Making Tax Digital (MTD) for VAT was first introduced back in April 2019. MTD resulted in many VAT-registered businesses with turnover exceeding £85,000 being required to keep digital records and use accounting software to complete their VAT returns. No doubt, many of our members will be familiar with the challenges this entailed. The MTD for VAT requirement is due to be extended to all other VAT registered businesses from April 2022.
The next stage of the MTD initiative is to introduce the same record-keeping and filing requirements for income tax. MTD for Income Tax was originally scheduled to be implemented from April 2023. However, citing the pandemic as a reason, the government announced in September that this part of the MTD initiative was to be delayed by 12 months until April 2024. This applies to self-employed businesses and landlords. There is a further 12-month delay for partnerships until April 2025. After that time, the requirement of keeping digital records and sending electronic returns to HMRC on a quarterly basis will apply to businesses with an annual income above £10,000. The key difference between this and MTD for VAT is that businesses will be required to send details of their income and expenditure each quarter, not just submitting VAT return figures. Some businesses may need to become more disciplined with their book-keeping and not wait to record everything at year-end.
By keeping accounting records up-to-date digitally via MTD, HMRC hopes that it will reduce errors. One would therefore have expected to see a reduction in the VAT tax gap in 2019/20. Interestingly, recent HMRC statistics show that the VAT gap has increased from 7.0% in 2018/2019 to 8.4% in 2019/2020. It is questionable if MTD for VAT is achieving its objective to reduce the tax gap.
The CLA has been lobbying the government since 2017 when the MTD initiative was first proposed, and we have been advocating that more time is required to thoroughly test the new systems and services. Although this recent delay is a very welcome announcement for businesses to give them more time to prepare for the latest instalment of MTD, we are still concerned that the current timetable for reforms – even delayed – are being implemented too quickly and could put the integrity of the tax system at risk.
For now, the government is still committed to the MTD project, and the general advice is that you should begin digitalising your accounting records now if you haven’t already. This is certainly the time to think ahead and make the best out of the extra time given.