£10,000 Making Tax Digital threshold “inherently unfair and unjustifiable,” says AAT

AAT Head of Public Affairs & Public Policy urges Government to think again on the proposed Making Tax Digital (MTD) exemption threshold for businesses and landlords with business income over £10,000 due to come into effect in 2023.

Broad and proactive support for MTD

AAT has always backed the concept of the Government’s £1.3bn Making Tax Digital (MTD) programme, believing that tax administration in the UK requires digitisation and that individuals, businesses, and the economy as a whole can benefit from greater use of digital technology.

Unlike many others, AAT did not repeatedly call for delays to MTD but instead worked to ensure our 4,250 AAT licensed accountants were ready for the introduction of MTD so that they could offer expert guidance and assistance to the 400,000 small businesses for whom they provide tax and accountancy services.

The approach proved successful, with many digitally engaged members embracing the change, most members welcoming the improvements brought about by MTD, and many of the initial sceptics acknowledging that once MTD came into effect, it was at worse better than they had feared, with improvements for both accountants and their clients alike, and at best – in a small number of cases – even described as “transformative.”

Improvements needed

However, AAT has made a number of recommendations as to how MTD could be improved. 

One of these longstanding recommendations, first made when MTD was announced back in 2016, was that the exemption threshold should not be £10,000 as Government initially proposed, but instead should be set at the same level as the personal allowance (currently £12,500). 

AAT understands the importance of reducing the exemption level below the current VAT threshold (£85,000) given HMRC estimates 43% of the tax gap (£13.4bn) is attributable to small businesses; the obvious need to tackle this, and the suggestion that MTD can play a part in doing so.

Yet the reduction must not be to the figure of £10,000 and instead should be brought into line with the personal allowance. This £2,500 gap may appear small but would make a big difference.

What’s wrong with a £10,000 MTD threshold?

There are many reasons why AAT and most of its members were quick to oppose the £10,000 threshold. For example;

• the £10,000 figure appears to be entirely arbitrary
• setting the threshold at the personal allowance level will avoid the need to regularly revisit the limits of an arbitrary figure and will reduce fiscal drag
• the £10,000 figure, set below the personal allowance, means that non-taxpayers will have to register for MTD and provide quarterly updates despite having no tax liability
• linking the threshold to the personal allowance will ensure only those with a tax liability have to register for MTD
• in 2016, 65% of AAT licensed accountants supported linking the threshold to the personal allowance compared to less than 5% who supported a £10,000 threshold

Politicians from all parties criticise the proposed threshold

In January 2017, this proposed threshold was heavily criticised by the cross-party Treasury Select Committee who described it as “palpably absurd”

In November 2018, the cross-party House of Lords Economic Affairs Committee described the proposed threshold as “untenable”

The Government originally promised to review the exemption threshold, was then silent on the issue before announcing in July 2020 that self-employed businesses and landlords with annual business or property income above £10,000 (income, not profits) will need to follow the rules for MTD for Income Tax from their next accounting period starting on or after 6 April 2023.

So, a threshold criticised as being too low in 2016 will be introduced at the same £10,000 level seven years later, in 2023. If it was too low in 2016 it will certainly be too low in 2023.

As well as creating considerable unnecessary bureaucracy for those with no tax liability – and more work for an already under pressure HMRC – the £10,000 threshold is an inherently unfair and unjustifiable measure that needlessly undermines the credibility and user acceptance of MTD.

The Government is effectively shooting itself in the foot and needs to change tack before any more damage is done. AAT very much hopes that the New Year will bring about a new start as far as the MTD exemption threshold is concerned. We will continue to campaign for such a change.

Phil Hall is AAT's Head of Public Affairs and Public Policy.