Introduction to Making Tax Digital
Making Tax Digital is a key part of the government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs - meaning the end of the annual tax return for millions.
The government announced its vision for modernising the tax system at March Budget 2015.
At Spring Budget 2017 the government announced that it would provide 3.1 million small businesses with an extra year (until 2019) before they are required to keep digital records and send HMRC quarterly updates. You can read more detailed information about this announcement in this tax information and impact note.
We’ve also set out below what the next steps will be.
Every individual and business now has access to their own personalised digital tax account and these are being regularly expanded and improved.
Four foundations of Making Tax Digital
1. Better use of information
Making Tax Digital presents significant benefits for our customers. It will mean that they will not have to give HMRC information that it already has, or that it is able to get from elsewhere – for instance from employers, banks, building societies and other government departments.
Digital tax accounts for all will mean that customers can see the information that HMRC holds and be able to check at any time that their details are complete and correct. HMRC will use this information to tailor the service it provides, according to each of our customers’ individual circumstances.
2. Tax in real time
Our customers should not have to wait until the end of the year or longer to know how much tax they should pay. HMRC will collect and process information affecting tax as close to real time as possible, to help prevent errors and stop tax due or repayments owed building up.
3. A single financial account
At the moment most taxpayers cannot see a single picture of their liabilities and entitlements in one place – we are changing that. By 2020, customers will be able to see a comprehensive financial picture in their digital account, just like they can with online banking.
4. Interacting digitally with customers
Our customers (and their agents) will be able to interact with HMRC digitally and at a time to suit them. They already have access to a digital account which will present them with an increasingly personalised picture of their tax affairs, along with prompts, advice and support through webchat and secure messaging. And digital record keeping software will be linked directly to HMRC systems, allowing customers to send and receive information directly from their software.
The Making Tax Digital roadmap, published in December 2015, set out how this bold vision for the future of the tax system would be achieved by 2020.
Making Tax Digital for individuals
The Personal Tax Account brings together each individual customer’s information in one online place. It allows customers to access the service from a digital device of their choice and at a time that suits them. It enables them to register for new services, update their information and see how much tax they need to pay.
At the moment, the information that HMRC receives from a range of sources is held on separate stand-alone systems, which can result in customers being asked to report, via a Self Assessment tax return, information that is already held by HMRC. HMRC is joining up these internal systems and will automatically include information it holds about a customer’s circumstances or income in their digital account, meaning the customer will not have to do this themselves.
Under Self Assessment, over 10 million customers fill in a tax return to tell HMRC about their circumstances and income. This is a burden for customers and inefficient for HMRC as well: mistakes can be made or the information can be wrong or submitted too late, meaning the right tax is not collected at the right time and HMRC has to take action. This can lead to penalties and interest charges for the customer which could have been avoided.
More effective use of third party information, that is, information provided to HMRC by someone other than the customer or their agent, will reduce the reporting burden on customers and reduce errors, making it easier to declare the right tax.
As the Personal Tax Account develops, customers will use it to tell us when things change. Over time, customers will no longer need to complete tax returns at the end of the year.
We are beginning by using information HMRC already holds and will make better use of this by connecting it with customers and displaying it in their tax account.
Making Tax Digital for business
We know that the majority of businesses, self-employed people and landlords want to get their tax right first time, but the latest tax gap figures show too many businesses are prone to making mistakes. The amount of tax not collected due to avoidable taxpayer errors and carelessness has risen to over £8bn a year. This not only costs the public purse – it also creates cost, uncertainty and worry when HMRC is forced to look into their affairs.
HMRC wants to help businesses get their tax right first time and to prevent them from feeling punished for making honest mistakes. That means reducing the likelihood of errors, lowering the chance of unwelcome compliance checks and giving businesses greater certainty that they are getting things right. Making Tax Digital for business is an important step in this direction. The introduction of digital record keeping and quarterly updates for the majority of businesses, self-employed people and landlords will reduce mistakes and will lay the foundations to go further, with digital nudges and prompts to help businesses steer clear of errors. It will also give businesses a clearer view of their tax position in-year. All of this will enable small businesses to meet their tax obligations at minimum cost and minimum disruption.
Making Tax Digital for businesses will bring the tax system into line with what businesses and individuals now expect from other service providers: a modern digital experience. New technology is continually transforming the way people and businesses shop, bank, travel, communicate, and trade. The appetite for digital services is strong, and relying on a predominantly paper-based tax system makes no sense in the 21st century. However, there is no question of forcing those who cannot go digital to do so. HMRC will ensure that there are alternatives for those who genuinely need them, and help will continue to be available for businesses who want digital support.
On 15 August 2016 we published 6 Making Tax Digital consultations. They set out our thinking on some of the key design and development questions in the following areas:
- Making Tax Digital: Bringing business tax into the digital age
- Business Income Tax: Simplifying tax for unincorporated businesses
- Business Income Tax: Cash Basis for unincorporated property businesses
- Making Tax Digital: Tax administration
- Making Tax Digital: Voluntary pay as you go
- Making Tax Digital: Transforming the tax system through the better use of information
A summary of feedback, the government’s decisions and our next steps have been published in these 6 response documents. We’ve also published a short overview of the responses which draws out the key conclusions from each consultation.
HMRC received over 1,100 written responses to the 6 consultations and over 1,200 people responded to the online survey in the short guide to the consultations.
We’re currently consulting on sanctions for late submission and late payment. This follows the government’s recognition in our summary of responses to the 2016 consultation on tax administration that we needed to do more work to get the late submission penalty model right for customers. The consultation also provides an update on penalty interest.
Following the feedback from the Making Tax Digital consultations, the government announced at Budget 2017 that it will provide 3.1 million small businesses and landlords and their agents with an extra year to prepare before they are required to keep digital records and send HMRC quarterly updates. Businesses that have an annual turnover below the VAT registration threshold will not be required to start keeping digital records and providing quarterly updates until April 2019, although they can choose to do so voluntarily.
These changes are therefore being introduced gradually, starting in 2018 with Income Tax for businesses, self-employed people and landlords with annual turnover above the VAT threshold. In 2019-20 we will extend the Income Tax elements of Making Tax Digital to all businesses, self-employed people and landlords with annual turnover above £10,000. We will then move on to VAT (2019) and Corporation Tax (2020). We will thoroughly pilot these changes with businesses from April, starting slowly and ramping up to hundreds of thousands, before rolling them out. This will ensure the software is user friendly and gives individuals and businesses time to prepare and adapt. Free software will also be available for businesses with straightforward tax affairs.
The government has already pledged to remove the smallest businesses, self-employed people and landlords from the scope of the changes by exempting all those with annual turnover of less than £10k from digital record keeping and quarterly updates (although they can still choose to enroll). This was in addition to those who were already removed from scope by the exemption for those with secondary income below £10,000.
The government also recognises that for some, digital is genuinely not an option and where this is the case, an alternative will be provided.
HMRC will continue to engage with stakeholders as it implements these changes to ensure they are straightforward and easy to use.
In the spring we will also publish a call for evidence with large and complex businesses about Making Tax Digital.
Research and case studies
We have published independent research into Making Tax Digital for business and created a number of case studies to illustrate how Making Tax Digital as a whole will work in practice.