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This publication is available at https://www.gov.uk/government/publications/making-tax-digital-changing-the-scope-and-pace-technical-note/making-tax-digital-for-business
This note provides a revised statement of impacts for the Making Tax Digital for Business programme, reflecting the changed scale and scope of the mandatory elements announced in the government’s Written Ministerial Statement of 13 July 2017.
At Budget 2015, the government set out its vision for a transformed tax system, and in December 2015 it published the Making Tax Digital roadmap. This set out the government’s plans to make fundamental changes to the tax system - transforming tax administration by 2020 so it is more effective, more efficient, and simpler for taxpayers.
The original Making Tax Digital proposals phased in the implementation of digital record keeping and quarterly updating by businesses, the self-employed and landlords for Income Tax Self-Assessment (ITSA), Value Added Tax (VAT) and Corporation Tax (CT) between tax years 2018/19 and 2020/21.
Following representations about the scope and pace of the reforms, the government announced by Written Ministerial Statement, on 13 July 2017, that businesses would not be mandated to use the Making Tax Digital system until April 2019 and then only to meet their VAT obligations. This will apply to businesses with turnover above the VAT threshold (currently £85,000). Businesses with turnover below the VAT threshold will not be required to use the system but can choose to do so. Businesses will also be able opt in for other taxes, benefitting from a streamlined, digital experience.
The government will not widen the scope of Making Tax Digital beyond VAT before the system has been shown to work, and not before April 2020 at the earliest. This will ensure that there is time to test the system fully and for digital record keeping to become more widespread. The changes mean that the smallest businesses and landlords will be able to move to keeping digital records for tax at a pace that is right for them.
For more information go to the Written Ministerial Statement.
Who will be affected and when do the changes come into force?
The Making Tax Digital requirements will apply to all VAT registered businesses for their VAT obligations from April 2019 where their turnovers are in excess of the VAT threshold (currently £85,000). There is no change to the previous assessment that Making Tax Digital is not expected to impact on family formation, stability or breakdown.
What does Making Tax Digital mean for businesses?
The government recognises that the majority of businesses want to get their tax right, but the latest tax gap figures published by HM Revenue and Customs (HMRC) show that too many otherwise compliant businesses find this hard, even some who use an agent to help them. Errors and mistakes, which contribute to this tax gap, are found in every sector with over £9 billion lost annually in tax.
Making Tax Digital will provide a more modern, digital service which will help businesses get their tax right, with technology making it easier for them to do so. We are confident that businesses will be able to use Making Tax Digital successfully, with the reforms making it easier for businesses to get their tax right the first time, not only reducing the tax gap, but also reducing the cost, uncertainty and worry that businesses face when HMRC is forced to intervene to put things right.
For Income Tax, businesses (including self-employed and landlords) will be able to keep records of their income and expenditure digitally, and send summary updates quarterly to HMRC from their software (or app) from April 2018 if they choose to do so.
From April 2019, VAT registered businesses (including self-employed and landlords) with turnover above the VAT registration threshold (currently £85,000) will have to:
- keep their records digitally (for VAT purposes only)
- provide their VAT return information to HMRC through Making Tax Digital compatible software
HMRC recognises that the business population that will be affected by the mandatory changes from April 2019 is diverse. Making Tax Digital will be available on a voluntary basis to other businesses, for VAT, Income Tax and National Insurance contributions.
These digital reforms will bring the tax system in line with what businesses and individuals now expect from other online service providers: a modern digital experience that helps them get their tax right first time. HMRC anticipates that many businesses that are not mandated from April 2019 will choose to move to the new service.
Keeping records digitally will result in more timely and accurate record-keeping, helping to prevent errors associated with manual processes. Quarterly updates direct from records will help prevent errors that can happen when businesses undertake manual calculations or transcribe information from one format into another.
The nudges and prompts that will be incorporated into the Making Tax Digital compatible software developed by third party software providers will help eliminate common errors, giving businesses greater certainty that they’ve got their tax right first time, reducing the need for unwelcome compliance interventions which are expensive and burdensome for both HMRC and its customers.
Whether part of the mandated VAT population or participating voluntarily, we expect Making Tax Digital to deliver benefits for businesses. Software will help businesses to stay on top of their record keeping, allowing them and those who represent them to understand better how their business is performing. Key benefits include:
- always knowing where you stand when it comes to tax
- having access to tax information online in a single place
- being able to work online collaboratively with an agent
- being able to plan and budget more effectively
Making Tax Digital will allow businesses to integrate tax into their day-to-day business record-keeping, and have the confidence that they have got it right.
