UK: Digitalisation of UK Tax System

The introduction of MTD was announced in the 2015 Government Autumn statement report as a measure of simplifying the UK tax system. HM Revenue & Customs (HMRC) have identified that the current human intervention in reporting has resulted in an estimated gap in revenue of nearly £9 billion. The UK government’s intention is to reduce this tax gap by introducing the requirement to keep digital records and automate the process of information that is sent digitally to them. 

MTD affectsthe following taxes: Value Added Tax (VAT), Income Tax and Corporation Tax. The implementation will take place in stages.

Making Tax Digital (MTD) Timeline 

MTD reporting for VAT came into effect from 1 April 2019 for VAT registered businesses with taxable turnover of £85,000 and above.

Income Tax and Corporation Tax will not be implemented until April 2021 at the earliest, which will allow time for businesses and organisations to test the new system. 

More complex VAT registered business have a deferred implementation date of 1 October 2019, such as: local authorities, public organisations and businesses based overseas. 

MTD for VAT 

From April 2019, VAT registered businesses and organisations are required to: 

• Maintain digital accounting records 

• Produce VAT returns using the information held within their accounting software 

• Submit digital records to HMRC on a quarterly basis without human intervention 

• Use a functional compatible software to digitally submit the information to HMRC. 

A “functional compatible software” is a software, which can connect to HMRC system via an Application Programing Interfaces (API) platform.

Further details on MTD recognised software suppliers are available on HMRC website. 

HMRC have announced that exemptions are available for businesses and organisations where they cannot interact with HMRC digitally. These exemptions are not automatic and each application will be considered based on the business or taxpayer‘s specific circumstances.

Voluntarily VAT registered businesses are not required to comply with the MTD regime. Whilst they can join this MTD scheme, they will remain within the scheme until they deregister from VAT. 

A new points-based penalty regime will replace the existing penalty system from April 2020. However, the UK Government have allowed a “soft landing” period for the first 12 months for failure to meet the mandated requirements. 

MTD for income tax pilot 

A trial of MTD income tax has already commenced and taxpayers are invited to test the new service. The taxpayers again will use a compatible functional software to submit quarterly updates where they meet the qualifying criteria of being self-employed and/or have rental property income. 

Businesses and taxpayers can delegate the MTD processto their UK tax agentsto deal with the ongoing administration and registration to the new system. 

MTD is challenging for both businesses and their advisers. However, we have been advised that, once the transformation has been embraced, businesses can benefit from automation, streamlining of processes and improved compliance, due to the information readily available to HMRC. 

‍