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MAKING TAX DIGITAL (MTD)

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.

Every individual and business now have access to their own personalised digital tax account and these are being regularly expanded and improved. HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world, modernising the tax system to make it more effective, more efficient and easier for customers to comply.

There are 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
    Clients (and 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.
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    HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world, modernising the tax system to make it more effective, more efficient and easier for customers to comply.
    The majority of customers want to get their tax right but the latest tax gap figures (2014 to 2015) show too many find this hard, with a cost to the Exchequer of over £8 billion a year due to avoidable taxpayer mistakes. In 2014 to 2015 over £3.5 billion of revenue was lost due to these mistakes in VAT returns alone.
    A modern tax system, based on digital technology will make it easier for businesses to get their tax right. Reducing the amount of avoidable errors will also reduce the cost, uncertainty and worry that businesses face when HMRC is forced to intervene to put things right.
    The logic of digitising the tax system is widely recognised and millions of businesses are already banking, paying bills, and interacting online. Digitising routine business tasks such as record keeping is the next step and is one many businesses have already taken.
     
    There is widespread agreement that Making Tax Digital for Business is the right approach for the future and the work will be closely with stakeholders to ensure Making Tax Digital is a success. However, a number of concerns about the pace and scale of change have been raised. As a result, the government has announced that the roll out for Making Tax Digital for Business has been amended to ensure businesses have plenty of time to adapt to the changes.
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    Businesses will not now be mandated to use the Making Tax Digital system until April 2019 and then only to meet their VAT obligations. This will apply to businesses who have a turnover above the VAT threshold – the smallest businesses will not be required to use the system, although they can do so voluntarily.
    This change means that no business will need to provide information to HMRC under Making Tax Digital for business more regularly than they do now. VAT has been online since 2010 and over 98% of VAT registered businesses already file electronic returns.
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    Making Tax Digital will build on this by integrating digital record-keeping to provide a single, seamless process with quarterly updates generated and sent direct from the software the business/agent uses to keep their records.
    The expectations of many of these businesses to take the opportunity to provide quarterly updates for other taxes too, but there will be no mandatory requirement to do so. Similarly, businesses that are not VAT registered and those below the VAT threshold who have voluntary registered for VAT can opt to join Making Tax digital for Business, giving them the choice of whether to opt to use commercial software to keep track of their tax affairs digitally and update HMRC on a quarterly basis.
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    By introducing Making Tax Digital for Business on a voluntary basis for most and only making it mandatory for those who already interact with HMRC regularly and digitally, we can smooth the transition maximising the opportunities of a modern digital tax system.
    The government has committed that it will not widen the scope of Making Tax Digital for Business beyond VAT before the system has been shown to work well, and not before April 2020 at the earliest. This will ensure that there is time to test the system fully and for digital record keeping becoming more widespread.
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Next steps
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The first businesses have already started keeping digital records and providing updates to HMRC as part of a live pilot to test and develop the Making Tax Digital service for income tax and NICs and we will continue to expand this pilot.
The government will re-introduce the legislation to give effect to Making Tax Digital for business that was published in the Finance Bill after the Spring Budget.
Making Tax Digital for VAT will be piloted by the end of this year, starting with small-scale, private testing, followed by a wider, live pilot starting in Spring 2018. This will allow for well over a year of testing before any businesses are mandated to use the system. No business will be mandated before 2019.
From April 2019 businesses above the VAT threshold will be mandated to keep their records digitally and provide quarterly updates to HMRC for their VAT.
Tax simplified
The government is committed to reducing burdens for taxpayers and building a transparent and accessible tax system fit for the digital age.
At the March 2015 Budget, the government set out the vision for a transformed tax system and the end of the tax return.
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Making Tax Digital sets out how this bold vision for the future of the tax system will be achieved by 2020 through the transformation of HM Revenue and Customs (HMRC) into one of the most digitally-advanced tax administrations in the world.
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Making Tax Digital will represent significant changes to the way in which the tax system will operate. These changes will put customers at the heart of what HMRC does going forward. We do not underestimate the scale of these reforms and are introducing them gradually between 2018 and 2020, because we know how important it will be to get them right and to give individuals and businesses time to adapt.
 