The ability to keep on top of their financial affairs, closer to real-time, will help businesses and their agents to free up time for more productive, higher value business activities – both should be able to work collaboratively to use this better, closer to real time picture of their affairs to deliver improvements in business performance. There is increasing recognition from agents about the opportunities afforded by Making Tax Digital to increase their focus on advisory services rather than compliance.
We also believe that Making Tax Digital will enable businesses to remain competitive, boost productivity and take advantage of the broader benefits and cost-efficiencies that going digital gives to them. The productivity, cost and efficiency benefits for businesses in moving to digital from manual or paper based recoding systems are well recognised, but not costed here, and Making Tax Digital will help drive the adoption of digital tools amongst UK business.
The impacts identified below either supplant or supplement those in the Making Tax Digital tax information and impact note (TIIN) published on 8 March 2017 at Spring Budget 2017.
HMRC estimates that the behavioural impacts of Making Tax Digital will contribute over £1bn to the Exchequer by 2022 to 2023. The methodology used to generate the estimates was certified by the Office for Budget Responsibility (OBR) at Autumn Budget 2017.
The estimates represent the net Exchequer Impact of Making Tax Digital, and have been certified by the OBR.
They combine the published figures in Table 2.2 of Autumn Budget 2017, ‘Making Tax Digital: reducing errors through record keeping’, and ‘Making Tax Digital: one year deferral for businesses with turnover below VAT threshold’; and the published figures in Table 2.1 of Autumn Budget 2017, ‘Making Tax Digital: only apply above VAT threshold and for VAT’.
More details can be found in the policy costings document published alongside Autumn Budget 2017.
The estimates represent net tax gap savings arising as a result of more timely and accurate record keeping and reducing error by electronic updating of HMRC systems directly from a business’ digital records.
Whilst Making Tax Digital is intended to help businesses get their tax right, with mandatory use of digital record keeping (for VAT only) and using Making Tax Digital compatible software to provide their VAT return information digitally, it is anticipated that some people with disabilities and those in rural locations with poor broadband services may find it more difficult to comply.
HMRC recognises that many people with disabilities use digital technology and are able to interact online using assistive technology. The decision to mandate, for Making Tax Digital requirements, the reporting of VAT for those business above the VAT threshold means that these businesses will already be familiar with the requirement to send information to HMRC electronically, and are likely to already do so, unless already exempted from the requirements to file VAT returns online. Businesses that are already exempt from engaging digitally will continue to be exempt and will not have to meet the obligations of Making Tax Digital.
Where a person with disabilities already complies with the requirement to send information electronically and uses assistive technology, the Making Tax Digital requirements should not impose additional costs to meet their accessibility needs.
In the published Terms of Collaboration between HMRC and Software Developers, HMRC has sought to ensure that available software will be compatible with forms of assistive technology, setting a minimum accessibility standard requiring that developers ‘make sure [their] digital tools meet the Web Content Accessibility Guidelines (WCAG) 2. AA as a minimum or higher in line with the Equality Act 2010’. This means that Making Tax Digital software should meet their needs in the same way that their existing software does.
Where a person with disabilities does not currently interact with HMRC online, but does use assistive technology for other online activities, if they choose to operate Making Tax Digital, the Making Tax Digital software should provide compatibility. Information to be published on GOV.UK will provide help for customers when choosing a suitable software product for their business, and will include information on compatibility standards.
For those moving to digital, especially those needing additional support, our customer support model will include:
- a multi-layered customer support model stretching across agents, third party software support, through to telephony support, webchat, and the Needs Enhanced Support service
- accessible online content to highlight the ease of customer journeys including recorded Webinars, YouTube videos and E-learning
- GOV.UK content including Help pages - signposting to information and guides and to local or third party providers of digital skills courses or support already provided by external providers
We will also continue to work across multiple channels supporting as many customers as possible to move onto digital services.
Ultimately, if a business cannot go digital, it will not be required to do so. The exemptions under Making Tax Digital mirror the existing VAT online filing exemption.
HMRC will ensure that clear guidance is widely provided and easily accessible for digitally excluded customers about the exemption process and will ensure that a mechanism is provided for an exemption to Making Tax Digital to be easily applied for through non-digital means.
Business and Civil Society impacts
The July 2017 announcement necessitated a widespread review of impacts and assumptions. HMRC’s previous assessment had been based on the unincorporated business population above a £10,000 turnover threshold, circa 3.5m businesses, whereas the revised mandated population numbers circa 1.2m businesses, both unincorporated and incorporated.
Estimates of on-going administrative savings associated with Making Tax Digital were informed through a review of the VAT tax obligations, sourced from the well-recognised Standard Cost Model.
