The 4 Foundations of Making Tax Digital
Making Tax Digital for individuals
The Personal Tax Account brings together each customer’s information into one place online.
It allows customers to access the service from a digital device of their choice and a time that suits them. It enables them to register for new services, update their information and see how much tax they need to pay.
The information that HMRC receives from a range of sources is held on a separate stand-alone systems.
This can result in customers being asked to report information that is already held by HMRC.
HMRC is joining up these internal systems and will automatically include information it holds about a customer’s circumstances in their account.
This means the customer will not have to do this themselves.
Under Self Assessment, over 10 million customers fill in a tax return to tell HMRC about their circumstances and income.
This is a burden for customers and inefficient for HMRC as well, mistakes can be made or the information can be wrong or submitted too late, meaning the right tax is not collected at the right time and HMRC has to take action.
This can lead to penalties and interest charges for the customer which could have been avoided.
More effective use of third party information will reduce the reporting burden on customers and reduce errors making it easier to declare the right tax.
As the Personal Tax Account develops, customers will use it to tell us when things change.
Over time, customers will no longer need to complete tax returns at the end of the year.
We are beginning by using information HMRC already holds and will make better use of this by connecting it with customers and displaying it in their tax account.
Making Tax Digital for business
HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world, modernising the tax system to make it more effective, more efficient and easier for customers to comply.
The majority of customers want to get their tax right but the latest tax gap figures (2014 to 2015) show too many find this hard, with a cost to the exchequer of over £8 billion a year due to avoidable taxpayer mistakes.
In 2014 to 2015 over £3.5 billion of revenue was lost due to these mistakes in VAT returns alone.
A modern tax system, based on digital technology will make it easier for businesses to get their tax right.
Reducing the amount of avoidable errors will also reduce the cost, uncertainty and worry that businesses face when HMRC is forced to intervene to put things right.
The logic of digitising the tax system is widely recognised and millions of businesses are already banking, paying bills, and interacting online.
Digitising routine business tasks such as record keeping is the next step and is one many businesses have already taken.
There is widespread agreement that Making Tax Digital for Business is the right approach for the future and we will continue to work closely with stakeholders to ensure Making Tax Digital is a success.
However a number of concerns about the pace and scale of change have been raised.
As a result the government has announced that the roll out for Making Tax Digital for Business has been amended to ensure businesses have plenty of time to adapt to the changes.
Businesses will not now be mandated to use the Making Tax Digital system until April 2019 and then only to meet their VAT obligations.
This will apply to businesses who have a turnover above the VAT threshold – the smallest businesses will not be required to use the system, although they can do so voluntarily.
This change means that no business will need to provide information to HMRC under Making Tax Digital for business more regularly than they do now.
VAT has been online since 2010 and over 98% of VAT registered businesses already file electronic returns.
Making Tax Digital will build on this by integrating digital record-keeping to provide a single, seamless process with quarterly updates generated and sent direct from the software the business/agent uses to keep their records.
We expect many of these businesses to take the opportunity to provide quarterly updates for other taxes too, but there will be no mandatory requirement to do so.
Similarly, businesses that are not VAT registered and those below the VAT threshold who have voluntary registered for VAT can opt to join Making Tax digital for Business, giving them the choice of whether to opt to use commercial software to keep track of their tax affairs digitally and update HMRC on a quarterly basis.
By introducing Making Tax Digital for Business on a voluntary basis for most and only making it mandatory for those who already interact with HMRC regularly and digitally, we can smooth the transition maximising the opportunities of a modern digital tax system.
The government has said that it will not widen the scope of Making Tax Digital for Business beyond VAT before the system has been shown to work well and not before April 2020 at the earliest.
This will ensure that there is time to test the system fully and for digital record keeping to become more widespread.