Who is likely to be affected
Businesses, self-employed people and landlords will be required to start using the new digital service from:
- April 2018 for income tax and National Insurance contribution (NICs) purposes if your turnover is over the VAT threshold
- April 2019 for income tax and NICs purposes if your turnover is below the VAT threshold
- April 2019 for VAT purposes for everyone who is VAT registered
- April 2020 for Corporation Tax (CT) purposes for everyone who pays CT
Businesses, self-employed people and landlords with turnovers under £10,000 are exempt from these requirements.
Those in employment who have secondary income of more than £10,000 per year through self-employment or property will also be required to use the digital service.
In the consultation the government said that it was considering exempting more of the smallest unincorporated businesses from the requirement to keep digital records and make regular updates to HM Revenue and Customs (HMRC).
The government announced at Spring Budget 2017 a one year deferral from the mandating of Making Tax Digital for Business (MTDfB) for unincorporated businesses and landlords with turnovers below the VAT threshold. This means that only those businesses, self-employed people and landlords with turnovers in excess of the VAT threshold with profits chargeable to Income Tax and that pay Class 4 NICs will be required to start using the new digital service from April 2018.
General description of the measure
The government recognises that the majority of businesses want to get their tax right, but the latest tax gap figures published by HMRC show that too many otherwise compliant businesses find this hard, even some who use an agent to help them. As a result over £8 billion a year in tax is lost from avoidable taxpayer errors.
This not only costs the public purse, it also causes businesses cost, uncertainty and worry when HMRC is forced to intervene to put things right.
HMRC wants to do more to help businesses get their tax right and these changes are a very important step in that direction. It will help businesses steer clear of avoidable errors, and give them a clearer view of their tax position in year.
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).
Those who genuinely cannot get online due to their individual circumstances such as disability, geographical, or other reasons, will be exempted from these obligations.
These digital reforms will bring the tax system into line with what businesses and individuals now expect from other online service providers: a modern digital experience.
These changes will help businesses get their tax and NICs right first time. That will reduce the likelihood of errors, giving businesses greater certainty.
The reforms are anticipated to take out around 10% of error on an ongoing basis, and give businesses a clearer view of their tax position in year, enabling them to plan to meet their tax obligations at minimum cost and minimum disruption.
Background to the measure
At Budget 2015, the government set out the 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.
This tax information and impact note (TIIN) updates the TIIN published on 31 January 2017.
These requirements will apply to businesses’ Income Tax and Class 4 NICs obligations from April 2018 if their turnovers are in excess of the VAT threshold. For those non-exempt businesses below that threshold, these requirements will apply from April 2019.
Businesses that are registered for, and pay VAT, will be required to operate MTDfB from April 2019, and those that pay CT from April 2020.
Income Tax self assessment (ITSA) was introduced in Finance Act 1994,1995 and 1996 (coming into effect for the tax year 1996 to 1997) supplementing legislation contained in the Taxes Management Act 1970 (TMA). Since then a large number of sections and subsections of legislation have been added to TMA by subsequent Finance Acts, dealing with issues like, for example, corrections and amendments of returns by HMRC and customers respectively.
VAT law in the EU is governed by various Directives, notably the Principal VAT Directive (2006).
The Directives are given effect in the UK mainly by the Value Added Tax Act 1994 as amended by subsequent Finance Acts, with most of the provisions on the administration, collection and enforcement of VAT set out in Schedule 11 to that Act. There are also many detailed rules in Statutory Instruments.
Legislation will be introduced in Finance Bill 2017 that will set out:
Digital Record Keeping - how to keep records of trading and transactions digitally, and categorise expenses with help from prompts and guidance in the software.
Establishing Taxable Profit - how MTDfB would help establish taxable profit. In particular, exploring when businesses (including self-employed and landlords) should record accounting and tax adjustments for the purposes of arriving at a taxable profit and how businesses should reflect reliefs and allowances.
Providing HMRC with updates - how businesses (including sole traders and landlords), would provide HMRC with quarterly updates under MTDfB. In particular, the level of detail the updates must contain, the time periods the updates cover, and when they should be submitted.
