The UK Government has announced that it will delay ramping up its Making Tax Digital (MTD) project, in light of COVID-19.
Making Tax Digital introduced new reporting obligations on value-added tax registered persons, requiring them to keep their records digitally (for VAT purposes only) and provide their VAT return information to HM Revenue and Customs (HMRC) through MTD-compatible software. The regime was introduced from 1 April 2019.
Affecting some 1.2 million businesses in the UK whose annual turnover is greater than £85,000, the MTD initiative is intended to reduce the amount of tax lost by the UK Exchequer to errors.
Tax gap figures showed avoidable mistakes cost the UK Exchequer more than £9.9bn in 2018, with £3bn attributable to VAT alone.
Originally the regime was to be introduced for income tax also, but the plans were reined in after lobbying from taxpayer groups.
Taxpayers and their agents criticised the additional burden that would be placed on taxpayers, at a time when many businesses are struggling to come to terms with the UK leaving the European Union.
Digital record-keeping and quarterly reporting by small businesses and landlords for income tax purposes has now been deferred until at least 2021.
- An Update On The UK's Tax On Diverted Profits
- BEPS Changes to the UK-Canada Double Tax Agreement
- An Update on the OECD’s Digital Tax Work
- The US's Opposition to Various Digital Tax Proposals
Light-Touch Enforcement of MTD
A light-touch approach was taken to the enforcement of the regime from April 2019. It was agreed that value-added tax-registered businesses would be required to establish digital links for the transmission of data to HM Revenue and Customs only from 1 April 2020. The UK Government has now said that businesses will be allowed an additional year, until 1 April 2021, to establish such digital links between all parts of their functional compatible software.
The announcement that the expansion of the project will be deferred will be welcomed by businesses, at a time when they will be focusing on short-term tax planning issues connected to COVID-19 and ensuring business continuity.
According to a survey conducted by the Chartered Institute of Accountants, the initiative has so far failed to deliver. It found that:
Nearly 90% of respondents say that MTD for VAT has not reduced errors;
The costs of MTD compliance have far exceeded government estimates; and
Just 14% of respondents say there has been an increase in productivity in their organization as a result of MTD for VAT.
The Digital Links Requirement
Under MTD, if a set of software programs, products, or applications are used as functional compatible software, there must be a digital link between these pieces of software. This digital link is required where the data to be included in any of the boxes of the VAT Return has been prepared within a software program, product, or application, and this data is then transferred to another program, product or application in order to submit the VAT Return data to HMRC via the API platform.
During the newly extended "soft landing period", where a digital link has not been established between software programs, HMRC will accept the use of cut and paste to transfer tax data as being a digital link for these VAT periods.