Making tax digital: where are we now?

Lee Sharpe reviews the latest developments in making tax digital.

There have been a number of making tax digital (MTD) developments over the last year or two, as set out in this article.

What is MTD anyway?

MTD was originally announced as “the death of the annual tax return” in the 2015 Spring budget. While MTD for VAT has been pretty much fully installed since April 2022, MTD for income tax has still to be fleshed out.

The annual income tax return has been replaced by five returns – the one we were told we were losing, plus four quarterly ‘updates’ (i.e., returns) for each business run by the taxpayer. Entrepreneurs with several businesses may feel like they are drowning in returns when MTD for income tax finally arrives!

But there are two additional critical aspects to the MTD revolution:

Digital record-keeping – taxpayers have to update books and records at least quarterly, but:
1. Records must be kept digitally (or at least the financial information must be digital).
2. Digital links will be necessary between all parts of the book-keeping system. For example, once an invoice has been input into the taxpayer’s system, that data must not be copied or re-keyed elsewhere – the accounting system must be integrated so that all parts ‘speak to each other’ automatically.
One of the government’s key goals is that MTD lays the groundwork for forcing self-assessment taxpayers such as landlords and the self-employed to pay their tax much sooner and more frequently than now. I surmise that the aim is essentially to mimic PAYE on monthly salaries. In the government’s November 2021 response to its official consultation on ‘timely payment’, it committed not to change payment routines in the current parliament, but that’s as far as it goes.

Strictly, only (1) is formally part of MTD, but any move to a more frequent payment regime will rely heavily on MTD’s quarterly ‘update’ (return) schedule. I would argue that forcing almost all unincorporated businesses to adopt digital record-keeping, digital links and monthly payments on account are much more important than the quarterly return schedule. But there is even more to come, as we shall see.

Other measures

MTD for VAT – In July 2020, the government announced that all VAT-registered businesses would have to file their VAT returns using MTD from April 2022, except where exempt (e.g., the business was digitally excluded). This, despite having said previously that only businesses with annual turnover exceeding the VAT registration threshold would need to file under MTD for VAT.
Basis period reform – Following a consultation in March 2021, the government announced that it would essentially force all unincorporated businesses to move to a 31 March year end for tax purposes (or 5 April, in broad terms, although the distinction is nugatory). This was sold as a ‘simplification’ but to this writer’s appreciation, the profession was concerned that many businesses would struggle.

In October 2021, the government nevertheless confirmed in the Autumn 2021 budget (now FA 2022, s 7, Sch 1) that it intended to press ahead with the reforms starting April 2024. Coincidentally, the government had announced on 19 September 2021 that the rollout of MTD for income tax would be postponed from April 2023 to April 2024.

Suspicions that the alignment of basis periods with MTD for income tax was more than just coincidence were arguably confirmed by a parliamentary report on basis period reform, which included that the original consultation in March 2021 had said that transition to a purely tax year basis “would simplify the introduction and experience of [MTD] for income tax…” (what that consultation had actually said was that MTD “should create opportunities to simplify and improve the taxpayer experience” but, to a cynic, the mistake might seem positively Freudian).

Reheated regulations or notices – HMRC published fresh attempts at the draft tertiary legislation governing the MTD for income tax regime early in July 2022.

These ‘notices’ were not well received, because they added little to the original drafts that had been published five years earlier, in 2017. One thing they did add, however, was confusion because they insisted that “…any transfer, recapture, or modification of that digital record within the functional compatible software must happen digitally and not manually”, which could be taken to mean that manually amending a cell in a financial spreadsheet would no longer be considered MTD-compliant, despite previous assurances that spreadsheets combined with bridging software would be acceptable.

Data grab – Apropos of nothing, July 2022 also saw HMRC issue a consultation on ‘increasing’ the data HMRC collects from its customers[sic]”, which raised a few eyebrows by suggesting that HMRC might soon require taxpayers regularly to provide details of:

Occupational data – the kind of work people were doing.
Location data – where they were doing that work.
Time data – employee hours worked: start and end dates for the self-employed.
Dividends – amounts paid to owner-managers (surprise, surprise! This would have been difficult to sneak in under MTD for corporation tax reporting, as it has no bearing on a company’s business profits or tax bill, but is obviously something HMRC would dearly like to know, nonetheless).

Again unsurprisingly, the consultation was not well received, with the professional bodies questioning how taxpayers would benefit from this extra work, how much it would cost them to comply, whether HMRC had the resources to manage the additional data and how the tax legislation might have to be adapted to cater for taxpayers having to provide information that had nothing to do with tax. How, indeed!

HMRC announces further delays to MTD for income tax

Just before Christmas 2022, HMRC effectively confirmed a further postponement of MTD for income tax of at least two years. In summary, MTD for sole traders and landlords with aggregate annual incomes:

exceeding £50,000 will be mandated from April 2026;
exceeding £30,000 will be mandated from April 2027;
below £30,000 will be subject to further review to inform the approach of any further rollout after April 2027; and
MTD for ITSA for partnerships from April 2025 is postponed (TBA).

Conclusion

Although I have not previously mentioned it, I suspect that the Administrative Burdens Advisory Board’s (ABAB’s) 2022 report is one of the key reasons for the further delay. Note that ABAB’s role is ‘to make a noticeable difference for small businesses by supporting HMRC to help make tax easier, quicker and simpler’, but there is precious little in the developments set out in the pages above that will make things easier, quicker or simpler for small businesses, or anyone other than HMRC, for that matter. From my reading of its no-nonsense report, the ABAB is not so easily fooled. I also suspect that the Spring Budget 2023 consultation on expanding the Cash Basis to larger businesses – and particularly the proposal to switch the Cash Basis “on by default” for the self-employed so as to match property businesses is – again – something that HMRC wants more than do its “customers”.

And so, the MTD Juggernaut will roll on, crushing everything in its path, such as TMA 1970. HMRC has long lamented that TMA 1970 is “increasingly unfit for purpose”; for example, it doesn’t let HMRC get away with dumb automation or ‘process now, discover (much) later’. HMRC has danced around the MTD quarterly ‘updates’, insisting that they are not really returns, and that is because of the admonition in TMA 1970, s 113 that ‘no person shall be required to make more than one return annually of the sources of his income and the amounts derived therefrom’.

Bearing in mind that HMRC evidently wants to use these quarterly updates for monthly (or at least quarterly) advance tax payments, there is no way that the pretence that they are ‘updates’ will last, or we might all simply say that the income from our last quarter was 3 shekels and some beans (no return = no reprisals).

Yes, on the basis that ruthless extermination awaits anything that gets in the way of HMRC either doing whatever it wants or getting whatever data it craves (tax-related or otherwise, as above), TMA 1970 is on borrowed time, I reckon. Just ask the current year basis…