‘End of Year’ Activity - how businesses might finalise their taxable profit for a period, including the activity they may need to undertake and how long they should have to do so.
These changes will provide the legislative framework so that businesses will:
- keep track of their tax affairs digitally using software or apps (digital tools). Regulations will specify what records must be recorded using digital tools
- provide summary tax data to HMRC quarterly, using digital tools. The summary tax data will be automatically generated for the business from the electronic records. For VAT, these quarterly updates will effectively replace the VAT return. For Income Tax and CT, these updates will cumulatively build an in-year picture of the business’ tax position for them
- gain a clearer view of their tax position in-year
- provide a finalised end of year position to HMRC of their tax affairs, again using digital tools. This obligation will apply ten months after the fourth quarter referred to above and will crystallise the taxable profits of that business for the previous year. For many businesses, this will simply be a matter of checking and agreeing the total for that year, based on the information which they have provided in the relevant four quarters. For businesses with more complex affairs, this will provide an opportunity to add and apply annualised reliefs and allowances for the period which would not have been reflected in the summary updates
Summary of impacts
Exchequer impact (£m)
MTDfB reducing errors through record keeping
|2017 to 2018||2018 to 2019||2019 to 2020||2020 to 2021||2021 to 2022|
These figures are set out in Table 2.2 of Spring Budget 2017 as ‘Making Tax Digital: reducing errors through record keeping’, and have been certified by the Office for Budget Responsibility (OBR). More details can be found in the policy costings document published alongside Autumn Statement 2015.
MTDfB one year deferral for businesses with turnover below VAT threshold and Increase cash basis
|2017 to 2018||2018 to 2019||2019 to 2020||2020 to 2021||2021 to 2022|
These figures are set out in Table 2.1 of Spring Budget 2017 as ‘Making Tax Digital: one year deferral for businesses with turnover below VAT threshold’ and combines ‘Making Tax Digital: deferral for businesses with turnover less than VAT threshold’ and ‘Making Tax Digital: Increase cash basis’, which have been certified by the OBR. More details can be found in the policy costings document published alongside Spring Budget 2017.
These digital reforms will contribute £1.9 billion to the Exchequer by 2021 to 2022. The MTDfB: reducing errors through record keeping costing was certified by the OBR at Autumn Statement 2015 and updated at Budget 2016 and again at Spring Budget 2017. The costing has been updated to take into account latest tax gap estimates, receipts information, and including an additional year (2021 to 2022). The updated costing also includes changes to extend the exemption announced at Autumn Statement 2015 to include primary income, and to allow businesses currently using spreadsheets to record transactions to continue to be able to do so (however they must ensure that the spreadsheets meet the necessary requirements of MTDfB). All other assumptions remain the same. In addition a subsequent MTDfB policy change was announced at Spring Budget 2017 which introduces a 1 year deferral for ITSA businesses and landlords with turnover below the VAT threshold. The costing for this is shown separately above.
The estimates represent net tax gap savings arising as a result of more timely and accurate record keeping. These revenue benefits are calculated following the general approach that is: revenue benefit = tax base x proportion of tax base covered x behavioural response.
Latest tax gap figures show the amount of revenue lost due to error and carelessness is now £8.7 billion (for 2014 to 2015), an increase of £0.5 billion on 2013 to 2014. To calculate the revenue benefit, assumptions were applied to break down the tax gap into revenue lost from small businesses within the scope of MTDfB, and due to errors and failing to take reasonable care. These were then projected forward to 2020 to 2021 by assuming that the relevant part of the tax gap will grow in line with the OBR’s forecast tax liabilities.
Take-up rates were estimated based on the phased introduction of the changes, that is, Income Tax and NICs from April 2018, VAT from April 2019 and CT from April 2020.
The behavioural response is the proportion of tax loss that will be prevented as businesses change their behaviour as a result of the new requirements. This was estimated from a series of workshops with operational experts, reviewing risks found in enquiries and considering which are related to record keeping failures and how much they would be impacted. The estimates obtained were then validated against the existing research base.
