What is Making Tax Digital?
Making Tax Digital (MTD) is an HMRC initiative designed to make sure the UK tax system is effective, efficient and easier for HMRC to administer.
While controversial and in some cases much criticised (due to poor implementation and perceived additional red tape – especially for businesses) it is in fact an initiative that will bring the administration of the UK tax system into the 21st century and without which the UK would arguably be a “luddite” nation in respect of tax administration.
What does MTD look like for Individuals?
Currently individuals and businesses file their tax returns in arrears with the returns often being submitted to HMRC quite some time after the end of the tax year.
The tax year ends on 5th April each year and personal tax returns must currently be filed by the following 31st January – and the vast majority of returns are usually filed in the December or the January.
This means that the vast majority of individuals are filing their returns and paying their taxes nine or even ten months after the end of the tax year.
In an age when tax returns could only be completed and filed on paper and in which one could not prepare one’s tax return until various documents had arrived by post from financial institutions, employers, pension providers, etc, it made sense to allow ten months for an individual to file their tax return.
But in an age of immediate electronic communication, mobile technology, and instant integration between technology platforms it makes absolutely no sense whatsoever.
Technology means that all of the following organisations could send information about an individual’s income and capital gains directly to HMRC as frequently as every month:
- Employers (for employment income and benefits)
- Main contractors (for construction industry income)
- Pension providers (for pension income)
- Fund managers (for investment income and capital gains)
- Banks (for bank interest)
- State pension
- Child benefit
- Other state benefits
If this information were to be sent monthly by the above organisations to HMRC, HMRC would have an accurate picture of an individual’s tax liability on a monthly basis. As one of the largest economies in the digital age, this is exactly what the UK should be aiming for as a tax system.
MTD is HMRC’s project to achieve exactly this.
The intent is that every taxpayer will have a Digital Tax Account (DTA) on HMRC’s online system and that the above organisations will feed data to each individual’s DTA on a monthly basis.
In theory that would mean, come the end of the tax year, that each individual (and HMRC) would already know their tax position.
The benefits of this to HMRC would be firstly that the information relating to an individuals tax position for a given year would be more accurate and secondly that it would enable HMRC to collect or refund any additional or overpaid tax more quickly. It is also likely to assist HMRC in bringing to heel those individuals who are not declaring all their income.
Much as we as taxpayers might prefer to delay paying our taxes as long as possible, it defies all logic in this digital age for our taxes to be collected ten months after the event. The earlier collection or repayment of additional or overpaid tax is something we will need to accept
One of the benefits to us as taxpayers of MTD will be that with the assistance of our accountants we would be able to monitor our tax position on an ongoing basis and budget for the tax more easily. It’s always better to know where you stand on an ongoing basis than to get a surprise a number of months after the event.
To find out about the timeline for HMRC’s implementation of MTD for individuals, please read our other blog Making Tax Digital Implementation Timeline.
It is important to note that individuals who are self-employed or who have a property letting or development business will have additional obligations under MTD and you can read about this below under What does MTD look like for Businesses?
If you would like to know more about MTD for individuals and how it might affect you please feel free to contact us:
E. H. Taylors
What does MTD look like for Businesses?
MTD for business (MTDfb) is a little more involved and will mean considerably more change for businesses than it will for individuals.
MTDfb will affect all of the following (from this point collectively referred to as “businesses”):
- Partnerships (including Limited Liability Partnerships)
- Self-employed individuals
- Individuals operating a property letting or development business
Whereas for individuals (who are not self-employed or operating a property business) it will be possible for HMRC to receive automated data feeds from various organisations into each taxpayer’s DTA (See above), this is not the case for businesses.
Businesses will instead be the SOURCE of information for HMRC.
Under MTDfb, businesses will have an obligation placed on them to provide HMRC with the information it requires regularly – and this means monthly or quarterly, depending on the type of information.
Some of the information businesses will be obligated to provide will be information that will be fed into the DTA’s of individuals (for example employees or sub-contractors of the business).
The rest of the information to be provided by a business will be about its own tax affairs (for example VAT, and corporation or income tax).
MTDfb is a more involved subject and we have therefore written a separate blog purely dedicated to MTDfb which you can find here: Making Tax Digital for Business.
If you are a small business in Southend or Hadleigh and you would like to know more about MTD for business and how it might affect you, please feel free to contact us:
E. H. Taylors
Written by Antony Holdsworth Bsc (Hons) FCMA