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Making Tax Digital and its future: 10 answers from HMRC

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There was understandably a lot of discussion at Accountex 2019 around Making Tax Digital (MTD), with the show opening just one month after MTD for VAT was mandated (as of 1 April 2019).

To attempt to discern the landscape now and in the future, for both businesses and accountants, we attended the keynote speech given by Theresa Middleton, HMRC’s director of Making Tax Digital for Business.

She was assisted when answering audience questions by Claire Williams, digital delivery team manager for MTD at HMRC. We also caught up separately with Verna Gellvear, from HMRC’s MTD Customer Readiness and External Stakeholder Team (CREST), to get her input.

What the HMRC representatives said has been condensed into answers to 10 important Making Tax Digital questions.

1. When is MTD for Income Tax starting?

Making Tax Digital for Income Tax is already here, Theresa Middleton reminded us: “We have delivered a very basic income tax service so that a million or so businesses with certain characteristics are able to join.”

It’s perhaps an indication of how keen she is for businesses to sign up that she didn’t directly mention MTD for Income Tax is still what HMRC refers to as a live pilot programme.

However, she did say there are issues: “There’s not very much software available and therefore there’s a sort of chicken and egg situation where an absence of mandation has meant that there’s not much choice for a business that might want to join.”

The solution, she said, is for HMRC to “expand the types of businesses that can join by delivering more functionality”. In other words, watch out for the MTD for Income Tax pilot soon, including businesses outside of the current limitations of sole traders with income from one business, and landlords.

As for when MTD for Income Tax will be mandated, “2021 at the earliest” was repeated by HMRC representatives. In her keynote, she referenced that the chancellor of the exchequer, Philip Hammond, had confirmed this position in his Spring Statement earlier this year.

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2. When is MTD for Corporation Tax starting?

“Corporation tax is obviously further back than Income Tax,” said Theresa Middleton, adding that the first step of a public consultation hasn’t yet taken place. Therefore, even a live pilot programme is unlikely to be launched soon and mandation is several years away.”

She added the progress of MTD for Corporation Tax will depend on “how well the VAT service lands and how well we’re able to stimulate the Income Tax market”.

This arguably places a question mark over whether MTD for Corporation Tax will ever arrive but Middleton once again repeated the mantra about sealing the £9.2bn tax gap caused by errors within tax filing.

She added: “With our digital tax ambitions, [we feel] we are going with the flow of the way that people and the economy and businesses are moving. We don’t feel that we’re ahead of the curve in any way.”

3. When will MTD for VAT be mandated for VAT-registered businesses below the VAT threshold?

Roughly speaking, two million businesses are registered for VAT, Theresa Middleton reported, although only half of them are actually above the VAT threshold. Under existing rules, those businesses under the threshold are not in the scope of Making Tax Digital for VAT.

Indeed, she reported a common call to HMRC’s helplines is from such businesses in a state of confusion.

However, as with mandation for Income Tax and Corporation Tax, Middleton made clear that the chancellor said there will be no further mandation of Making Tax Digital for businesses of any kind across 2019 or 2020.

In other words, and to be clear, nothing has changed for businesses that have registered for VAT but are under the threshold, and they do not have to take part in MTD for VAT at the present time.

4. What businesses are excluded or exempt from MTD for VAT?

Some businesses can apply to be digitally excluded, which is to say it’s impossible or impractical for them to use technology in the way MTD for VAT demands. Theresa Middleton summarised this by saying: “Nobody who is unable to go digital will be forced to do so.”

Examples include those who live in remote locations that lack an internet connection, those whose disabilities prevent them using technology in the way MTD for VAT requires, and even those whose religious beliefs are incompatible with the use of technology.

She reported that existing digitally exempt customers “don’t need to reapply […] they’ll effectively be moved across into the service as exempt”.

However, those who until now have complied with online VAT filing but believe that they’re now unable to comply with MTD for VAT for the listed reasons (or “other factors”, to quote Middleton), will need to apply for exemption with HMRC.

Notably, she reported that these businesses can continue to file VAT the old way until they hear back from HMRC after applying for exemption. She added that even if businesses are turned down then they can appeal and continue filing the old way.

Middleton said: “People don’t need to worry about moving on to [MTD for VAT] if they think they might not be capable of doing so, until that whole process is run all the way through.”

5. Can a business be deferred from MTD for VAT?

Outside of exemption and insolvency, some types of more complex businesses are deferred from being mandated for MTD for VAT until at least October 2019. Examples include trusts and VAT groups.

Theresa Middleton explained that “most businesses that are mandated from October can start to join now if they wish to do so”, again skipping over the fact that, for the deferred businesses, submission is via a live pilot, similar to MTD for Income Tax discussed above.

A deferred business that voluntarily signs up for MTD for VAT earlier will certainly avoid the crush towards the end of the year (remember: the new Brexit date of 31 October 2019 occurs around the same time, so HMRC’s attention might be elsewhere).

Not yet included in the live pilot are VAT GIANT (Government Information and National Health Trusts) service users, about which Middleton said little other than to acknowledge they were not yet part of even the MTD for VAT live pilot for deferred businesses.

However, these organisations are likely to be receiving specialist advice on the way forward and are outside the scope of this article.

