Making Tax Digital
In 2015 the government announced major plans to modernise the tax administration system by introducing digital
services for tax. There are three main strands to these proposals, as follows:
- personalised digital tax accounts for individuals and for businesses
- quarterly digital reporting of income and expenditure by businesses, self-employed people and landlords
- options for paying tax.
Consultations have now been published by HMRC which provide further details of these proposals and so
we have set out below what we currently know about the changes.
Digital tax accounts
Digital tax accounts for individuals have already been created by HMRC. These are called Personal Tax Accounts.
These accounts have been linked to HMRC internal systems so that they will be pre-populated with income and tax
details that HMRC already hold. This includes employment income, PAYE and NIC and any state retirement pension.
From April 2018, it is intended that interest paid by banks and building societies will be included in digital tax
accounts. In order for this to happen, banks and building societies will be required to provide information to
HMRC earlier, and more frequently, than currently. Taxpayers will also be able to report any additional sources of
income through their digital tax accounts in 2018.
HMRC expect that with pre-populated information
and taxpayers able to add in other sources of income, the digital tax account will mean that a significant number
of taxpayers, with relatively straightforward tax affairs, will not need to complete a tax return.
Digital tax accounts are also being established for businesses and these will show an overview of the income tax
or corporation tax, VAT and NIC details of the business. In order to show details of the income subject to income
tax or corporation tax, details of the business’s income and expenses will be provided by new quarterly tax
By 2020, most businesses, self-employed people and landlords will be required to keep track of their tax affairs
digitally and update HMRC at least quarterly through their digital tax account. These changes will be phased in
from 2018. These measures will not apply to unincorporated businesses or landlords where their turnover or gross
income from property is under £10,000. Some businesses and landlords with income above £10,000 will also
benefit from a deferral of the new rules by one year. The upper threshold and eligibility for this deferral have
not been detailed in the consultations. Charities and Community Amateur Sports Clubs are also likely to be
exempted from these new rules.
To meet these quarterly reporting requirements, taxpayers will be
expected to use software or apps which record day-to-day transactions, categorise them into different types of
income or expenses and then feed the summary data directly into HMRC systems. HMRC has no plans to offer free
software but expects developers to provide free software for businesses with the most straightforward affairs.
The periodic updates of data to HMRC will be made quarterly but could be done more frequently if a
business or landlord chooses. When an update is due, businesses and landlords will have one month to compile the
information and declare that the period’s data is complete to the best of their knowledge.
In order to help the self-employed and landlords meet these additional reporting requirements, HMRC are
consulting on a range of options including:
- the extension of cash basis accounting to more businesses and allowing unincorporated property businesses to
use the cash basis
- the reduction in the number of accounting adjustments required to arrive at a taxable profit or loss.
Please let us know if you would like further details of these changes.
What about partnerships?
The consultations propose that a partnership, through a nominated partner, would fulfil the obligations of
record keeping on behalf of the partners. The partnership’s updates would then feed directly into each
partner’s digital tax account as pre-populated income based on the profit allocation of the partnership.
Therefore individual partners would not have to maintain their own digital records. A similar approach would be
taken for jointly held property which is let out.
The ‘End of Year’ return
Throughout the year, businesses will have provided HMRC updates of their business income and expenditure. After
the end of the year, having made any adjustments to arrive at their taxable profit or loss, businesses will make
an ‘End of Year’ declaration that everything is correct and complete. This declaration will be made
within nine months of the end of a period of account (normally a period consisting of four consecutive quarterly
Tax payment changes
For employees, HMRC has already started using real-time PAYE data to reduce under and overpayments by changing
tax codes in-year. They are proposing to extend this principle through individuals’ digital tax accounts to
include common income types in the in-year tax calculations. In principle, tax arising on additional income which
is small or regular will be collected through PAYE tax code changes. On larger amounts of income, individuals will
be advised through their digital tax accounts how much tax will become due after the end of the tax year and will
be given options on how and when to pay what is owed. Businesses, self-employed people and landlords, who are
keeping their records digitally, will be able to adopt pay-as-you-go tax payments on a voluntary basis.
Timeline - key dates
Consultations on Making Tax Digital closed
Accounting periods starting after:
Quarterly updates for unincorporated businesses and landlords
VAT comes within Making Tax Digital
Quarterly updates for companies
How we can help you
Please note that, at the moment, you do not have to do
anything in respect of these developments. If you do want to access your digital tax account you may need to verify
your identity. You can find details at: www.gov.uk/personal-tax-account
If we are your tax agents, we cannot access the account on your behalf.
Please be assured though
that we will continue to assist you with your tax affairs and we will keep you informed of developments in the
Making Tax Digital project.
Please speak to us if you have any questions regarding Making Tax Digital.