The UK government’s tax authority, Her Majesty’s Revenue & Customs (HMRC) is not generally associated in people’s minds with technological innovation. However, the HMRC hopes its new initiative, Making Tax Digital (MTD), introduced in April 2019, will improve radically the way business tax is collected and administrated in the UK.
What exactly is Making Tax Digital (MTD)?
Making Tax Digital (MTD) is the UK government’s strategy to bring tax collection into the 21st century. Under MTD businesses will be required to use digital technology to seamlessly provide the government with the financial data required to calculate their tax liability. This means that businesses will have to ensure they can provide this data automatically to HMRC, from their own digital accounting records.
Who will be affected?
The Government has already introduced MTD for businesses who pay Value Added Tax (VAT). VAT is a consumption tax added to the sales price of most product and services and the standard rate of VAT in the UK currently stands at 20%. MTD will be extended to include income tax and corporation tax reporting in the next few years. This means that the implications of these changes will be both immense and far-reaching.
To get an idea of the size and scope of the current changes it is worth looking at the numbers involved. Businesses with taxable annual turnovers above the VAT (Value Added Tax) threshold of £85,000 (around $107,000) will be required to comply with MTD. In the 2017-18 tax year, 17% of sole traders and 71% of UK companies had to pay VAT.
How does Making Tax Digital work?
MTD requires businesses to use specialized HMRC compatible accounting software. This is accounting software which has been designed to connect directly to the Government’s tax recording systems and transfer the required financial data to them automatically.
This means that business owners or their accountants will not be allowed to simply submit manual returns to the HMRC as they may have done in the past.
The intention is that removing human intervention will help remove the risk that businesses might submit incorrect tax accounting data. This can occur for a variety of reasons such as human error.
What does this mean for businesses?
On the face of it, meeting the requirements of the HMRC’s MTD initiative may appear to be relatively straight forward.
However, businesses will have to ensure that they have accounting systems that now meet the HMRC’s requirements. Significant numbers of business owners will have to make potentially time consuming and expensive changes to their existing accounting procedures in order to comply with the HMRC’s new arrangements. This means that they may have to purchase new compatible accounting software, or, where a business records financial transactions using computer spreadsheets, they will have to obtain special compliant ‘bridging software’ that has been designed to deliver the required financial information to HMRC.
The good news is that the HMRC does not endorse any particular accounting software system and at the time of writing the HMRC website lists and links to over 400 compatible software packages. Well known accounting software providers like Xero, Quickbooks (Intuit) and Sage are on the list, as well as a wide variety of other companies.
When is this happening?
From April 2019 VAT registered businesses and organisations with taxable annual turnover above the VAT threshold have been required to comply with MTD requirements. From 2021, MTD will be extended to include income tax and corporation tax reporting.
Criticism of Making Tax Digital
It is worth pointing out that not everyone in the UK business community is completely happy with HMRC’s plans for Making Tax Digital.
A survey by the British Chambers of Commerce of 967 UK businesses, undertaken in January and February 2019, just weeks before the introduction of MTD, revealed some worrying statistics.
The survey found that around 1 in 5 companies affected by MTD had never heard of Making Tax Digital or know it only by name. Furthermore, 38% of businesses have had to buy new accounting software or upgrade existing software resulting in significant financial costs. (Similarly, a survey undertaken by Quickbooks accounting software developers, Intuit, in March 2019 found that only 25% had already taken all of the necessary steps to become MTD compliant.)
The British Chambers of Commerce survey also revealed dissatisfaction with the Government’s timing of the introduction of MTD for VAT which is at a time when businesses are also burdened with the preparations for the impacts of the UK leaving the European Union (Brexit).
The British Government has high hopes for MTD.
They believe that business owners will benefit from MTD as they will find it easier to submit accurate tax returns. The government itself hopes to benefit because the planned changes will help cut fraud and under/over reporting of tax liabilities resulting from things like human error.
Whether the initiative will help the HMRC reach its goal of becoming “one of the most digitally advanced tax administrations in the world” remains to be seen. However, one thing is certain. Tax authorities all over the world will be watching closely to see what they can learn from the UK’s experience and to see if the benefits the UK government anticipate actually materialize.