Leading tax bodies respond to the Making Tax Digital delay

The Association of Taxation Technicians (ATT) and Chartered Institute of Taxation (CIOT) welcome a delay to a major change in how self-employed businesses and landlords with annual business or property income above £10,000 keep their records and report to HMRC.

But the tax organisations say there is still much to be done to ensure that Making Tax Digital (MTD) delivers its purported benefits without adding significant costs and burdens for businesses and their advisers.1 They would urge HMRC to prepare and publish a detailed implementation roadmap to ensure there is adequate time for software development, testing and communication in time for the launch of Making Tax Digital for Income Tax Self Assessment (MTD for ITSA).

In a written statement to Parliament today (23/9),2 the new Financial Secretary to Treasury (FST) Lucy Frazer said the Government will introduce MTD for ITSA a year later than planned, in the tax year beginning in April 2024. Frazer added that general partnerships will not be required to join MTD for ITSA until the tax year beginning in April 2025. The date at which all other types of partnerships will be required to join will be confirmed later, she said. The FST claimed a later start for MTD for ITSA provides more time for those required to join to make the necessary preparations and for HMRC to deliver the most robust service possible, affording additional time for testing in the pilot.

Alison Hobbs, Chair of the joint ATT and CIOT Digitalisation and Agent Services Committee, said:

“The delay gives HMRC a fighting chance of achieving the goals of MTD while limiting the confusion and costs for individuals who are reeling from the impact of the pandemic and, for some, the consequences of Brexit.

“There is now more time to sort out problems and get software products tested, for example, but HMRC must make full use of this extra year.  They must also undertake a significant communications and educational exercise to try to ensure all affected taxpayers are aware of their obligations and how to comply with them in time. Our tax adviser members report that it has been difficult to get clients engaged with MTD for ITSA because of uncertainty with the project up to now.

“We now need to see a marked increase in the number of taxpayers taking part in the pilot, as well as an increase in the number of software products available.

“We urge the Government to use the extra time to assess the effectiveness of MTD for VAT, as well as whether the administrative burden it is imposing on business is reasonable.”

Alison Hobbs added:

"We are pleased that general partnerships will be deferred until 2025 to allow HMRC to focus on getting sole traders and landlords ready for MTD ITSA first.

“Excluding partnerships from the initial wave of MTD for ITSA is sensible. It is increasingly clear that imposing the digital requirements on partnerships will be challenging because of the way partnerships are managed and taxed.  In addition, many large partnerships and limited liability partnerships (LLPs) have an international dimension which creates added complexity. We hope the deferral until April 2025 for general partnerships will give sufficient time to enable these issues to be ironed out. But LLPs want some certainty about when they will be mandated into MTD for ITSA so they can also have adequate time to prepare. HMRC need to say soon when LLPs will have to comply with the regime.” 

On basis period reform announcement in Frazer’s written statement, Alison Hobbs commented:

“We welcome the delay outlined in the minister’s statement as this will give more time for consultation on proposals that could have a fundamental impact on affected businesses.”

Notes for editors

1. HMRC’s Measuring Tax Gaps 2021, published on 16 September, puts tax lost due to taxpayers’ failure to take reasonable care in 2019-20 at £6.7 billion (1.0 per cent of total theoretical liability) and tax lost due to taxpayer error at £3.7 billion (0.5 per cent). The figures are up from £6.1 billion (0.9 per cent) and £3.1 billion (0.4 per cent) respectively in 2018-19.

The CIOT said the findings in this report illustrate the complexity of the tax system. More than £10 billion of the tax gap relates to taxpayers not getting things right through what HMRC categorise as error or a failure to take reasonable care.  Whilst the CIOT recognise that we are in the early days of Making Tax Digital (MTD) and the published tax gap data does not allow a granular analysis, we are surprised to see such a significant increase in these elements of the tax gap. MTD is supposed to reduce the tax lost from these behaviours and bring in hundreds of millions of pounds of additional revenue. So far there is no clear sign that this is happening. These figures back up what CIOT have heard from our members – that Making Tax Digital is unlikely to reduce the amount of taxpayer error and may even in some situations be increasing it.

2. Lucy Frazer’s written statement to Parliament is here.

3. Making Tax Digital

VAT-registered businesses with a taxable turnover above the VAT threshold (£85,000) are now required to follow the Making Tax Digital for VAT (MTD) rules by keeping digital records and using software to submit their VAT returns. If you are below the VAT threshold you can voluntarily join the Making Tax Digital service now. VAT-registered businesses with a taxable turnover below £85,000 will be required to follow Making Tax digital rules for their first return starting on or after April 2022.

Self-employed businesses and landlords with annual business or property income above £10,000 will need to follow the rules for MTD for Income Tax Self-Assessment from April 2024.

The Government published a consultation on the future design of MTD for Corporation Tax, welcoming views from companies and other organisations within the charge to Corporation Tax, agents, professional bodies and software developers. The Government will provide businesses with an opportunity to take part in a pilot for Making Tax Digital for Corporation Tax and will not mandate its usage before 2026.

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