If you’re not sure what the government initiative Making Tax Digital (MTD) is, you’re not alone.
A recent survey found that 43% of its respondents didn’t know what the proposed changes are. But it is a change that will affect businesses across the UK and the way they submit their taxes.
Here, we’ll explain the key elements of Making Tax Digital (MTD) and what you need to do.
The basics of Making Tax Digital
Making Tax Digital is a new initiative from the government designed to take all your tax needs online.
The aim of the scheme is to simplify tax and to make it digitally accessible for everyone in the UK. A key element is that every small business and individual will have 24/7 access to a digital tax account that they can use to see all of their liabilities and update any information in real time.
The government has identified four foundations that underpin MTD:
- Tax simplified
- Tax in one place
- Making tax digital for business
- Making tax digital for individuals
We’ll go through the four foundations individually to help you understand the implications of each one, but, broadly speaking, the first two refer to the general principles of MTD, and the second two refer to the specific implications of the scheme for businesses and individual people.
Tax simplified
The first foundation refers to the simplification of HMRC’s data. The idea is that taxpayers will no longer need to give HMRC information that it already has, and they will be able to see the information that HMRC currently holds via their digital account.
What’s new? Prior to MTD, HMRC stored information across multiple systems, which led to mistakes and frustration. MTD will usher in the consolidation of all of this information in one place, and make it easily accessible to taxpayers.
What does this mean for you? The idea here is that it will be much easier for you to see and pay anything that you owe to HMRC via your digital account. You will also be able to change information in real time to prevent the build up of big under or overpayments that can be such a headache at the end of the tax year. There will also be additional support for those who find it hard to get online, or who are identified as needing it for other reasons.
If all of this comes together, digital tax should go a long way to making tax simpler for most individuals.
Tax in one place
Following on from the consolidation of data mentioned above, this foundation is all about making tax payments easier, because rather than dealing with different areas of HMRC, you will be able to see everything in one place on your digital account.
What’s new? Up until now, there has been no way to deal with different payments all in one go. If you are owed money from one area but you need to pay money to another, you had to deal with the two separately. The idea of this part of MTD is that all of those areas will be consolidated in your account, and that you will see a net figure that you can deal with in one go.
What does this mean for you? If this works out as the government hopes that it will, it should save you the time and frustration of dealing with multiple areas of HMRC and allow you to get everything done quickly in one payment.
Making tax digital for businesses
This is easily the foundation that has caused the most concern for people learning about MTD. The government’s hope is that, by 2018, most small businesses will update HMRC quarterly, and will be able to receive information about liabilities before the end of the tax year.
What’s new? Before MTD, most businesses dealt with liabilities once at the end of each tax year, but this will change to once every quarter for businesses, self-employed people and landlords under the new scheme. Businesses will now be required to use digital tools (software and apps) to keep track of income and expenditure, and this data will feed quarterly into HMRC, allowing business owners to see it through their digital account.
What does this mean for you? The intention of the government is that this will make paying tax easier for businesses. They won’t be hit with unexpected costs once the tax year has finished, and will be able to make financial plans with more certainty.
The reality is that the implementation of the new regulations will be tough for a lot of businesses, particularly smaller businesses. Many businesses won’t just be able to start using the new software as if by magic, and the quarterly updates will require time and money that they’re not currently spending. That said, there will be exemptions and grace periods for certain businesses, particularly the smaller businesses, though the government has not yet released all of this information.
The government would argue that this will save you money in the long term through giving you more up to date information, but it remains to be seen if the benefits will outweigh the significant costs that a lot of businesses will be hit with.
Making tax digital for individuals
The changes for individuals are more welcome. Every UK taxpayer now has access to a digital account which allows them to see their tax in real time and submit information where necessary, and the plan is for tailored support to be provided to anyone who needs it through webchats and secure messaging.
What’s new? HMRC now uses real-time PAYE data to reduce end of year under and overpayments. This means that the chances of getting hit with payments, or bleeding money from your salary, will be significantly reduced. The idea is to eliminate payment mistakes completely by 2017. You will have 24/7 access to your account and there will be tailored support available.
What does this mean for you? The idea is that everything will become easier for you. You can always make sure that HMRC has the right information for you, payments will be streamlined, and you shouldn’t have to deal with the stress of over and underpayments for much longer.
End of the tax return
One specific aim of MTD that is worth mentioning is to eradicate the need for tax returns. Thanks to more regular data updates from companies, and the ability of individuals to manage everything in their online account, there should soon be no need for the government to require additional information at the end of the tax year to calculate what you owe.
published under Tax and Legislation Guides
