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Making Tax Digital: the key areas

The Government's Making Tax Digital (MTD) initiative is due to be implemented between 2018 and 2020. HMRC recently launched six new MTD consultations, inviting public input on the finer details of its digital strategy. Here we outline some of the key points covered by the consultations.

1. Bringing business tax into the digital age

The Government's first MTD consultation considers the practicalities of moving to compulsory digital record-keeping and quarterly 'updates' to HMRC for businesses, including whether any financial support, extra tax relief or practical help might be required to assist in a successful and timely transition.

The document also confirms that the smallest unincorporated businesses and landlords will be exempt from the MTD requirements and duties - those with a turnover or gross income from property under £10,000 per annum will not be required to keep digital records.

2. Simplifying tax for unincorporated businesses

The second consultation seeks input on changing how the self-employed map accounting periods onto the tax year (basic period reform).

It outlines proposals to extend cash basis accounting to larger businesses. Currently, cash basis accounting can only be used by businesses or self-employed individuals with turnover below the VAT threshold, which is currently set at £83,000 per annum. However, the consultation considers whether this threshold should be increased.

In addition, HMRC outlines plans to simplify the business reporting requirements for unincorporated businesses, which it hopes will 'reduce the burden involved in calculating profits'.

It also considers reducing the need to distinguish between capital and revenue for businesses using cash basis accounting.

3. Simplified cash basis for unincorporated property businesses

This consultation focuses on proposals to extend cash basis accounting to some types of landlords, which HMRC hopes will ease the transition to MTD and the adjustment to quarterly reporting.

Currently, simplified cash basis accounting is only available to some unincorporated traders. The Government is proposing that this is extended to unincorporated property businesses, including non-resident landlords and those with furnished holiday lettings. There would be no turnover criteria but tax relief on interest costs would continue to be restricted to a maximum of 20%.

4. Voluntary pay as you go

Under the Government's plans, those businesses required to comply with quarterly reporting and digital record-keeping could be given the opportunity to make voluntary payments towards their tax liabilities throughout the year.

The consultation is inviting input on the ways in which such payments can be made and managed, as well as the repayment of voluntary payments. Regular direct debit arrangements and quarterly payments on account are among the options being considered.

5. Tax administration

To support the MTD initiative, the Government intends to amend the tax administration framework and the way in which HMRC interacts with its customers.

The tax administration consultation sets out proposals to align some aspects of the framework across taxes, as well as changes to the enquiry regime and the penalties for late payment and filing. HMRC is proposing the introduction of a points-based system for penalties, whereby a penalty will only be charged once points reach a specific level.

6. Transforming the tax system through the better use of information

The final consultation focuses on how HMRC intends to make more effective use of the information provided by third parties, with the aim of creating a more 'transparent service' and reducing end of year under and over-payments. This could involve updating PAYE codes more regularly and coding out of bank interest via PAYE in the short term. The document also explores how better use of third party information could eventually lead to the end of the tax return by 2020.

The full collection of consultation documents can be viewed here:

The MTD consultations outline a number of changes which could have significant implications for businesses and landlords. Although the details are yet to be finalised, we will be here to advise and support our clients as we enter this new phase of digital taxation.