HM Revenue and Customs (HMRC) is extending its Making Tax Digital (MTD) programme to cover business below the VAT threshold and individuals filing income tax self-assessments.
The department’s MTD programme, which aims to digitise the UK tax system, was introduced on 1 April 2019 for VAT returns for businesses with a taxable turnover of more than £85,000.
In April 2022, HMRC will begin introducing the programme to businesses with a turnover below the £85,000 VAT threshold, and in April 2023 it will also apply to taxpayers who file income tax self-assessments for business or property income of more than £10,000 a year.
According to a financial secretary to the Treasury Jesse Norman’s written statement to Parliament, this will “allow businesses, landlords and agents time to plan, and gives software providers enough notice to bring new MTD products to market, including free software for businesses with the simplest tax affairs”.
Norman added: “HMRC will expand its pilot service from April 2021 to allow businesses and landlords to test the full end-to-end service before the requirement to join.”
The statement said 30% of businesses with a turnover below the VAT threshold have already joined voluntarily. “The government will also consult in the autumn on the detail of extending MTD to incorporated businesses with corporate tax obligations,” it added.
HMRC describes MTD as a way to help businesses and individuals reduce errors leading to tax overpayment or underpayment. Once reports go fully digital, the new approach is also intended to reduce tax evasion.
Mistakes reportedly accounted for a £33bn “tax gap” in 2016-17, which is the difference between what the exchequer expected to receive and what was actually paid. This figure was reduced to £8.5bn in 2018-19 after the changes made by MTD.
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Norman said these are the “next steps” as the government “brings the UK’s tax system into the 21st century”.
“Making Tax Digital will make it easier for businesses to keep on top of their tax affairs,” he said. “But it also has huge potential to improve the productivity of our economy, and its resilience in times of crisis.”
According to a report by the Infrastructure and Projects Authority, more than 1.4 million businesses have signed up for MTD as of May 2020. More than five million VAT returns have been submitted through the service, including 280,000 smaller VAT businesses.
In 2017, the MTD programme was strongly criticised by the Lords Economic Affairs Committee and the Commons Treasury Committee, which called for the government to delay the project.
In response, HMRC announced in July 2017 that it would delay the wider Making Tax Digital for Business programme until 2020, but would introduce changes, mandating businesses with a turnover above the VAT threshold to keep digital records for VAT purposes. Businesses now have to keep digital records and provide VAT returns through software.