There are three direct tax random enquiry programmes which are used to produce tax gap estimates. They cover:
- self assessment individuals and small partnerships
- small and medium-sized enterprises
- CT for small and medium-sized enterprises
Random enquiry programmes allow HMRC to estimate the extent of under-declaration of liabilities arising from the submission of incorrect returns. Each return selected is subject to a full enquiry involving a complete examination of books and records.
This measure is not expected to have any significant macroeconomic impacts.
The costing also includes a behavioural response which captures the impact of taxpayers improving their compliance as a result of the introduction of these digital reforms through better, timelier record keeping and the prevention of some errors.
Impact on individuals, households and families
This measure impacts on individuals who run their own business to the extent reflected in the ‘Impact on businesses’ section.
The measure is not expected to impact on family formation, stability or breakdown.
HMRC does not have evidence to suggest this measure will have a significant or disproportionate impact on groups with legally protected characteristics, as recognised in the Equality Act 2010.
The government recognises that many people with disabilities use digital technology and are able to interact online using assistive technology. HMRC will ensure that available software will be compatible with forms of assistive technology and that those that are willing to operate MTDfB are able to do so.
Ofcom’s 2016 statistics indicate that 59% of homes now own a tablet device and 71% of UK adults now have a smartphone. 97% of small and medium-sized businesses have access to online services. Although it is expected that the digitally excluded population will be relatively small, some of the segments impacted by the changes may be disproportionately represented within this population.
Individuals with protected characteristics under the Equality Act who fall within the current legislative definitions of ‘digitally excluded’ will be exempted from the digital record-keeping and update requirements and HMRC will provide non-digital alternative channels to them.
Impact on business including civil society organisations
The MTDfB digital reforms are a key part of the government’s initiative to transform HMRC into a world-leading, digital tax authority, making it easier and quicker for individuals and businesses to keep on top of their tax affairs, with digital tax accounts meaning the end of the annual tax return for millions.
The changes will affect most businesses, including micro and small businesses, and we recognise that the population that will be affected is diverse. This includes around 3.3 million self-employed individuals (including around 900,000 landlords), 1.6 million companies, over 400,000 ordinary partnerships, and about 600,000 businesses with income from different sources (for example, both self-employment and property).
The changes will improve the quality of record-keeping for businesses, reducing the likelihood of mistakes, and help businesses to manage their affairs more effectively.
The changes will reduce ongoing costs to business by removing, either fully or partially, some of the current information obligations placed on businesses. This would reduce the time businesses spend meeting their tax obligations, and move the focus away from time-consuming activities such as gathering and inputting data and more towards reviewing the updates that the software has generated and making any amendments.
It is expected that these changes will also affect agents acting for businesses. Some businesses may find the new MTDfB software means that they can do more in relation to record keeping and tax. Some businesses which currently use agents and are recording income and expenditure digitally may choose to make the quarterly updates themselves. With software categorisation of income and expenditure, final end of period activity should be a simpler process than it is currently for a business maintaining their books and records on paper. Routine work will be done automatically. This will allow both agents and their clients to focus on higher value business activities.
Individual partners in partnerships will no longer have to separately provide HMRC with details of their share of the profits or losses from the partnership.
They may therefore save agent fees at year end where they previously required an agent to make the return. Once businesses have transitioned to regular digital record keeping, the obligation to provide quarterly updates to HMRC is expected to result in an overall reduction in burdens compared to the current once a year reporting requirements.
Our analysis of the ongoing impact on administrative burdens uses the Standard Cost Model (SCM). The SCM represents the cost of complying with the tax system for a normally efficient business. This provides a consistently calculated and informed set of estimated costs for each tax obligation, averaged across the entire business population.
The assessment brings into the model the full range of tax and NICs obligations covering the majority of the unincorporated business population.
Changes in time for existing obligations are considered in conjunction with estimates of additional ongoing software costs, and the burden of quarterly updating, to provide the overall administrative burden impact.
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 ITSA and VAT obligations, plus the complete removal of certain obligations, are estimated at £270 million.
The SCM provides the estimated costs for a proportion of businesses incurring ongoing software and external agent costs as a result of complying with these obligations, and until behavioural responses to these digital reforms are better understood, these costs are maintained at current levels. Costs are then estimated for increased software subscription costs, and making quarterly updates. Steady state costs are estimated at £170 million.
