The ATT and CIOT welcome the clarity brought about by today’s announcements around Making Tax Digital, finally ending the speculation about its extension to income tax, but warn that tensions around compliance costs will remain.
HMRC made significant announcements today (Tues) regarding Making Tax Digital (MTD), which requires businesses to maintain digital records and send quarterly updates to HMRC through compatible software. These announcements were:
MTD for VAT will apply to all VAT registered businesses, regardless of turnover, from April 2022 (currently it only applies to businesses with taxable turnover above the VAT threshold of £85,000).
Income Tax Self Assessment (ITSA) will be introduced from April 2023, for unincorporated businesses and landlords. The Government will consult later this year in relation to corporation tax.
On VAT, Tina Riches, Chair of the joint CIOT and ATT Digitalisation and Agent Services Committee, said:
“The extension of MTD for VAT to voluntarily VAT registered businesses was the logical next step. Around 300,000 such businesses are already signed up for MTD for VAT, and 1 April 2022 gives the remaining 700,000 or so businesses time to get ready for the change.
“But there is still much to be done to ensure that the expected benefits of MTD are delivered in a cost-effective way. In a January 2020 survey of businesses and their advisers by CIOT and the ATT nearly 90 per cent of respondents said that MTD for VAT had not reduced errors and just 14 per cent of respondents said there had been an increase in productivity in their organisation as a result of MTD for VAT. The survey also showed that the costs of MTD compliance had far exceeded government estimates."1
The tax bodies have long argued that reporting tax digitally should be something that businesses do because it is beneficial to do so, rather than through compulsion. The tax bodies do note the attraction of having a slick digital tax system providing government with nearer to real time data to enable systems such as the COVID-19 pandemic self-employment income support scheme to run smoothly.
On the extension to ITSA, Tina Riches said:
“It is encouraging to have a long lead time although there is much work to be done to get businesses, software and HMRC systems ready by April 2023.
“Setting a ‘go live’ date should now act as a catalyst for the development of MTD for ITSA compatible software. There are currently only six software products that are compatible with MTD for ITSA, and a small number of businesses in the current pilot. Both these numbers need to increase substantially, together with an ability for people with more complex affairs, including partnerships and their partners, to participate, if there is to be an effective pilot of the regime before it becomes mandatory in April 2023.
“Individuals within the scope of MTD for ITSA will include a greater number of small, and possibly less ‘tax-savvy’ taxpayers than those within the scope of MTD for VAT. MTD for VAT software can allow businesses to make quite fundamental errors, such as reclaiming VAT on wages, and if MTD is to deliver benefits for businesses and reduce the tax gap then MTD for ITSA software must design out these types of problem, rather than let them proliferate. In addition, appropriate help will need to be available for the digitally challenged who are not exempted from the new provisions.”
HMRC estimate average transitional costs for MTD for ITSA of about £175 for each affected business, with an additional annual cost of about £20 each.
Tina Riches continued:
“These estimates seem to be surprisingly low, and rather questionable. While the average transition cost for MTD for VAT was estimated by HMRC to be just £109 per VAT–registered business, less than 10 per cent of respondents to our survey estimated their or their clients’ costs at or below that amount, with 45 per cent of respondents estimating costs between £109 and £500 – and some 12 per cent estimating costs over £5,000. We are concerned that HMRC have again underestimated the true costs of MTD, especially if the software is to be sophisticated enough to prevent the errors that MTD is supposed to reduce.”
The tax bodies also welcome the announcement of a 10-year strategy to build ‘a trusted, modern tax administration system’, of which the extension of MTD to ITSA will form an important part.
Tina Riches said:
“The UK’s tax administration framework has been creaking at the seams for some time and is in urgent need of modernisation. But this is a complex area so it is right for the Government to take the time to conduct reviews and consider what reforms are needed over a long period to help make sure that the new system stands the test of time. We look forward to continuing our engagement with HMRC in this area.
“We are pleased that HMRC have committed to providing a more personalised service for taxpayers through their personal tax account and at the same time improving parallel services for their agents to enable agents to see and do what their clients can by designing in agent access from the outset. This recognises the important role that agents play in helping clients comply with their tax obligations and is something we have long been asking for.”
Notes for editors
1. Survey results contradict government claims of realising benefits of digital tax reporting, January 2020
2. MTD for VAT
VAT-registered businesses with a taxable turnover above the VAT threshold (£85,000) are now required to follow the Making Tax Digital rules by keeping digital records and using software to submit their VAT returns. If you are below the VAT threshold you can voluntarily join the Making Tax Digital service now. VAT-registered businesses with a taxable turnover below £85,000 will be required to follow Making Tax digital rules for their first return starting on or after April 2022.
MTD for ITSA
Self-employed businesses and landlords with business turnover above £10,000 will need to follow the rules for MTD for Income Tax from their (current or next account period) following April 2023. Some businesses and agents are already keeping digital records and providing updates to HMRC as part of a live pilot to test and develop the Making Tax Digital service for Income Tax. If you are a self-employed business or landlord you can voluntarily use software to keep business records digitally and send Income Tax updates to HMRC instead of filing a Self Assessment tax return.
3. The Chartered Institute of Taxation (CIOT)
The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.
The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.
The CIOT’s 19,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.
The Association of Taxation Technicians
The Association is a charity and the leading professional body for those providing UK tax compliance services. Our primary charitable objective is to promote education and the study of tax administration and practice. One of our key aims is to provide an appropriate qualification for individuals who undertake tax compliance work. Drawing on our members' practical experience and knowledge, we contribute to consultations on the development of the UK tax system and seek to ensure that, for the general public, it is workable and as fair as possible.
Our members are qualified by examination and practical experience. They commit to the highest standards of professional conduct and ensure that their tax knowledge is constantly kept up to date. Members may be found in private practice, commerce and industry, government and academia.
The Association has over 9000 members and Fellows together with over 5,000 students. Members and Fellows use the practising title of 'Taxation Technician' or ‘Taxation Technician (Fellow)’ and the designatory letters 'ATT' and 'ATT (Fellow)' respectively.
Contact: Hamant Verma, External Relations Officer, 0207 340 2702 HVerma@ciot.org.uk
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