News / Tax

Making Tax Digital

One of the ways in which the UK tax authorities aim to better manage the collection of tax is through a scheme called Making Tax Digital. But is it working? Peter Webb, our Head of Tax Advisory, take a look at how things are going and what’s coming next.

Each year the UK tax authorities, HMRC, publish figures for what they refer to as ‘the tax gap’. This figure is the difference between what HMRC expects to collect in tax and the amount actually received. The latest figures were published recently for the year ending 5 April 2021, and the tax gap was an astonishing GBP32 billion. To put that in context, the average cost of building a new hospital is around GBP350 million, so this represents the equivalent of 90 hospitals.

One of the key elements in HMRC’s plan to close the tax gap is a strategy called ‘Making Tax Digital’ (MTD). The hope is that by requiring businesses and individuals to report income and gains directly and more regularly using appropriate software, less errors will be made and the right amount will be paid, so more tax will be paid than happens now.

The first step in the MTD journey applied to VAT. The system went live in April 2019 and generally applied to businesses turning over more than the VAT registration limit of GBP85K. HMRC’s hope was that MTD would reduce the amount of “avoidable errors” and increase the amount of tax collected. So has that happened? According to official government figures the tax gap has widened following the implementation of MTD for VAT. The difference between what HMRC feel they should be collecting and what they actually receive is increasing rather than getting smaller.

Nevertheless, the next step was taken on 1 April 2022 when all VAT registered businesses, whether or not their turnover exceeded the registration limits, were brought within the MTD regime.

So what’s next?

The next phase is to bring around 4.2 million taxpayers who earn more than GBP10K a year (from either businesses or properties) into this digital reporting system. This is a significant step, and there are very few exclusions allowed. The process was originally due to begin on 6 April 2023 but has now been delayed with a new date of 6 April 2024. From that point, taxpayers will need to keep digital records using compatible software, prepare and submit quarterly reports of income and expenses along with an end of year summary. In addition, a “final declaration” will need to be submitted by 31 January following the end of the tax year to include details of all of other taxable income and gains.

Although more frequent reporting is needed, thankfully the current system of two payments on account and a balancing payment by 31 January after the tax year is expected to remain in place for the foreseeable future.

If you’re already working with a professional then the likelihood is they will be able to make your MTD submissions for you. But if you’re managing things yourself you’ll need to ensure you understand whether or not you will be required to report under the MTD regime, understand your reporting requirements, and have appropriate software in place.

To discuss any aspect of your tax planning please contact your nearest office.