A number of factors have come together recently, indicating that the road to “Making Tax Digital” (MTD), HMRCs flagship project for Income Tax, is not proceeding entirely to plan.
You may remember that “Making Tax Digital” (MTD) was originally announced in 2015, with a planned start in 2018. Experience quickly highlighted that this was simply not feasible, but after two more deferrals, HMRC is now adamant that it will be applicable for the self-employed and landlords with effect from April 2024, with partnerships following from 2025 and companies no sooner than 2026. It is, of course already in place for all VAT registered businesses. The introduction was, however, postponed in 2017 again in 2020 and finally 2021, so it is now scheduled to go live in April 2024. At that point it will affect some four million self-employed people and landlords with income of over £10,000.
The implementation of the VAT element of MTD seems to have gone reasonably smoothly, but that is not entirely surprising since many businesses were already submitting VAT returns online using previous IT systems. However, research carried out by HMRC and published in May 2022 shows that a relatively small proportion of the sample felt it would be easier and quicker (most of whom were young, IT literate and with a relatively low turnover). Generally, some 58% of those surveyed were either “disengaged”, “lacking confidence” or “resistant and less capable”. Only 10% of these groups felt that the software would be easy and less than a quarter felt it would be quicker. The majority of such taxpayers were still using paper-based accounting systems.
As usual, the implementation of the new system was tested by a pilot project, with about 100 taxpayers signing up to trial the system. However, from the outset the effectiveness of the trial was brought into question by the inability to deal with any but the simplest cases – even a taxpayer with rent and a pension was unable to enter the trials. Incredibly, a freedom of information request revealed that by January 2022 only 9 taxpayers remained in the trial – representing the 4 million who will eventually be brought into the system. HMRC will be relaunching the trial in July, to include a wider set of circumstances, but since the pilot scheme will not cover a full tax year until April 2024 there will not be time to assess the findings in full before MTD goes live. Given the time frames involved it is also questionable whether all the software providers can be wholly up to date in time for the launch if the pilot scheme is still running.
As the system stands there are also two areas which are likely to cause serious problems for agricultural businesses. From a confidentiality viewpoint, the new system will enable any agent to see all aspects of the taxpayers’ affairs, so, for example, if a letting agent is empowered to file the rental returns, he will also be able to see the filings for the farm business.
Perhaps even more seriously, HMRC has confirmed that where there are multiple trades within a single business, each trade will have to file a separate MTD return each quarter (as well as an annual summary). For example, a farm with both commercial and holiday lettings and a farm shop would need to file four separate returns each quarter, four annual summaries and then a self-assessment return resulting in 21 separate filings where currently everything goes on a single return. One can understand why the word “simplified” has dropped off the HMRC press releases. This aspect has not been widely publicised and may have caught the software developers by surprise. One software sales department suggested that the workaround would be to open separate bank accounts and buy multiple software packages – though that raises the possibility of needing to consolidate all the data yet again for VAT purposes.
HMRC has invested too much time and money in the project for it to be abandoned, but it is clear that the implementation will not be straightforward. There is, therefore, a fairly pressing need to ensure that businesses are as prepared as they can be well in advance of the April 2024 deadline, and hope that the worst of the glitches are ironed out before then – the prospect of effectively using four million taxpayers as a “pilot” project does not sound appealing.
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