April 1st 2019 was a highly significant date if you’re a business in the UK with an annual turnover above the VAT threshold of £85,000. It marked the official commencement of the government’s Making Tax Digital scheme for VAT, giving affected firms until August 7th 2019 to submit their first quarterly VAT return to HM Revenue & Customs (HMRC).
The British government’s aim with Making Tax Digital is to make HMRC one of the world’s most advanced tax administrations. Does this mean you should be viewing the system as a sign of what the future holds for business taxation?
The story behind Making Tax Digital
HMRC has stated its intention to transform tax administration to make it:
- More effective
- More efficient
- Easier for taxpayers to get their tax right
To this end, Making Tax Digital was announced in 2015, originally with a focus on introducing digital record-keeping and quarterly updating for businesses, landlords and the self-employed.
At first, the scheme encompassed VAT, income tax self-assessment and corporation tax, but there were widespread concerns about the pace of change, particularly among smaller businesses. The government responded by announcing that the pace of mandation would be slowed, with Making Tax Digital for VAT being introduced in April 2019 and other taxes not being impacted until April 2020 at the earliest.
HMRC has said its focus is on supporting businesses in making the transition to Making Tax Digital. Former chancellor of the exchequer Philip Hammond confirmed in his 2019 Spring Statement that the government would take a “light touch approach to penalties” in the first year of implementation, with no filing or record-keeping penalties being issued in cases where businesses are doing their best to comply. Furthermore, the government won’t be mandating Making Tax Digital for any new taxes or businesses in 2020.
What it means for businesses
The language used by HMRC makes it clear that businesses won’t be hit with penalties if they’re actively working to comply with the new Making Tax Digital rules for VAT. Deliberate non-compliance, however, will be viewed differently and could result in sanctions.
It’s therefore important that, if you’re a VAT-registered business in the UK, you’re taking action to achieve compliance with Making Tax Digital. That means using the service to maintain digital records and using software to submit your VAT returns.
HMRC recently reminded the 1.2 million businesses affected by the new rules that they should be working to submit their first quarterly VAT return using software by August 7th 2019. Those paying by direct debit need to register by July 27th.
Approximately 10,000 firms are registering for Making Tax Digital every day, with 600,000 companies now signed up and 400,000 submissions already successfully completed.
“Now is the time for businesses with an August quarterly filing deadline to sign up and join the hundreds of thousands already experiencing the benefits of MTD.” - Theresa Middleton, HMRC director of Making Tax Digital.
Is digital taxation the future?
The rapid evolution of digital technologies has had a transformative impact on many aspects of business, work and everyday life in the 21st century, so it follows that business taxation will be similarly revolutionized by digitization in the coming years.
Britain may be at the forefront of tech-driven reinvention of tax administration, but it’s certainly not alone in this space.
A recent report published by the Institute of Chartered Accountants in England and Wales (ICAEW) presented case studies of 12 forward-looking tax administrations from around the world, including China, Brazil, Canada, Nigeria and Russia.
“It is vital for anyone involved in tax to understand how new technology and new techniques are changing the landscape, and to understand the advantages and potential pitfalls of digital transformation.” - Paul Aplin OBE, ICAEW president.
In Australia, larger employers have been required to submit reports under the real-time Single Touch Payroll scheme since July 2018. The system is expanding to encompass all employers from July 2019.
Singapore, meanwhile, enforces mandatory online tax returns for the largest businesses, with a rollout of the digital system to smaller firms currently underway.
The steady global expansion of initiatives such as these, combined with the potential efficiency benefits digital tax administration can offer to businesses, tax authorities and governments, suggests that digitization will shape the future of business taxation.
However, there are still some major barriers to be overcome before systems like Making Tax Digital become the norm. The cost and complexity of implementing such schemes will be a stumbling block for many governments, while others could struggle with the migration from legacy tax regimes to modern, digital platforms.
Data security and privacy are also crucial considerations. With cyber threats posing a greater risk than ever before, governments and tax authorities will need to feel confident of meeting the highest security standards before making a wholesale shift to digital taxation.