With all that’s been happening in 2020 you could be forgiven for thinking that HMRC has lost its enthusiasm for Making Tax Digital (MTD).
Well you might think that, but…..I’d be willing to bet you’re wrong
Where are we?
Since April 2019 all but a handful of exempted VAT-registered business with VAT-able turnover above the £85,000 VAT registration threshold (the compulsory registered) have been required to keep digital VAT records and submit their VAT returns using MTD-compatible software.
All of which means, 1.2m businesses are now legally required (mandated) to keep a digital record of their business transactions, but only for VAT purposes.
Scratching the surface
However, in January 2019 the entire UK business population was estimated to be 5.9m. So, HMRC’s drive to digitize British business has barely scratched the surface.
There is a long way to go to achieve its ambition to become one of the most digitally advanced tax administrations in the world.
The coronavirus effect
I fully expected a restart in March. The Budget and then Chancellor’s Summer Statement was strongly tipped to include a high-level statement-of-commitment to MTD as a way of signalling a move to the next stage in its rollout.
As know everything changed – including the Chancellor. As Rishi Sunak faced the economic impact of Covid-19, there was little time to focus on strategic things.
As the UK turns the corner, I am growing increasingly certain there will be an imminent announcement over the future of MTD. While it might not come until the autumn Budget, I believe that it will be much sooner. Possibly by the end of this month.
VAT or Income Tax?
Buoyed by the ‘success’ of the lunch of MTD for VAT HMRC will almost certainly look next to tackle income tax for the self-employed, known generically as Making Tax Digital for Business (MTDfB) .
The Department’s long-term mission is to get all but the smallest of unincorporated businesses and private landlords (the self-employed) to keep a more or less real-time digital
record of their business transactions and to file regular updates of their income and expenditure. At least quarterly.
The last time HMRC talked about rolling out MTDfB the size of the affected population was thought to be in the region of 3.6m.
Initially, the intention had been to go for a big bang approach. This was never realistic and after a period of consultation, it was decided to start with a small population, around 400K. This cohort was made up of the self-employed with a turnover of £85K and above.
They should have been legally required to on-board during the 2018/19 tax year But after listening to industry concerns, the plug was pulled and the launch of MTDfB was deferred to at least April 2020.
If my bet is right, things are about to change. During the coronavirus crisis, the Chancellor was hampered by not having real-time information on the self-employed. This is now a factor in favour of pressing forward again with MTDfB.
I expect to see HMRC expand its current limited MTDfB pilot (which is only supported by six developers) to all comers from April 2021. With the view to returning to mandating those with turnover above £85K to onboard for quarterly reporting.
- 2021 – HMRC opens up a large scale pilot opens.
- 2023 – Mandate the approximately 400,000 self-employed with turnover above 85k.
- 2024-5 – Mandate self-employed with turnover below the 85k threshold.
- 2025 – Start to mandate companies
Larger scale change?
It is possible that the Government’s ambition will go well beyond mandation for the larger self-employed business. If it does, you can expect any future announcement to be backed up with a new timebound MTD roadmap which seeks to set out the route to full mandation for all. Including, companies, the balance of the self-employed and the voluntarily VAT registered.
However, the Government needs to balance the benefits of a more aggressive pace against the impact on businesses reeling from the financial crisis of a lifetime.
But what about the software developers
You might reasonably ask ‘what about the shortage of MTDfB compliant software?’.
One of the learnings from the introduction of MTD for VAT was around the late development of the software. This made life difficult, as accountants weren’t able to visualise how they would need to work would change, creating confusion and resistance.
Based on my experience of VAT mandation once a clear government announcement has been made over the future direction for MTD software developers will double down on their effort to deliver MTDfB compliant software.
In fact, I am confident that many have near market-ready products. The companies are just waiting for Government to fire its starting gun.
If I am right the impact of a relaunch of MTD will mean that licenced accountants and AAT members working in finance teams will face a steep learning curve as they get back up to speed on MTD over the coming months.
It is vital that you keep abreast of what is required, your client’s / employers rely on you to give them the advice that they need at the right time.
Still, AAT will be one step ahead to ensure that the information you require is to hand just when you need it the most.
Brian Palmer is the tax policy adviser for AAT.