Once all businesses complying with the new requirements have fully transitioned, and are making full use of software capabilities, steady state savings associated with an overall reduction in time spent complying with existing VAT obligations, plus the complete removal of certain obligations, are estimated at £16 million. Businesses seeing the most savings are those currently operating paper or spreadsheet-based accounting systems and moving to commercial Making Tax Digital software.
Transitional (one-off) costs
Transitional costs are likely to cover:
- time spent in setting up new software or reviewing existing software processes
- a small minority of businesses may need to purchase new hardware or upgrade existing hardware
- additional accountancy or agents costs to facilitate the move to Making Tax Digital
- training of staff and familiarisation with Making Tax Digital and how it impacts on their business
Transitional costs may be lower for businesses already using digital tools. For those businesses that have limited existing digital capability and/or need to purchase hardware, costs may be higher. HMRC anticipates that a significant majority of businesses with a turnover in excess of the VAT threshold will already have the necessary digital tools to operate Making Tax Digital. The estimated transitional cost to the mandated population of 1.2m businesses is £131m with these costs potentially eligible for full tax relief.
It should be noted that those now mandated to join Making Tax Digital from April 2019 for their VAT obligations are businesses that are likely to be more digitally ready and capable of making an earlier transition, with the majority already reporting VAT quarterly. Where they have alternative reporting arrangements, these will be maintained. Because a significant proportion of the mandated population already uses software and has less need of new or upgraded hardware to operate Making Tax Digital these transitional costs are lower than previously estimated.
These are expected to include:
- cost of moving to Making Tax Digital compatible software, from either paper or spreadsheet systems
- using bridging software to accommodate Making Tax Digital compatibility for spreadsheets
- seeing marginal increases in existing software costs through Making Tax Digital compatibility improvements being passed on to businesses
The estimated steady-state cost to the mandated business population is £52m, with these costs potentially eligible for full tax relief. Estimated costs depend on final software solutions, potential availability of free software to the mandated population and individual providers’ pricing structures. HMRC is working closely with the software developers to ensure a wide range of products will be made available at different price points.
HMRC’s revised assessment of impacts suggests that there will be an ongoing net cost to VAT registered businesses with a turnover above the VAT threshold of £37m.
As previously, the government recognises that this produces a broad estimate, and so we will review and test this analysis and our assumptions through ongoing extensive engagement and consultation with businesses, and through further research and analysis. This means that the final estimate of the savings and costs to business could be different from the estimate presented here.
The assessment of the Making Tax Digital impacts over the 5 year period to 2022 to 2023 is set out below. Note that the presented figures have been individually rounded to the nearest million and therefore may not sum to the net impact.
Current breakdown of Administrative Burden impacts (all £m)
|Profile (£m)||2018 to 2019||2019 to 2020||2020 to 2021||2021 to 2022||2022 to 2023|
|Steady-state (on-going) costs||£2||£46||£52||£52||£52|
|Administrative burden (on-going) savings||£0||(£8)||(£16)||(£16)||(£16)|
|Transitional (one-off) costs||£4||£111||£16||£0||£0|
The TIIN published at Spring Budget 2017 indicated that Civil Society organisations may potentially see an increase in requests for help and support from less digitally engaged individuals and business in transitioning to the new requirements. The change in the scope of mandation may lessen that impact. HMRC is, however, continuing to work with Civil Society stakeholders to support the successful implementation of Making Tax Digital and the move to digital for both the organisations themselves and the people they represent.
The illustrated estimates reflect only the mandated VAT population from April 2019.
HMRC has worked with the Administrative Burdens Advisory Board and a number of other stakeholders to test its model and assumptions.
In HMRC’s previous impact assessment estimates the bulk of savings were made by ITSA businesses with turnover less than £85,000, and operating basic or paper-based accounting systems, moving to the new Making Tax Digital processes. These no longer form part of the mandated population.
HMRC has engaged extensively with all sectors affected by the changes, and will ensure there is software and support in place that meets their needs and is testing the processes extensively. An Income Tax pilot commenced in April, and HMRC will start to test Making Tax Digital for VAT by the end of 2017, starting with small-scale, technical testing, followed by a wider, live pilot in spring 2018.
The Making Tax Digital programme is much broader than just keeping records digitally and updating HMRC electronically from those records. It brings with it a whole new way of interacting with government that will improve business’ experience in interacting with HMRC.
We remain confident that Making Tax Digital will provide benefits to businesses and we intend to make sure that they have the information, products and time necessary for them to make a smooth transition.