Digital Tax Accounts and Making Tax Digital


HM Revenue and Customs (HMRC) announced its new Making Tax Digital (MTD) in the March 2015 Budget but since then, there have been many consultations and changes in the implementation dates. The aim is for HMRC to be interacting digitally with all taxpayers.

MTD had been planned to start in April 2018. It will now start in April 2019 and only at that date for businesses with a turnover above the VAT threshold.

The end of the tax return

The original intention for small business owners had been the eradication of the annual tax return by 2020 (but see the heading below ‘when does it start..’) most businesses, self-employed people and landlords will instead be required to keep track of their tax affairs digitally and to update HMRC at least quarterly via their digital tax accounts, or more often if they’d prefer. HMRC has said that this doesn’t mean you’ll have to complete a full tax return four times a year; you’ll simply need to provide more regular updates online.

The introduction of a ‘real time’ tax system means that instead of reporting information on tax returns and paying liabilities long after the end of the tax year, you will be able to see a real-time view of your business tax affairs and liabilities through your digital accounts. This should make it easier to understand how much tax you owe and to budget accordingly.

Road Map

The Roadmap was issued in 2015 and this is the document outlining HMRC’s vision for reform and original intention for the end of the Tax Return by 2020. This document has now been archived and we must look to the commentary used in the overview paper updated on 13 July 2017 which only states with any degree of certainty that MTD will apply from April 2019 businesses above the VAT threshold and beyond that, we will have to lookout for updates.

HMRC has identified its ‘four foundations’ which will result in the transformation of the tax system and enable them to remove the requirement for Tax Returns to be filed. Under MTD, they are called reports and declarations instead of a tax returns or self-assessment as we know it.

Four foundations:

Tax simplified: taxpayers will no longer be required to provide HMRC with the information they already hold or have access to.

Tax centralised or in one place: Information will be retained in one centralised place and taxpayers will be able to see a full ‘tax picture’ of what taxes they pay and owe online, in their ‘digital account’ with HMRC. They will be entitled to set off overpayments of one tax against liabilities of another.

Making tax digital for businesses: businesses will be required (or their agents) to update/report to HMRC on a quarterly basis their accounting information prepared digitally and HMRC will use this to enable accurate interim tax calculations. Businesses will still need to make year end submission, which in essence is preparing their annual accounts that should reconcile their quarterly returns.
Making tax digital for individual taxpayers: enabling digital interaction with HMRC at any time and giving individuals a personalised picture of their tax affairs, along with prompts, advice and support.
Who does it apply to?

At this stage, the Making Tax Digital proposals are geared at sole traders and partnerships, as well as individual taxpayers. HMRC is also proposing that Making Tax Digital would only apply after £10,000 annual income or turnover, so a sole trader with one small business that makes sales under £10,000 a year would be exempt from MTD. However, a sole trader with two businesses, each making sales of £6,000 a year, would have to comply with MTD, because his/her total income for the year is £12,000.

If you have income taxed under PAYE and are also self-employed or have rental income, and the total of your self-employment and rental income is under £10,000 then you will no-longer need to complete a tax return. Instead, you will update your digital tax account. HMRC intends that usually any tax due will be collected through your tax code.

Personal Tax Account

Each individual will have a personal tax account. It enables them to register for new services, update their information and see how much tax they need to pay. Access to your personal tax account requires registration on the government gateway and your national insurance number. Access is available now.

Here is a link to the sign in or set up page:

Here is a link (You-tube channel) to show you how to access your personal tax account:

When does it start & How would Making Tax Digital work?

MTD was planned to start in April 2018. It will now start in April 2019 and only at that date for businesses with a turnover above the VAT threshold as mentioned above.

Changes to VAT reporting will come into effect from April 2019. From that date, businesses above the VAT threshold have to provide their VAT information to HMRC through Making Tax Digital software.

In their Overview paper which was updated 13 July 2017 HMRC state, ‘The government has committed 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.’

Businesses will send summary data to HMRC about their business each quarter, or more often if the business prefers. The summary data will consist of total income and total expenditure.

Businesses will need to send this information from online accounting – HMRC has confirmed that they will not be providing their own bookkeeping / accounting software and that the use of “digital record keeping software that links to and updates business’s digital accounts with HMRC” will be mandatory, except for taxpayers who are exempt from MTD.

Each business will have a proposed 10 months after the year end to file an “End of Year declaration”, submitting final figures.

How will tax payments work?

HMRC is not planning to change the current payment dates, but they have asked as part of the consultation if they should review the payment on account regime. Under MTD, businesses may have the right to make “voluntary payments” towards their tax liabilities, which would be aggregated together. HMRC has tentatively suggested it may need to be warned of upcoming voluntary payments.

HMRC has also said: “Under Pay As You Go, the customer will decide how often and what amount they want to pay. Payment will not have to be at any fixed time, or at regular intervals; the customer will retain control and choice, so they feel confident that they have made the right decision for their circumstances, and have the opportunity to amend their choices if circumstances change.

How will penalties work?

HMRC are proposing to abolish the current penalty system for late submissions and instead impose a “points” system similar to driving licence penalty points, with a financial penalty to be imposed only when the points reach a set level. That level is suggested as four points, with the slate cleaned after 24 months after the last points were added. Penalties for inaccurate information would only apply to the End of Year update and VAT quarterly returns.

HMRC issued a consultation and this has now concluded without a clear roadmap as to what these penalties will be, however, it appears that legislation for MTD will be included in the next Finance Bill which is expected to be introduced after the summer recess on 5 September 2017.

So what next?

HMRC have changed the timetable on a number of occasions and it appears that they are now going adopt a wait and see attitude to see how the pilot scheme and the scheme for VAT registered business works in practice before implementing a scheme for others caught within the MTD net.