The challenges caused by the new Making Tax Digital plans



The government recently announced plans for an extension to its Making Tax Digital programme. The decision was met with scrutiny; Andrew Diver, head of tax at Beatons, explains why.

During a time in which small businesses are under great pressure and relying increasingly on government support to survive, the prospect of increased administration and tax reporting has left many frustrated.

HMRC’s Making Tax Digital (MTD) programme is part of a tax-modernisation scheme which aims to make tax reporting simpler and reduce errors. However, individuals and organisations, ranging from sole traders to small businesses, have pointed out some potential flaws in the workings of this new system.

The Making Tax Digital timetable has required compulsory VAT-registered businesses filing quarterly electronic returns since 2019, but announcements have now extended the scope of this tax digital revolution.

  • All VAT registered businesses will need to file using MTD software by April 5, 2022
  • Landlords and self-employed with income or rents of more than £10,000 will need to file income tax returns quarterly from April 5, 2023

While most VAT-registered businesses are used to reporting transactions to HMRC quarterly, landlords and the self-employed have only reported profits to HMRC annually.

Therefore, having to report and file tax more often will lead to further time commitments for them, something which may inherently change the way in which sole traders approach their working hours throughout the year.

A large portion of those who let properties are also older people who may have limited computer skills and will potentially be challenged by this increased reliance on technology. So, one of the first hurdles this extension must overcome is ensuring that the systems are simple to use.

There are currently 549 HMRC approved software choices for businesses filing VAT returns using MTD. Navigating the software choices as this extends to income tax, some from companies with little trading history, will leave many stepping into the unknown.

It is imperative that this programme reduces administration time rather than increasing it. Businesses fear that increased reporting may lead to more time being spent in the back office, more money spent on admin staff and less time being made available to trade.

Despite fears, the Treasury has pointed to a report by Lloyds Bank which states that the most digitally engaged firms save a day a week in admin.

Although a digitised tax reporting and filing system would improve the productivity of our economy in the future, it is the timing of this announcement that may have led to its criticism. Businesses are already having to make cuts and streamline processes, so do not have the time to dedicate to selecting and changing their administration systems for an additional four electronic submissions a year.

We are hopeful that the Treasury will reflect on the current circumstances and representations made by professional bodies and will provide some deferment or relaxations to help the transition into more regular digital reporting.

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