At the moment, the information that HMRC receives from a range of sources is held on separate, stand-alone systems. This can result in taxpayers being asked to report via a Self Assessment tax return information that is already held by HMRC on another of its systems. This unnecessary burden for taxpayers is 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 and HMRC has to take recovery action. This can lead to penalties and interest charges which could be avoided.
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HMRC understands that taxpayers need varying levels of support. All taxpayers will receive the data and services relevant to them and, for those who have difficulty going online or who need extra support, help will be available through other channels. HMRC is training the teams on its helplines to spot taxpayers in need of extra help. These taxpayers will be offered alternative means of support — over the phone, through face-to-face visits or through partners in the voluntary and community sector. HMRC will also analyse the information it holds to identify those looking to bend or break the rules. They will be spotted earlier, and tackled earlier, to avoid non-compliance and reduce the need for expensive compliance interventions later on. Through its better use of data, and presenting digitally the data it holds, HMRC will make life easier for taxpayers and make the collection of tax more efficient.
MTD for businesses
Millions of businesses already manage their tax digitally: 98% of Corporation Tax returns and 99% of VAT returns are submitted online, and HMRC has delivered digital accounts to millions of small businesses. By April 2016, all of the UK’s five million small businesses will have access to their own digital account. By 2020, most businesses, self-employed people and landlords will be required to keep track of their tax affairs digitally and update HMRC at least quarterly via their digital tax account. These changes will be introduced for some businesses from April 2018, and will be phased-in by 2020, giving businesses time to adapt. These businesses will be required to use digital tools, such as software or apps, to keep records of their income and expenditure. HMRC will ensure that free apps and software products are available, but many businesses and their advisers will choose to use commercially-available tax software packages.
Businesses will use software that compiles their tax data as part of their ordinary day-to-day activity, highlighting any possible errors (for instance, arithmetical mistakes or figures which look out of place) and offering prompts for information that might otherwise be overlooked. Once the software has compiled the relevant data, businesses or their agents will feed it directly into HMRC systems via their computers or smartphones. Updating HMRC directly in this way will be secure, light-touch and far less burdensome than the tax returns of today. Businesses currently report information on tax returns and pay liabilities long after the end of the tax year. The government is changing the tax system so that it operates much more closely to ‘real time’. Business will be able to see, through their digital accounts, a real-time view of their tax and a calculation of the tax due. By reporting information closer to real time, businesses will find it easier to understand how much tax they owe, giving them far more certainty over their tax position and helping them to budget accordingly.
The government will consult widely on the details of these measures in spring 2016, including on whether they should apply to charities, sports clubs and their trading subsidiaries. The government has already announced, however, that these measures will not apply to individuals in employment or pensioners, unless they have secondary incomes of more than £10,000 per year from self-employment or property. The government is consulting on options to simplify the payment of taxes, including whether to align payment dates and bring them closer to the point when profits arise, so that businesses make a single regular payment that covers all of the tax that they owe.
MTD for individuals
By April 2016, every individual taxpayer will have access to their own digital account — simple, personalised and secure, offering an increasing range of services. By 2020, HMRC aims to be interacting digitally with all taxpayers. By that time, the full range of tax and Child Benefit services will be available for all taxpayers to use, accessible from a wide range of devices and protected by the very latest technology to encrypt data and keep it safe. HMRC will automatically target prompts and advice through secure messaging in the accounts, tailored to taxpayers’ specific needs and circumstances — such as when someone has a baby, or approaches retirement. Digital support will be there for those who need it, as HMRC builds on the successful online services it already operates through Twitter, YouTube, webinars and webchats.

The government will consult widely on the details of these measures in spring 2016, including on whether they should apply to charities, sports clubs and their trading subsidiaries. The government has already announced, however, that these measures will not apply to individuals in employment or pensioners, unless they have secondary incomes of more than £10,000 per year from self-employment or property. The government is consulting on options to simplify the payment of taxes, including whether to align payment dates and bring them closer to the point when profits arise, so that businesses make a single regular payment that covers all of the tax that they owe.

Tax in one place
At the moment, many taxpayers have to contact different parts of HMRC to find out their financial position relating to different taxes. A business may pay income tax, VAT, National Insurance or Corporation Tax; an individual may pay income tax, National Insurance contributions or student loan repayments and receive Child Benefit; some people run a business as well as being an employee or having a pension. The modern, digital tax system will give all of these taxpayers a single, personalised view of their overall tax position across all of their liabilities. This overview will make it much easier for taxpayers, and their tax agent if they have one, to see the payments they have made to HMRC. Those who need to pay HMRC will be able to do so through their digital tax account. Where they need to pay more than one liability, they will be able to make a single payment — off-setting any tax owed on one liability against an overpayment on another. It will feel like paying a single tax. There will be rules governing when money can be reallocated between different liabilities, and HMRC will be working with stakeholders to establish how these rules will work. Those with more than one source of income collected through PAYE will see an up-to-date picture of their tax affairs, showing all of the information received by HMRC from their employer, and how each income source affects their tax calculation. For example, someone with two part-time jobs will be able to take control of how their personal allowance is split between each of them, in order to pay the right tax in-year. To deliver these changes, HMRC needs to reconfigure its internal systems significantly and this work is already underway with, for example, the creation of the business tax dashboard and the launch of digital tax accounts. This will open up new opportunities for developing a simpler tax administration framework. Here too, HMRC will work with stakeholders and taxpayers to ensure that every opportunity is taken to improve the transparency and accessibility of the tax system. 
The end of tax return
Over the next five years, the changes outlined in this document will bring about the end of the tax return for millions of taxpayers: • Most businesses will keep their records using digital tools and send that information at least quarterly to HMRC • In spring 2016, HMRC will consult on where it might obtain information directly from third parties, removing the need for taxpayers to report it • Taxpayers with changes to report or other information to submit will do so through their digital tax account • A new system of online billing will collect outstanding tax which can’t be collected through PAYE (for example, small pensions) with no need for Self-Assessment tax returns • Those who currently choose to complete tax returns simply to check their tax is in order will find all the information they need in their digital account. Of course, taxpayers will still be responsible for ensuring that their tax bills are right and telling HMRC about information that is not reported through other means. But digital accounts will make this much easier, quicker and simpler.
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