Policy paper

Summary of consultation responses

Updated 8 March 2017

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 tax affairs. HM Revenue and Customs (HMRC) has been informally consulting with people about since early 2016 and published 6 formal consultations in August 2016.

During the consultation period, HMRC ran a series of public events across the country and online to hear views direct from businesses and agents. It also ran a short online survey for small businesses on some of the key questions from the consultations, which received over 1200 responses.

This document provides an overview of the key themes from the responses to the consultations and summarises some of the main decisions the government has taken as a result of listening to stakeholders. It also incorporates the online survey responses we received.

Full details can be found in the response documents.

1. Bringing business tax into the digital age

Under HMRC’s plans to build a more accessible and transparent tax system, most businesses, self-employed people and landlords will start to keep track of their tax affairs digitally and update HMRC quarterly from 2018. This will make the annual tax return a thing of the past for millions of people and businesses.

With millions of businesses already banking, paying bills, shopping and interacting online, integrating tax with the day-to-day running of a business is a natural next step. This will help businesses steer clear of errors - reducing the £8 billion a year cost to the public purse, get their tax bills right, and give them a clearer view of their tax position as they go through the year. Reducing the amount of avoidable errors will also reduce the cost, uncertainty and worry that businesses face when HMRC is forced to look into their affairs.

Respondents overwhelmingly support the move to a digital tax system. The main concerns raised focused on:

  • the pace of change
  • the capability of the smallest businesses and those who struggle with digital technology to adapt
  • burdens on businesses
  • agents’ ability to access digital services to support their clients
  • data security when using third party software

We have listened to the concerns and as a result:

  • businesses will now be able to continue to use spreadsheets for record keeping, but they must ensure that their spreadsheet meets the necessary requirements of Making Tax Digital for Business - this is likely to involve combining the spreadsheet with software (The importance of retaining the ability to keep records in this way was requested by a wide range of stakeholders, particularly small businesses)
  • businesses eligible for three line accounts will now be able to submit a quarterly update with only three lines of data (income, expenses and profit)
  • free software will be available to businesses with the most straightforward affairs
  • the requirement to keep digital records does not mean that businesses have to make and store invoices and receipts digitally, something they were particularly concerned about
  • activity at the end of the year must now be concluded and sent either by ten months after the last day of the period of account or 31 January, whichever is sooner
  • charities (but not their trading subsidiaries) will not need to keep digital records
  • for partnerships with a turnover above £10 million, Making Tax Digital for Business is deferred until 2020

The government will need to consider further issues such as the initial exemption threshold and deferring the changes for some small businesses. Given the range of views expressed on this matter from respondents to the consultation, the government will take more time to consider these issues alongside the fiscal impacts. Final decisions will be made before legislation is laid later this year.

In addition to the written responses, the Treasury Select Committee published a report into Making Tax Digital for Business. The consultation decisions address many of the Committee’s recommendations, including recognising the importance of thoroughly piloting the changes before implementation. HMRC will begin piloting digital record keeping and quarterly updates for a full year from April 2017, building up to working with hundreds of thousands of businesses and landlords before rolling the services out more widely. This will ensure the software is user-friendly and gives individuals and businesses time to prepare and adapt.

HMRC has also published an updated impact assessment. Some respondents claimed Making Tax Digital could cost thousands of pounds per business. The impact assessment outlines that there will be a significantly smaller one-off transitional cost of £280 per business, followed by small ongoing annual savings. This is in addition to the benefit of having a clearer in-year view of your tax position and removing uncertainty and the worry of HMRC interventions.

Read the full consultation response document.

2. Tax administration

This consultation covered proposed changes to tax administration including those necessary to deliver Making Tax Digital for Business. It covered proposals for compliance powers and for late submission and late payment penalties. It proposed that current interest rules for Income Tax and Class 4 National Insurance Contributions should continue to apply and asked for views on the possible alignment of interest rules across tax regimes.

Respondents were supportive of proposals to replicate HMRC’s existing compliance powers under Making Tax Digital for Business. Legislation on this will be included in the Finance Bill 2017.

