In July 2020, the UK Government announced plans to increase the scope of Making Tax Digital (MTD), its flagship scheme to streamline and digitalise tax administration for small businesses and self-employed individuals.
Here, we provide background to the MTD scheme and the Government's proposed changes.
What is Making Tax Digital?
MTD was originally to be rolled out in 2018 for all small taxpayers with turnover exceeding £10,000. Following concerns expressed about the compliance burden, MTD was rolled out instead from 1 April 2019, only for those already obligated to file VAT returns – those with turnover greater than £85,000.
Under MTD, these businesses are required to keep their records digitally for VAT purposes and provide their VAT return information to HM Revenue and Customs through MTD-compatible software.
The idea behind MTD is to bring the UK's tax administrative system into the digital age, making the tax compliance process cheaper, faster, and more efficient for taxpayers, as well as less prone to error and fraud.
What is Going to Change?
On 21 July 2020, the Financial Secretary to the UK Treasury announced the Government's "roadmap" for MTD in a written statement to parliament, alongside its long-term plans for tax administrative reform.
One of the most significant changes proposed by the Government is to extend MTD for VAT to those businesses that have voluntarily registered for VAT, who have a turnover below £85,000.
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Legislation to be included in Finance Bill 2020/21 will require these businesses to use MTD from April 2022.
The Government also remains committed to expanding MTD to other taxes. Under these proposals, new regulations will be drafted to require businesses and landlords within the income tax self-assessment regime and with income exceeding £10,000 to use MTD from April 2023.
The Government said that this timetable will provide sufficient time for software providers to develop and bring to market new MTD products, including free software for those with the simplest tax affairs. The Government intends to open its pilot scheme from April 2021 to allow businesses and landlords to test the service.
Additionally, the Government plans to begin a consultation with taxpayers in autumn 2020 on proposals to include in the MTD scheme incorporated businesses taxed under the corporate tax regime. However, the timetable for extending MTD to corporate taxpayers is as yet unclear, with further details expected to emerge in the consultation document.