Draft legislation was published on 13 September in respect of income tax and an overview of draft regulations in respect of VAT as part of the Making Tax Digital reforms. HMRC intends to finalise the new regulations for VAT by April 2018 and businesses will be given until April 2019 to comply with the new rules. Making Tax Digital for income tax is not expected to become mandatory until 2020.
By introducing Making Tax Digital, HMRC aims to overhaul and modernise the current UK tax system. The aim is to create an online tax facility similar to online banking, requiring businesses to submit tax returns digitally and allowing them to view their tax liabilities and/or entitlements online, all in one place.
Only those businesses that have a turnover exceeding the VAT threshold (currently £85,000) will be required to comply with the new VAT regulations. Other businesses will be able to use the new digital system on a voluntary basis. Under the new legislation, businesses will be required to:
- use functional compatible software in order to meet the new requirements
- preserve digital records using the functional compatible software, for up to six years. These records will include information about the business and its taxable supplies
- submit VAT returns online
Businesses will also be able to frequently and voluntarily submit VAT information through the functional compatible software to update their digital account.
Provided sufficient time is allowed to comply with the proposed Making Tax Digital system, there should be advantages for businesses - particularly those that are obligated to comply with the current VAT reporting obligations. If Making Tax Digital proves to be as successful as touted, we may see an extension to other business taxes affecting these businesses beyond 2020.