Government U-Turn on ‘Making Tax Digital’ 

Yet another U-Turn by the government, and one which will be widely welcomed by the small business community.

“Making Tax Digital” is a flagship project of the government, meant not only to bring the tax system into the 21st century, but also to bring in additional revenue of about £500m. The problem is that no one from the government has adequately explained how this was meant to happen. Not only that, they seemed to gloss over the additional costs that everyone else knew would be faced by small businesses in meeting these requirements.

Originally, from April 2018 unincorporated business with a turnover in excess of £10,000 would have been required to make quarterly reports to the tax office, as would people receiving rental income above this level. There would then be two further summary reports to be made after the end of the tax year. These requirements were separate and distinct, so someone operating a business and receiving rental income would be faced with making a total of ten reports each year. In March, the government conceded that the proposed timetable was not possible, and delayed the start until April 2019 for all businesses below the VAT registration limit, currently £85,000 per annum.

Fortunately, the government has shot itself in their collective feet in a number of ways. Firstly, the need to prepare for Brexit, as well as calling an early General Election, has placed considerable additional pressure on their resources. Secondly, the changes to the tax rules affecting contractors working within the public sector has apparently resulted in a significant shortage of software and other IT specialists available to the tax office. A spectacular case of “unexpected consequences”. The result is that the government has announced that there will be the following significant changes to “Making Tax Digital”.

Firstly, it will only apply to businesses with a turnover above the registration threshold for VAT. Secondly, it will initially only apply to VAT. Thirdly, even these substantially reduced obligations will be delayed until April 2019. Fourthly, “Making Tax Digital” for other taxes will be delayed until at least April 2020, and will be voluntary only for businesses with turnovers between £10,000 and the VAT registration limit.

According to The Treasury, these changes result in businesses not being required to make information available to HMRC more frequently than at present. However, it is not clear whether this will apply to businesses operating the Annual Accounting Scheme for VAT which is currently available to businesses with a turnover below £1.3m. However, if the Treasury statement is correct then we can expect to see a huge increase in the number of businesses applying to operating under this scheme.

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