This produces a net administrative burden saving of £100 million (steady state in 2021 to 2022). HMRC has profiled these estimates using take-up assumptions over the period from 2017 to 2018 to 2022 to 2023.
Estimated costs depend on final software solutions, the availability of free software and individual providers’ pricing structures. 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.
It is also expected that businesses will incur transitional costs in moving to the new arrangements. Our current estimate is that the transitional costs average about £280 per business (in their year of transition) over the period 2017 to 2018 to 2020 to 2021.
The costs are likely to cover:
- time spent in familiarising themselves with the new digital tools and quarterly submission of information
- purchase of new apps and upgrading existing software. This will depend on what free software is available from the market, and take-up
- a small minority of businesses may need to purchase new hardware or upgrade existing hardware
- additional accountancy / agents costs
The assessment of the MTDfB impacts over the 6 year period to 2022 to 2023 is below: Note that the presented figures have been individually rounded to the nearest ten million and therefore may not sum to the net burden impact
Current breakdown of Administrative Burden costs and savings (all £m)
|Profile (£m)||2017 to 2018||2018 to 2019||2019 to 2020||2020 to 2021||2021 to 2022||2022 to 2023|
|Steady state costs||-||£50||£150||£170||£170||£170|
|Administrative burden savings||-||-||-£150||-£270||-£270||-£270|
|Transitional costs (one-off)||£100||£200||£590||£100||-||-|
The government announced at Spring Budget 2017 a one-year deferral from the requirements of MTDfB for businesses with a turnover of up to the VAT threshold. HMRC has amended the profiles in the above table to reflect this announcement.
The revised table indicates that although businesses will see costs in the first transitional years, net savings will start to be made from 2021 to 2022 onwards.
Transitional costs may be lower for businesses already using digital tools or where they are eligible to use free software. For those business that have limited existing digital capability and/or need to purchase hardware and software, costs may be higher. HMRC anticipates that a significant majority of businesses with turnover in excess of the VAT threshold will already have the necessary digital tools to operate MTDfB.
Quantitative estimates of the one-off transitional costs and ongoing savings will continue to be developed through ongoing research and consultation with businesses to ensure that these are reflective of the final software solution and MTDfB policy design.
Small and micro business assessment: these changes will improve the quality of record keeping, reducing the likelihood of mistakes (and attendant risk of unwelcome and costly HMRC compliance interventions) and help businesses to manage their cash flow more effectively. In the longer term, we anticipate a reduction in administrative burdens for these businesses.
The government recognises by their very make-up that this group includes businesses which are likely to be more affected by one-off transitional costs and digital capability issues, and may therefore find it more difficult to move to the new digital requirements.
In the consultation the government said that it wanted to consult further on financial support to help some businesses make the transition to the new arrangements. It sought views on the support required and what form this should take.
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 number of businesses and individuals affected and the impacts on them will be reviewed throughout 2017 as large scale piloting takes place in advance of MTDfB’s mandatory introduction.
Operational impact (£m) (HMRC or other)
These digital reforms build on HMRC’s existing digital services for businesses, including the business digital tax account that is already available to all 5.4 million small businesses.
From April 2018, businesses in scope (including self-employed and landlords) with turnovers in excess the VAT threshold will be required to keep their records digitally and update HMRC quarterly with summary data from their software. HMRC will need to develop a customer support model for businesses that need help with the transition.
MTDfB benefits will be mainly realised through Exchequer benefits from the reduction in the tax gap and the improved and modernised experience that a fully digital HMRC will offer to business customers. However, we also currently anticipate a small departmental efficiency saving of £3 million over the Spending Review period up to and including 2019 to 2020.
Justice impact test and rural proofing: HMRC is required to consider these proposals in relation to their impacts on rural communities and the justice system. While further work is required in these areas, preliminary assessments suggest any impact is likely to be negligible.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be monitored through information collected from HMRC’s MTDfB processes, and will also be kept under review through communication with affected stakeholder groups.
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