6. Will a business get fined if a mistake is made with MTD for VAT?

There’s been wide-scale confusion about HMRC’s “soft landing period”, with many believing it implied more than it actually does. All it means is simply that in the first year after launch, HMRC will not enforce the strict rule on digitally linking software for MTD for VAT purposes.

However, when it comes to penalties with MTD for VAT, Theresa Middleton introduced a new phrase with which to grapple: “A light touch to penalties in the first year.”

Put simply, businesses that have tried to comply with MTD for VAT but made a mistake might not be penalised. In pointing this out, she was simply reiterating the chancellor in his Spring Statement.

Middleton continued: “[HMRC’s] aim is to help businesses transition to the new service, and that it should land and work well, not that we should chase after people who have tried their best to get it right but haven’t done so […].

“If people are doing their best to join but somehow get in a bit of a muddle when they come to submit their nine boxes of data, we don’t want to penalise people for that.”

Of course, it will be down to VAT assurance officers to define what a “muddle” constitutes—and whether the business should suffer in response. It’s clear from Middleton’s tone, however, that the starting point will be that businesses can demonstrate they’ve made every effort to comply.

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7. What can businesses do if they can’t afford (or refuse to purchase) MTD for VAT software?

One of the consistent complaints from accountants has been that MTD forces businesses to buy either new software or pay to upgrade their existing software.

Theresa Middleton commented it was a “fair challenge that HMRC has decided we are no longer going to provide free software”, but stated that it wasn’t the business of a tax authority to compete in a country’s software market.

She explained: “There’s a general government principle that government should do what only government can do.”

However, she reiterated HMRC’s plan that MTD for Income Tax mandation will be accompanied by some kind of free product—although only for the very smallest businesses, demonstrated by the fact they are beneath the VAT threshold.

As for MTD for VAT, of the circa 200 products now available, Middleton pointed out that 13 of them are free. Some have conditions attached, such as being offered by particular banks, and she advised businesses to consult accountants for guidance on which to choose.

Additionally, she said, bridging software can help overcome incompatibilities with some older accounting software, or the use of spreadsheets for VAT accounting. Notably, Claire Williams explained that “about 15% or 20% of the returns are through bridging products so far”.

“Most of the [software] costs can be fully set off against tax,” Middleton said. “We are aware that we’ve pushed a bit of a cost on to businesses here. We don’t think it’s as bad as some people are fearing it to be.”

8. How can businesses and accountants keep up with MTD developments?

Another criticism HMRC has faced is not doing enough to communicate details about MTD with accountants (which HMRC includes in a group known as “agents”), and businesses.

Responding to a question from the floor following Theresa Middleton’s speech, Claire Williams pointed out that: “[HMRC] has to manage taxpayers’ money carefully and when you look at the population we’re trying to target here, it’s actually quite a small one.”

As such, the campaign has and will continue to be low key.

There will be no TV adverts, she continued, but HMRC is making good use of emails and mail outs, with 650,000 businesses already signed up to the email list and letters being sent out to businesses that haven’t yet signed up for MTD for VAT.

She said HMRC attending trade shows such as Accountex ensured contact with accountants, who could then educate their clients.

Middleton mentioned that HMRC offers digital help, such as webinars that are typically attended by 800 people at a time, and YouTube videos or social media content.

But, in summary, it’s perhaps wise to keep an eye on information sources provided by HMRC and never assume that it will actively communicate with you in advance.

9. Why should a business embrace MTD?

While MTD for VAT is now mandated for all eligible businesses, HMRC arguably faces an uphill struggle to sell the benefits of the MTD for Income Tax live pilot before its mandation in 2021 (at the earliest).

Verna Gellvear emphasised the benefits to businesses, especially those already using the VAT system. She said: “You get to do regular quarterly returns. You’re able to see your tax liabilities at a specific period in time for the two taxes.

“When it comes to accounting software, this could be a point in your business where you start thinking about the future.”

She added that, because MTD for Income Tax is not mandated, businesses can give it a try but then withdraw if they don’t believe it’s for them.

“You can be there and try and influence,” she said in summary. “Then you can also get your skills right for when mandation does come in. So, it’s a way of practising before you’re being made to do it.”

10. Why should accountants embrace MTD?

HMRC also needs to convince accountants that their clients should take up MTD for Income Tax, of course. Theresa Middleton reported in her keynote that agents are “the least satisfied customer group”, so once again it could be an uphill struggle.

Verna Gellvear framed the benefits in the context of professional opportunities: “I think then they could be seen as being at the forefront of their profession. They are the forward-thinking accountants.

“It’s been quite interesting for me to go out and be challenged by accountants who say they don’t like MTD, and who tell us they don’t think it’ll work. But behind them there’ll be an accountant thinking, ‘I’m going to have his business.’

“If you change that mindset to being from negative to positive then you’ll attract clients.”

Conclusion on the future of MTD

There’s little doubt from HMRC’s comments at Accountex that the Making Tax Digital for Business juggernaut is continuing on its way.

Theresa Middleton and other HMRC representatives were positive about MTD for VAT’s take up so far and gave every impression that they’re ready for whatever comes their way.

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