The government is extending the requirement to operate Making Tax Digital (MTD) to the 4.2m taxpayers with business and/or property income over £10,000, including landlords, sole traders and partnerships, for their Income Tax obligations.
These changes will apply to businesses, self-employed individuals and landlords who have profits chargeable to Income Tax and pay Class 4 National Insurance contributions (NICs).
General description of the measure
Making Tax Digital (MTD) is the first phase of the move towards a modern, digital tax service fit for the 21st century. It supports businesses through their digitalisation journey and provides a digital service that many have come to expect in their everyday lives. MTD and its extension forms a crucial building block in the government’s 10-year strategy, ‘Building a trusted, modern tax administration system’, published 21 July 2020, to make the tax system more resilient and effective, to boost business productivity, and better support taxpayers.
The Government recognises the challenges faced by many UK businesses as the country emerges from the pandemic over the last year. In recognition of this and of stakeholder feedback, we will now be introducing MTD ITSA a year later, in April 2024 instead of April 2023.
MTD ITSA builds on the successful introduction in April 2019 of MTD for those VAT-registered businesses with taxable turnover above the VAT threshold and will follow the introduction of MTD for VAT-registered businesses with turnover below the VAT threshold from April 2022.
There is a growing body of evidence, from research and insights from taxpayers already operating MTD VAT, which demonstrates that MTD is securing a range of benefits for those that use it in practice. MTD users are reporting that preparing and submitting returns is easier, and that MTD has increased their confidence in managing tax affairs and using technology.
Over a quarter of VAT-registered businesses below the VAT threshold have voluntarily chosen to join MTD VAT, demonstrating that a modern, digital approach to managing tax can work for businesses of every size. Many of these businesses will also have Income Tax obligations and will be keen to operate MTD ITSA.
Under MTD, businesses must keep digital records and use third-party software to submit their tax returns to HM Revenue and Customs (HMRC). Under the changes, those mandated to use MTD ITSA will need to keep records of their income and expenditure digitally and send a quarterly summary of income and expenses, and an end of year report, using MTD compatible software (or applications).
The software these businesses use must be MTD enabled, and capable of receiving information from HMRC digitally via HMRC’s Application Programming Interface (API) platform.
More information can be found at Making Tax Digital (MTD) – Customer Costs and Benefits for the Next Phases of MTD where the impacts, costs and benefits to businesses and individuals of the next phases of MTD expansion (ITSA and VAT) together, set out in further detail.
Policy objective
MTD and its extension forms a crucial building block in the government’s 10-year strategy to make the tax system more resilient and effective, to boost business productivity, and support taxpayers.
UK businesses and individuals are increasingly turning to digital tools and it is vital that the UK’s tax administration system keeps pace. MTD aims to help tackle the part of the tax gap caused by error and failure to take reasonable care, by removing opportunities to make certain types of mistakes in preparing and submitting tax returns. It does not change businesses’ tax liability or payment obligations, but reduces scope for error, and allows for better customer interaction and guidance through digital prompts and nudges. This in turn contributes to a reduction in the tax gap, supporting public services and levelling the playing field for businesses. The projected gains to the Exchequer resulting from MTD reflect the reduced scope for error.
Businesses that move to real-time record keeping using accounting software may experience significant productivity benefits, as their software provides an up-to-date picture of their finances and may also provide additional functionality to integrate record keeping with other business processes. This can further reduce time spent on administration, allowing businesses to spend their time serving customers, innovating, growing and creating jobs.
Businesses will therefore also save time through processes that help them get their taxes right first time and reduce the chances of time spent putting errors right at a later stage. Less time spent on tax administration has scope to cut stress and allow businesses to focus on their most pressing business priorities.
Background to the measure
Originally announced at Budget 2015, and following formal consultation in 2016, the first phase of MTD was implemented from April 2019.
For VAT periods starting on or after 1 April 2019, VAT-registered businesses with a turnover above the VAT registration threshold have needed to keep their records digitally and provide their VAT return information to HMRC through MTD-compatible software.
In July 2020, the government published ‘Building a trusted, modern tax administration system’, which set out a vision for the future of tax administration in the UK, designed to improve its resilience, effectiveness and support for taxpayers.
A long-term strategy of focused, collaborative and transparent improvement of the tax administration system has the potential to yield huge benefits, both for individual taxpayers and businesses. It also contributes to the collective strength and resilience of the country as a whole.
Extending MTD is a critical building block for this, with the expansion of mandatory MTD VAT from April 2022 and the introduction of mandatory MTD ITSA from April 2024, a year later than announced in July 2020.