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HM Revenue and Customs (HMRC) has announced that its initiative Making Tax Digital (MTD) will be introduced a year later than planned, in 2024.
MTD, an umbrella term for a major digitisation of the UK tax system, was initially introduced in 2019 for VAT returns for businesses with a taxable turnover of more than £85,000, with a planned scope of automation expanding into main duties such as income tax self-assessments (ITSA). The initiative was introduced as a way to help businesses and individuals reduce errors leading to tax overpayment or underpayment, and reduce tax evasion once reports go fully digital.
With the latest changes announced by HMRC, MTD for income tax will be mandated for businesses and landlords with a yearly business income over £10,000 in the tax year commencing April 2024. Businesses within scope will need to keep digital records and use software to update HMRC quarterly, through MTD software.
According to the government, the challenges faced by many UK companies following the pandemic, as well as stakeholder feedback, were among the factors prompting the decision to shift the implementation date for MTD once again. In July 2020, HMRC announced that the programe would be extended gradually until April 2023 to cover businesses below the VAT threshold and income tax self-assessments above £10,000 a year.
HMRC also noted that a later start for MTD for ITSA gives those required to join the system “more time to prepare and for HMRC to deliver a robust service, with additional time for customer testing in the pilot”. Some 1.5 million businesses have signed up for MTD since 2019, according to the department.
“The digital tax system we are building will be more efficient, make it easier for customers to get tax right, and bring wider benefits in increased productivity,” said Lucy Frazer, financial secretary to the Treasury. “But we recognise that, as we emerge from the pandemic, it’s critical that everyone has enough time to prepare for the change, which is why we’re giving people an extra year to do so.”
The Association of Independent Professionals and the Self-Employed (IPSE) welcomed the move as a “breathing space before another painful hit to the self-employed”. According to the association, following the financial impact of the pandemic, many freelancers are not ready to make the shift to MTD.
“Although we can see the benefits of digital record-keeping, we continue to have reservations about certain aspects of the change,” said Andy Chamberlain, director of policy at IPSE. “The shift to quarterly reporting will be a serious and heavy additional admin burden for many freelancers.”
HMRC described MTD as the first phase of a broader plan to move towards a modern tax administration system, and a “natural extension” of the way many businesses already operate. However, a Public Accounts Committee report published in October 2020 found that the programme, although ambitious and logical, could impose unreasonable costs on taxpayers.
The PAC report said that “the effectiveness of the programme is not yet known”, although HMRC is confident it will achieve its goals of “improving compliance rates, increasing productivity of businesses and allowing HMRC to realise savings”.
The PAC added: “It is not clear that MTD will help reduce the tax gap or taxpayer costs at a time when individual taxpayers and small businesses are under considerable pressure.”
The PAC report also mentioned the findings of a survey of businesses and agents, carried out by the Chartered Institute of Taxation and the Association of Taxation Technicians, which “raised doubts about the effectiveness of Making Tax Digital in reducing errors and increasing productivity as expected by the government” and suggested that the compliance costs “far exceed” HMRC’s estimates.