News / Tax

Will tax ever go digital?

In March 2015 George Osborne famously announced the death of the Tax Return, with the expectation that digital options would soon become the norm. But the government’s Making Tax Digital project has suffered numerous delays and setbacks. With another Tax Return deadline looming, Peter Webb, our Head of Tax Advisory, looks at the current state of the digital tax system.

Making Tax Digital is the umbrella term for the digitisation of the UK tax system. A few years ago, it was heralded as a necessary and sensible step for the way in which Tax Returns and other tax reports should be filed. Yet, six years after its inception, it feels very much as if those reports of the death of the Tax Return have been greatly exaggerated.

Making Tax Digital was first introduced for VAT in April 2019. Most VAT-registered businesses with a turnover above £85,000 are now required to keep digital records and use accounting software to complete their VAT Returns. And although the transition to digital for VAT was far from smooth, from April 2022 all other VAT registered businesses will be required to report digitally.

The next step is to roll out Making Tax Digital for Income Tax. Due to the pandemic this was delayed from April 2023 until April 2024. From that date self-employed businesses and landlords letting property will be required to keep digital records and use specific software to report their income to HM Revenue on a quarterly basis. For partnerships, the requirement has been further delayed until April 2025. After then, the practice of keeping digital records and sending electronic Returns to HMRC on a quarterly basis will apply to partnerships too. Some exclusions apply; if profits are less than £10,000 then this won’t be mandatory. Under the new rules businesses and landlords will be required to send details of their income and expenditure each quarter using specific software rather than submitting an annual Tax Return as they do currently. Without question this will be a significant increase in the compliance burden for these businesses.

The aim of Making Tax Digital is to reduce taxpayer errors and to lower the “tax gap” (the gap between how much tax HM Revenue feels it should be collecting and the amount actually received). But a report published in October 2020 found that the changes could impose unreasonable costs on taxpayers stating “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”.

And in reality it feels like the Government’s plans aren’t holding up; figures show that the gap between the amount of VAT expected and that actually received has increased from 7.0% in 2018/2019 to 8.4% in 2019/2020 following the implementation of Making Tax Digital.

Despite this, the government is pressing ahead with their plans to extend Making Tax Digital to Income Tax. With this in mind, it’s certainly sensible to begin to digitalise your own records and ensure you’re prepared for significant changes to come.

For help and advice with any aspect of your own taxes, please contact your nearest office.