold and delayed implementation by one year – the Government had clearly listened to ideas first put forward by AAT and subsequently mirrored by others. However, this did not go far enough. The announcement yesterday of what effectively amounts to a two-year delay is much better and demonstrates a real willingness on the part of Government to listen to the views of AAT and others to ensure MTD is a success.
By adopting a phased implementation programme there will be:
- More time for accountants and agents to educate and raise awareness amongst their client base (we launched a specific AAT MTD Centre last month for exactly that purpose
- Accountants and agents will have scope to improve their familiarity with the MTD processes through experience with registered businesses prior to full implementation
- Clarity that MTD remains compulsory but that there will be phased implementation to both help the business community and help HMRC achieve the best possible outcomes
- Maintenance of customer confidence and goodwill in HMRC
So, the timing is much improved and provided there are no more unexpected delays we can move forward with certainty. That said, there remains the sticky issue of thresholds – a subject not addressed in the Ministerial Statement issued yesterday.
Many commentators, including politicians, professional bodies and special interest groups, have called for the cut-off point to be maintained at the VAT threshold of £85,000 on a permanent basis. Indeed, a small number of our own members have called for the same.
However, this ignores the fundamental basis upon which MTD was devised, which is to help reduce the tax gap. Approximately 50% of the tax gap (£18.3bn) is due to errors in the tax returns of SMEs and less than 8% of this comes from companies with a turnover above the VAT threshold. In other words, the vast bulk of the savings are to be made by engaging companies with much lower turnovers. Almost 60% of the £18.3bn gap is attributable to those with a turnover between £15,000 and £85,000 so it wouldn’t make any financial sense to exclude them from MTD on a permanent basis.
AAT has always accepted the need for a reasonable threshold, we simply wanted to get there more slowly to give companies and agents, as well as HMRC themselves, a chance to get to grips with what was required. This is why AAT had consistently pushed for a three-year phased implementation programme.
Our original recommendation was for an £85,000 threshold in year one (the current VAT threshold), £33,500 (higher rate tax band) in year two and £11,500 (the current personal allowance) in year three – and for the threshold to be maintained in line with the personal allowance each year thereafter.
The final point very much remains AAT’s objective. Ultimately, in 2020 the threshold should not fall to £10,000 but should instead mirror the personal allowance.
According to a 2016 MTD survey, less than 5% of AAT members support a £10,000 threshold whereas 65% support the threshold matching the personal allowance. By linking the threshold to the personal allowance, the need to regularly revisit the limit is avoided and fiscal drag will not be an issue.
A threshold of £10,000 also means many businesses whose profits are less than the personal allowance and currently pay no tax would still need to go through the MTD process. Something the Treasury Select Committee perhaps understandably described as “palpably absurd.”
We will continue to make this point to HMRC, Treasury and other interested stakeholders and hope that as with the implementation timetable, common sense eventually prevails.
Phil Hall is AAT's Head of Public Affairs and Public Policy.