Making Tax Digital: Government Compromises and The Changes to Expect

The government has published its response documents to the Making Tax Digital consultation and has confirmed that the proposed changes will be in place by April 2018.

The response document emphasised that there was strong support for the digitisation and simplification of tax. With over 3,000 responses expressing concerns about the timetable and exemption thresholds, there has been some compromise made to the original proposals.

Bringing Tax into the Digital Age

Making Tax Digital aims to create a more accessible tax system and facilitate easier use and payment of tax for individuals, self-employed, businesses and landlords.

This response document acknowledges and directly addresses the concerns raised by the consultation:

  • Businesses will be able to use spreadsheets for record-keeping, although this will likely need to combine with software at some point
  • Free software will be made available to businesses whose affairs are deemed to be ‘straightforward’;
  • Businesses are not required to store invoices and receipts digitally;
  • Businesses eligible for three line accounts will need to submit quarterly; but only supply information of their income, expenses and profit
  • Charities will not need to keep digital records; however, their trading subsidiaries will be expected to keep digital records;
  • Partnerships with a turnover of £10m and above will be deferred until April 2020.

Further consideration will be given to the initial exemption threshold and the deferring of changes for some small businesses. This will be assessed according to the possible fiscal impact.

Tax Administration

The area of Making Tax Digital that raised the most concern was the timetable for its introduction. The government has agreed to a year of piloting; this will run from April 2017 to April 2018, when Making Tax Digital will be fully implemented.

The timetable also raised cost concerns, which have been addressed directly. The government believes that the cost of transition will be £280, but the overall investment will be considerably lower than calculated by some sources.

The government also confirmed that there will be delays to the enforcement of the late submission penalties, although we await final confirmation of the penalty interest rate and the alignment of interest rules.

Simplifying Unincorporated Businesses

Again, the government states a positive response to the consultation papers, but explains it has only proceeded with two measures; the entry threshold and expenditure rules. The entry threshold for the cash basis will be extended to £150,000 and the simplification of capital and revenue expenditure rules for the cash basis will be clarified in the final legislation. Further clarification of the rules should help businesses know what expenditure is deductible for tax.   

This response paper notes that further review of the reform to the basis period and the measures to simplify period end reporting requirements will be conducted.

Simplified Cash Basis for Unincorporated Property Businesses

This consultation reviewed the extension of the cash basis for unincorporated landlords; this was supported by the majority of respondents. The government has therefore accepted this approach and will extend the cash basis accounting to enable landlords to pay tax on the money collected, rather than paying tax on the expected rent. To ensure larger property businesses are not unfairly favoured, there will be a maximum limit threshold of £150,000 rental income per property for the cash basis to apply.

Voluntary Tax Payments

Although there was positive feedback to the voluntary payment proposal, the government has had to consider how payments would need to be allocated according to type of business, individual and landlords. Generally there was an expectation by respondents that the repayment would be straightforward and fast, however the government has responded with a different plan. Repayments will not be available initially, instead these will be made once Making Tax Digital is fully embedded. Furthermore, the government has specified that repayment will not be available shortly before a liability is due if a customer has failed to pay on time in the previous 12 months.

Transforming Tax with Better Information

The final consultation paper focuses on how HMRC could better use the information it receives from third parties. This is a fundamental part of making the tax system more transparent and accessible. From 2017, HMRC will utilise PAYE information during the tax year to calculate tax liabilities. Initially, the government plans to contact customers (sic) about their digital accounts by letter, which will be replaced by digital prompts in time.

There has been considerable focus on improving the integration of third parties and the HMRC software to ensure the process of drawing information and correcting data is clear. The paper also explains that there will be additional work to develop the third party integrations and the information they are able to provide.

Further information

Digital Tax will become a reality whether we like it or not. There are still areas where further clarification is needed, however all businesses should start preparing now.

For further information about how these changes might affect you or your business, please do not hesitate to contact us. You can email at or call the office on 01923 224411.