Despite repeated statements to the contrary, it was confirmed by HMRC on 19th December that the introduction of Making Tax Digital (MTD) for Income Tax, originally proposed in 2015 for 2018 introduction, will not now become mandatory until 5th April 2026, rather than 2024 as previously stated.
In addition to the deferral, HMRC has also announced changes to the scope of the initiative. The new rules will initially only apply to businesses with turnover in excess of £50,000, with those having turnover of between £30,000 and £50,000 given a further year to comply. It is unclear what will happen for businesses with turnover between £10,000 and £30,000. This sector is probably the most lucrative in terms of “closing the tax gap” but is also likely to be the least IT literate and compliant. HMRC have stated that there will be a “review into the needs of smaller businesses” – so it would appear that implementation here will not take place for at least three more years and that there will be some relaxation in the turnover rules. In line with previous announcements, the introduction of the new regime for partnerships will follow later than individuals, but no date has been given other than that it will not now be 2025 as previously planned.
It is interesting to speculate on why this initiative has been deferred. The most obvious answer is probably simply that it has become clear that either the technology isn’t yet reliable, or the feedback from trials and pilots shows that businesses are not yet willing or able to comply. In an HMRC survey carried out earlier this year they found that 58% of those surveyed were either “disengaged”, “lacking confidence” or “Resistant and less capable”. Other possible reasons might be:
- Continuing uncertainties with the interaction between MTD and PAYE for those with multiple sources of income
- Problems in the early trials of the system (it appears unlikely that any effective pilot schemes will have concluded before the 2024 implementation date)
- Lack of available free software and inability of some software packages to deal with more complex MTD scenarios including the “one business /multiple trades” situation.
- The fear that introducing a major change in a period of “challenging economic environment” might cause economic damage as some smaller businesses decide to close or accelerate retirement plans rather than comply.
The statement is silent on whether the switch to a fiscal year basis of assessment will also be deferred – or it may be that HMRC recognise it needs to be fully concluded before MTD starts.
It is even possible that HMRC are considering the suggestion from the Country Landowners Association (CLA) and others that the concept of a diversified rural business unit could be recognised for tax purposes. This is a key lobbying issue for the CLA this year, and if adopted could remove some of the more complex MTD issues.
This is the third deferral, and some believe that the whole initiative is starting to lack credibility. However, it seems unlikely that the project will be abandoned since too much has been invested and HMRC undoubtedly feel that the initiative will produce results. A more likely scenario is that voluntary early adoption will be encouraged before entry becomes mandatory. During the next few years, the changing age profile of taxpayers may also remove some of those least able to participate.
According to MHA partner Joe Spencer;
“The continued deferrals have somewhat undermined the need for urgency, but I do not believe the project is dead. Businesses now have a strictly defined and realistic target date to introduce digital systems and ensure they are in good working order for when MTD really does happen.”
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