Extension of Making Tax Digital
By Philip McNeill, Head of Taxation (Tax Practice and Owner Managed Business Taxes)
23 July 2020
Philip McNeill considers the recent announcement of the extension of Making Tax Digital.
Extension of Making Tax Digital
The announcement of mandation for MTD to income tax from April 2023, and to all VAT registered businesses from April 2022, heralds a period of change and development for businesses and their advisers. While the long-awaited consultation on corporation tax will mark a first step towards quarterly reporting for companies.
The changes
HMRC have set out their vision in an MTD ‘roadmap’ which has drawn on lessons learnt from the COVID-19 experience. From April 2023 there will be mandatory quarterly reporting of business and property income for unincorporated businesses with gross income of over £10,000.
MTD for VAT is extended to all businesses from April 2022, so there will no longer be an exception for voluntary registrations.
A brief outline is given on the Gov.uk Making Tax Digital overview page under Making Tax Digital for Income Tax and Making Tax Digital for VAT.
Background
This is to come as part of a series of change – tax administration is also in sight – to make the system fit for the 21st century. This is an ongoing process of change over the next ten years to 2030.
The idea of MTD for income tax has been around for a number of years. COVID-19 has acted as catalyst, bringing digital to the fore.
In particular, disparities between the Coronavirus Job Retention Scheme and the Self-Employed Income Support Scheme (SEISS), have highlighted the absence of up-to-date information for the self-employed. The potential benefits to Government and business owners of HMRC having such information are clear in terms of more targeted delivery of SEISS.
For example ‘It would have enabled government to provide support to many more self-employed individuals who had recently set up in business without further exposing the scheme to fraud and organised criminal attack, as the data to support their claims would have been already available and accessible’ per Building a trusted, modern tax administration system.
The track record of MTD for VAT – mandated for those over the registration threshold since April 2019 – has also facilitated an assessment of the impact of any extension to MTD.
The first steps in the new plan aim to provide HMRC with access to up-to-date business for up to four million small businesses and landlords. This is designed to ensure ‘better targeted policy responses and makes the tax administration system more resilient and effective in responding to future crises.’
There will be an ongoing process of consultation and collaboration as the plan is developed.
Uncertainty
At the time of writing there are many details to be clarified, but the representative bodies, including ICAS, will have their opportunities to make representations. One of the key uncertainties for accountants will be the role of accounts – are they simply for tax reporting or will they remain a useful business tool?
Other issues to consider include accounting year-ends and overlap relief, the use of spreadsheets, the interaction with self-assessment for income tax for those with multiple income sources, and benefits of accruals accounting versus those of cash accounting.
The ICAS view of Making Tax Digital
The ICAS view of MTD is that digitalisation should be business-driven rather than tax-driven.
The long-term vision of Making Tax Digital is attractive. It potentially empowers taxpayers, reduces data handling costs and provides a new range of services for both taxpayers and their agents. However, this could be undermined by poor and rushed implementation.
In this context, the announcement now of a start date of April 2023 is most welcome.
Digital should not be mandatory for everyone. Alternative, non-digital channels should be available and adequate resourcing is needed for HMRC to deliver the best service.
The aim should be to create a system that taxpayers want to use. In addition, Agent Services must be made available at the same time or ahead of services for individuals and businesses so that agents can properly support their clients (ICAS MTD Strategy, July 2019).
Agent authorisation
MTD for income tax will be delivered by HMRC’s new Enterprise Tax Management Platform (ETMP). Moving income tax onto ETMP will involve new authorisation processes for tax agents through which the agent/client relationship is acknowledged by HMRC.
It is expected that a new authorisation process will be developed for the extension of MTD to income tax and that this process would become the new standard authorisation process for agents.
There are a number of challenges in this area. Some of these are considered in the ICAS March 2020 Briefing Paper on digital authorisation.
ICAS is currently working with HMRC to investigate the options with a view to a system which best meets the needs of clients, agents and HMRC.
Next steps
ICAS will be working closely with HMRC on the details of implementation. Please let us have your views.
The involvement of practitioners will be key to successful working of a new system. ICAS would welcome your involvement on a practitioner panel. Please get in touch tax@icas.com