What’s the thinking behind Making Tax Digital?

by Iain Mason

If any business owners are wondering why the government is so determined to go ahead with its Making Tax Digital programme, they need look no further than the annual tax gap figures.

Released in the summer, these show the tax gap – i.e. the amount that should be collected, as opposed to the amount that is actually collected – rose by £1 billion for the year 2016/17 to £33billion.

Put in a more positive light, this is actually a drop to 5.7% of the overall tax liabilities.

And HM Revenue & Custom’s further positive spin is that had the percentage gap remained at its 2005/06 level, then that £33billion would actually have been £71billion.

What made up the 2016/17 tax gap?

• Small businesses made up the largest proportion of unpaid tax, at £13.7 billion
• Taxpayer errors and failure to take reasonable care made up £9.2 billion of unpaid taxes
• Criminal attacks made up £5.4 billion
• Income Tax, National Insurance Contributions, and Capital Gains Tax made up the largest proportion of the tax gap by tax type at £7.9 billion
• The VAT gap shows a declining trend over time, falling from 12.5% in 2005/06 to 8.9% in 2016/17.

HMRC says that “keeping the tax gap consistently low is a result of HMRC’s work to help customers get things right from the start, and the department’s sustained efforts to tackle evasion and avoidance”.

But, with small businesses being the worst offenders, the government is pinning its hopes on Making Tax Digital to get the figure lower still.

 So what is Making Tax Digital?

Making Tax Digital, or MTD, is being phased in from April 2019 with the aim of helping businesses and their agents get their tax right. Businesses will need to keep their accounts digitally, submitting their returns quarterly through MTD compatible software.

The changes start with VAT returns. VAT returns must be submitted using compatible software and the first return to be filed within the regime will be from the first VAT period that begins on or after 1 April 2019.

The timetable for the introduction of MTD for businesses is:

April 2019          VAT registered businesses with turnover above the VAT threshold, unless digitally excluded

2019/2020         All businesses on a voluntary basis

April 2020           Non-VAT registered unincorporated businesses and landlords

2020 +                 Companies and large partnerships

HMRC adds: “Once fully operational, MTD will help to reduce the tax gap by helping to prevent error and failure to take reasonable care. Digital record keeping combined with a modern, more automated tax system will help businesses get their affairs right first time.”

Making Tax Digital cannot be avoided, so if you run a business now is the time to act, to ensure you and the software you use are fully compliant. If you have any concerns or queries about Making Tax Digital, how it affects your business and how we can help please get in touch with our tax specialists.