MTD will apply from April 2022 to all UK VAT registered businesses regardless of their turnover and to certain business income tax records from April 2023.
HMRC have announced that Making Tax Digital (MTD) is to be extended to cover all UK VAT registered businesses from 1 April 2022 and to cover most business income tax records from April 2023. At present the MTD rules only apply to those whose UK taxable turnover is above the £85,000 UK VAT registration threshold. MTD compliance, with its requirement for digital records and use of compatible software to submit the VAT return may be an onerous requirement for micro businesses who may have only registered for VAT voluntarily – perhaps to obtain VAT refunds or to appear larger to their customer base. However, although there was little detail in the announcement, it is likely that the option to apply to HMRC for an exemption from MTD will also be available to these smaller businesses. An exemption can be sought if it is not reasonable or practical for the business to use computers, software or the internet to follow the MTD rules. A mere disinclination to comply however is not a valid reason.
The change will impact all businesses that are voluntarily registered for UK VAT because their UK taxable turnover is under the threshold, who are not at present required to comply with MTD. If they are unable to secure an exemption, MTD compliance will require them to keep VAT records digitally and use software that is MTD compatible. This may be a change to their current approach and involve some expense. The requirement for digital links between software programs, which has been one of the biggest MTD problems for larger businesses, is unlikely to be as challenging for micro businesses. However, it may well be relevant for businesses that are larger but whose UK taxable supplies are under the threshold because their main turnover derives from exempt or outside the scope of UK VAT supplies.
Some smaller voluntarily registered businesses may decide to deregister instead of complying with MTD. Deregistration can however also trigger a VAT cost due to the rules about assets on hand, so advice may be needed.
We understand that although MTD compliance has been generally high, a significant minority of businesses that should be using MTD at present have not yet signed up to use it. HMRC suspended their program of encouraging such businesses to comply for a few months due to the pandemic but recently began it again. It appears that a major reason for non-compliance has been a misunderstanding - just submitting VAT returns online is not enough to be MTD compliant.
The announcement of the extension in scope has fortunately been made well in advance, so affected businesses can think about what they want to do, weigh up the pros and cons of staying VAT registered and complying with MTD, as opposed to deregistering, and seek advice if needed.
Alongside the update on VAT, the Government has announced that from April 2023, businesses and landlords with business income over £10,000 per annum which are liable for Income Tax, need to keep digital records and use software to update HMRC quarterly through MTD. The Government has also confirmed it will be consulting later this year on the design of what the MTD system should look like for Corporation Tax.
It will be interesting to see whether and how the MTD requirements for VAT develop further once they apply to the entire taxpayer base. It is clear that the UK is keen to re-consider aspects of the VAT regime following Brexit, for instance as relates to exemptions for financial services. The type and granularity of data gathered from taxpayers is an obvious area for change in order to help better inform policy going forward.
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