Making Tax Digital programme will make UK business tax 'fit for digital age', says government

The tax authority has published six consultations seeking views on the design of the new regime including digital record-keeping requirements, exemptions and penalties. The changes are due to be introduced for income tax and National Insurance in April 2018, for VAT in April 2019 and for corporation tax in April 2020.

Jane Ellison, the financial secretary to the Treasury, said that the new policy, dubbed 'Making Tax Digital', was at the "heart" of government plans to create "a transparent and accessible tax system fit for the digital age".

"The new system will make the UK's tax administration more efficient and straightforward, and will offer businesses greater clarity when it comes to paying their tax bills," she said.

"By replacing the annual tax return with simple, digital updates, businesses will be able to concentrate on putting people and profit, not paperwork, first," she said.

However, tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com, warned that some of the proposals could create additional burdens for businesses – in particular, the new requirement for businesses to provide quarterly income and expenditure updates to HMRC.

"This will be complex, and in the case of the very largest businesses not obviously useful for either the business or HMRC," she said. "There is a case to be made that businesses overseen by HMRC's Large Business Service should be able to opt out of quarterly updating with the agreement of their CRM."

"There is also a specific point to be made about interest rates. Currently, the largest businesses are obliged to pay corporate tax in quarterly instalment payments, or QIPs. Because QIPs are based on estimates and are partly payable before a company's year end they cannot be accurate, so almost all QIPs result in over- or underpayments on which interest is calculated. It is not clear from the consultations whether the separate interest regime for QIPs, with a lower rate of interest linked to the bank rate, will continue," she said.

HMRC has published six consultations, each of which looks at specific elements of the proposed reforms and all of which close on 7 November. They include how digital record-keeping and quarterly updates should operate; simplified requirements for unincorporated businesses and the self-employed; simplified requirements for unincorporated property businesses and landlords; allowing businesses covered by the new requirements to 'pay as you go' voluntarily; changes to the tax administration framework; and use of third-party information.

Unincorporated businesses and landlords that earn less than £10,000 annually will not be required to provide quarterly updates to HMRC or keep digital records, while those considered to be 'digitally excluded' will also be exempt. The government also intends to defer implementation of the changes by one year for the next tier of small businesses that fall outside the £10,000 threshold, at a level of turnover to be determined based on consultation feedback.

Under the system envisaged by the consultation, businesses would be able to feed information on income and expenditure into their own tax software, from where it would be transmitted directly to HMRC's systems. Information held by HMRC on that business would be updated quarterly, "or more often if the business prefers", and would only be in summary format. New businesses would be required to make their first update up to four months after the date that the business first becomes active. The software would prompt businesses when it is time for their quarterly reports.

Businesses would be given nine months from the end of their period of account to complete their 'end of year' activity, at which point their tax liability for that particular year would be finalised.

The new regime would include a new "points-based" penalty system, under which financial penalties would only be applied after the fourth offence. Each additional 'point' would result in an additional fine. Points would be "re-set to zero" after a "sustained period of compliance", with a two-year period proposed in the consultation.