Having considered the responses to the proposals for late submission penalties, we recognise that more work needs to be done and will look again at this. We can confirm that in order to support customers during the transition to Making Tax Digital for Business, customers will be given a period of at least 12 months before they are charged any late submission penalties.

Most respondents considered penalty interest to be the most attractive proposal for a late payment sanction. Current interest rules for Income Tax and Class 4 National Insurance Contributions will continue to apply. We will now consult further on specific proposals for late payment penalty interest and the alignment of interest rules in 2017.

Read the full consultation response document.

3. Simplifying tax for unincorporated businesses

This consultation asked for views on changes to simplify how and when unincorporated businesses report their profits and increase the number of unincorporated businesses eligible for the cash basis of accounting.

The vast majority of respondents supported the objective of simplifying the tax system. Some were concerned about the timing of the reform in this consultation and whether businesses have the capacity to understand multiple changes at once. The government has chosen to proceed with two of the measures published in the consultation. The measures being taken forward are increasing the entry threshold for the cash basis to £150,000 and simplifying the rules on capital and revenue expenditure within the cash basis to make it easier for businesses to work out whether their expenditure is deductible for tax.

As a result of stakeholder comments, further consideration is being given to the reform to the basis period rules and measures to simplify period end reporting requirements.

Read the full consultation response document.

4. Simplified cash basis for unincorporated property businesses

This consultation considered the extension of cash basis accounting to unincorporated landlords. Currently, under the normal accruals accounting system, income and expenditure is recorded when it becomes due not when it is paid.

Almost all respondents supported landlords being allowed to use the cash basis, so they only have to declare income if they have actually received it, with many supporting cash basis as the default option for landlords. The government has taken on this approach and will extend cash-basis accounting so that thousands more will be able to pay tax based simply on the difference between money they have taken in and what they have paid out. For small landlords this will mean paying tax on rent received rather than rent due.

Although a majority of respondents supported having no entry threshold for using cash basis, others felt that the cash basis is not suitable for the largest unincorporated property businesses and that we needed a threshold. The government has therefore decided to include a maximum rental income threshold of £150,000 per property business. This excludes only 0.5% of businesses, leaving approximately 2.36 million eligible businesses with up to 1.8 million expected to benefit from the administrative savings of using cash basis.

Read the full consultation response document

5. Voluntary pay as you go

This consultation looked at options for those businesses, self-employed people and landlords required to use digital record keeping to make and manage voluntary payments of their tax throughout the year. It considered how voluntary payments will be allocated across different tax bills, explored the best way of dealing with the repayment of voluntary payments and the opportunity regular updating provides to make earlier repayments. Respondents were generally supportive of the opportunity to make voluntary payments throughout the year.

The majority wanted voluntary payments to be easily and speedily repayable. We agree and have decided that a repayment will not be repayable shortly before a liability becomes due only if the customer failed to pay on time in the previous 12 months.

HMRC agrees that early repayments are better left until Making Tax Digital for Business is fully embedded.

There were some concerns over the proposal that HMRC would allocate voluntary payments against tax liabilities as they arose, instead of the customer, and over whether HMRC systems would ensure this was carried out in the customer’s interest. HMRC has decided to proceed with its proposal on payment allocation. We believe this will reduce the need for customers to have to access their digital tax account to tell HMRC where payments should go. We will ensure that robust allocation rules are in place and publicly available.

Read the full consultation response document

6. Transforming the tax system through the better use of information

This consultation focused on how HMRC will make better use of the information we currently receive from third parties to save customers providing information we already hold and to provide a more transparent service for customers.

In 2017, we will start to use PAYE information during the tax year to calculate whether the right tax is being paid. In the short-term, customers will still receive letters directing them to their digital account to check this, but in future, customers will be prompted digitally to check their tax account.

We have been working with third party information providers and individual customers on co-designing a process for resolving queries when a customer believes the information provided by a third party is incorrect. We will continue to use customer feedback and engage with stakeholders to ensure that this process is clear and easy to use.

We will adopt a gradual phased approach to using further sources of third party information and will seek to make better use of information we already hold.

Read the full consultation response document.