The concept of MTD (Making Tax Digital) was first publicly aired by HMRC when David Cameron became Prime Minister in 2010. At first glance, it appeared to be yet another of our wonderful Tax Office’s impractical ideas and was, for many years, regularly kicked into the long grass.
Nevertheless, once HMRC has an idea, however mad or impractical, they tend to pursue it with the energy of a dog searching for its favourite bone and so in 2014 they opened their Digital Delivery Centre in Gateshead. This was touted as their new headquarters for the newly created HMRC Digital team for tax innovation and surprise surprise, top of their agenda was MTD.
The newly formed team were tasked with making MTD a reality and 5 years later all large companies were enrolled into MTD for VAT, with all other VAT registered businesses following in April 2020. In reality, it was an easy win as there is very little difference between the new MTD return and the old VAT return.
Following the successful introduction of MTD for VAT, the then head of HMRC, Jim Harra, got a bit carried away and announced that MTD for VAT was just the start and that by April 2023, everyone who completed a SA tax return would be required to submit quarterly MTD returns. Despite missing his promised start date by 4 years (it could conceivably be longer!) Big Jim still got his knighthood earlier this year.
The GDS transformation programme
The Government Digital Services (GDS) transformation programme was launched in 2015 and rapidly became the Holy Grail for successive governments but as usually happens with these announcements, HMRC’s digital planners had hugely underestimated the amount of work involved in making it a reality.
True, they did a decent enough job on MTD for VAT, but Digital Self-assessment was a much tougher nut to crack and year after year its launch was delayed, until the end of the current tax year that is.
All good things come to an end
Similar to the vast majority of the population and most accountants, I had studiously ignored most of the farrago relating to MTD for self-assessment for what feels like (and is) years. Following postponement after postponement, this was something long into the future and there were many of us doubting whether or not, it would ever arrive.
Together with nearly all accountants, I saw MTD for individuals and small businesses as a tedious imposition, therefore, when I received a letter a few months ago on the topic, sent personally by Victor Palumbo, HMRC’s deputy director for change readiness for MTD, it was a bit of a shock.
In essence, the letter stated that all businesses and taxpayers who complete an SA return, were being brought into MTD wef April 2026. The only reprieve was for businesses with a turnover of less than £50,000 pa, individuals who are not carrying on a full-time trade or letting multiple properties, and pretty much anyone else who regularly completes a tax return, with an income of less than £50k pa.
Have the consequences of MTD been thought through?
I can understand the thought process behind HMRC’s decision to include anyone who receives income from self-employment and/or property exceeding £50,000 and I appreciate the benefits of a more rigorous accounting regime and better cashflow for the Treasury. However, as many others have already realised, there are a number of anomalies when it comes to the underlying logic.
The most obvious example of flawed logic was setting the income threshold at £50,000. In most cases, once allowable expenses are deducted the resultant profits may not even be taxable, especially when you factor in the personal allowance. It also looks certain that many people running businesses at breakeven or at a loss will be swept up into the quarterly MTD treadmill.
The next glaring example of twisted logic are HMRC’s plans to reduce the threshold to £30,000 on 6th April 2027 and the following year to £20,000 thereafter, with no allowance for inflation. These plans emanating from the HMRC think-tank in Gateshead, clearly have no conception of property prices in the Southeast.
Anyone living in Greater London would immediately recognise the issue of average rents in this region, with pretty much anyone renting out a property in and around the country’s capital likely to fall foul of the ridiculously low limit of £20,000, which equates to only £384 per week. This is just barely above the average rent for a bedsit and the landlord’s net income is probably going to be negligible.
When fax machines were state-of-the-art
In reality, HMRC have been cooking up this project since the then Chancellor Gordon Brown introduced self-assessment in 1997 when fax machines were state-of-the-art. You might therefore have imagined that when it came to implementation they would have all of their ducks in a row. After all, when they finally introduced online self-assessment tax filing, the system was reasonably robust and, whilst not exactly user-friendly, at least it was serviceable.
The difference this time around, is not that they’ve using badly designed systems or substandard software, it’s because HMRC has not, and I really can’t believe I’m saying this, even bothered to develop a computer program to facilitate completion of MTD returns. When this was put to them, the Deputy Chief, Little Ange MacDonald, blithely insisted that anyone caught in the net must use commercial software.
Free tax software, or the lack of it!
Finally, I must return to the issue of the lack of it! I’m not sure if HMRC’s refusal to provide taxpayers with free software to submit their MTD returns is just down to laziness, or a cynical move to save money. But after criticism by the PAC, they have twisted the arms of existing tax software providers to provide free versions.
In recent weeks a number of these firms have succumbed to the pressure and have announced that they will provide a very basic free version of their tax software in time for the April 2026 launch date. A list of the providers of free versions can be found at: https://www.gov.uk/guidance/find-software-thats-compatible-with-making-tax-digital-for-income-tax
There remains the question as to will the free versions cover anything other than the simplest returns, which I doubt. Also be careful, as from past experience, I’ve found that most other types of free software, are only free for the first one or two returns, so check before you download to avoid future charges.
Accountant’s view
Until recently, I had believed that HMRC’s favourite game of ‘kicking the can down the road’ might well continue indefinitely and eventually be quietly dropped. Sadly, it appears that I was wrong.
Finally, at MJ&Co we are now receiving more information from HMRC, as to how MTD will operate in practice and I will no doubt be returning to this subject in the very near future.
