Making Tax Digital by Lee Sharpe

Lee Sharpe looks at progress on Making Tax Digital, following the legislative updates.

General Update

A general update on MTD was included in Lee's previous post: Making Tax Digital: Discussion and Disagreement on the Cost of MTD. The big news, of course, was the slippage of the introduction of mandatory ‘digitalisation’ for direct taxes, from April 2018 to “definitely no earlier than April 2020”, thereby setting up VAT as the first real MTD deadline – still at April 2019. The government said it had been listening to concerns raised about the speed of implementation. I should not be at all surprised to find that Brexit and customs had more to do with the revised timetable.

Given how integral VAT is to one’s financial records, of course, requiring digital record-keeping and returns ‘only’ for VAT is a bit like saying road tax will apply only to cars with four or more wheels. In particular, focusing only on the reporting requirement overlooks that businesses will still be required to keep their financial records in an acceptable digital format, at least for VAT (and by broad implication, pretty much everything else).

The CIOT has noted that, while 99% of VAT returns are currently filed online, only around 12% are filed directly from software, with the remainder presumably being entered into HMRC’s online form manually. This suggests a serious disconnect between the figures generated naturally by accounting software and what users think the ‘correct’ position should be. And there are of course several possible reasons why, such as partial exemption, fuel scale charge, or use of a retail scheme. If HMRC thought VAT would be a soft landing for digital reporting, it may have to think again.

Draft Legislation

The draft Finance Bill 2017-19 was published in early September, and it includes provisions in relation to Making Tax Digital, for VAT and for businesses subject to Income Tax. Unsurprisingly, the draft legislation runs to many pages.

It comes as Clauses 60 – 62 and Schedule 14, much of it re-working / adding to TMA 1970. The provisions give the government very broad powers, but there is little real detail as to how things will work. The meat on the bones will be provided by future “regulations”. Some key points are set out below.


Certain persons are excluded, including the Trustees of a charitable trust, and certain business activities are excluded, including Lloyd’s underwriting business, and simply holding interests in REITs and / or OEICs.

The provisions will apply to a partnership basically if one or more of the partners is chargeable to Income Tax (save for excluded activities, as above).


The Commissioners are obliged to make regulations to exempt from at least some of the requirements, the “digitally excluded”, such as:

  • Practising members of a religious order or society whose beliefs are incompatible with digital records or communications
  • Those for whom it is not reasonably practicable to use electronic communications or to keep electronic records, including by reason of age, disability or location (presumably where Internet access is poor)
  • Further exemptions, such as by reference to income or financial criteria, are also permitted

It seems all partners have to be digitally excluded on an individual basis, in order for a partnership to be exempt.

Note that there is a single “digital exclusion condition” but there are in effect two digital requirements: keeping electronic records, and filing electronic communications. It is unclear how the exemption will apply if, for example, someone can use a computer, but has no suitable Internet access (although common sense may prevail, if the forthcoming regulations prove insufficient).

Digital Record-Keeping

The Commissioners may, by regulations, require a person or partnership to keep specified records relating to the relevant business in electronic form, and preserve those records in electronic form for a specified period. Those records are any records the Commissioners consider relevant to ascertaining information required to be provided by the new regulations. (This requirement is in addition to, and not in place of, any other requirement that the person or partnership keep and preserve records). Failure to comply for a given period will result in a penalty ‘not exceeding’ £3,000 for each person or ‘relevant partner’ in a partnership (i.e., anyone who was a partner during the period in question). However, the new penalty should not apply where a ‘normal’ penalty for a failure to keep SA records is already in point.

There will be further regulations to prescribe

  • The electronic form of the information to be provided / records to be kept
  • The keeping of records of electronic communications (does this mean only communications with HMRC – submissions, etc., as per SI2003/282, or could it ultimately include other communications?)
  • For the production of such information and records in accordance with the legislation
  • Standards of accuracy and completeness

Digital Reporting

The Commissioners may, by regulations, require a person or partnership to provide to HMRC, by electronic communication, periodic updates of specified information about the business of the person or partnership, including any information relevant to calculating profits, losses or income of the business, and including information about receipts and expenses. Clearly, potentially much more than a simple account of income and expenditure.

The regulations may require information to be provided at or for specified intervals, times or periods. But the regulations may not require such information to be provided more often than once every 3 months (which is about the only constraint I could find, anywhere in this draft legislation, apart from the start date for VAT MTD not being any earlier than April 2019). There are also provisions about the “end of period statement”.

All of these “regulations” are to be made by Statutory Instrument, with its inherent lack of parliamentary scrutiny.

Specifically with regard to VAT, the draft legislation in Clause 62 says that regulations must be introduced to ensure that a person will be exempt from having to keep/preserve electronic records as more generally to be prescribed, so long as the person has not made taxable supplies in excess of the registration threshold in the preceding 12 months, and was not subject to those requirements in the previous month.

Without more detail, this could mean either that the obligation will be switched off a month after turnover falls below the registration threshold, or possibly that the record-keeping requirement is left permanently “switched on”, because the exemption is denied in each successive month. Although the regulations themselves will hopefully shed more light on this, I tentatively read this to mean that, at least so far as VAT digital record-keeping, etc., is concerned, once a business is caught, its digital record-keeping obligations may persist, even if it is no longer required to make electronic returns.

So far, this exemption appears to apply only for VAT purposes, so presumably its scope will be widened by appropriate use of the “income/financial criteria” exemption referred to above.

There is a right of appeal against any decision made under the regulations, although there is scant detail at this stage.


As already noted, there is very little in the draft legislation in terms of detail or mechanics: it is more about giving the Commissioners as much scope as they might possibly want to impose MTD – without giving too much away about what MTD will really mean.

Lee Sharpe

Written by Lee Sharpe

Lee Sharpe is a CTA with over 20 years experience advising clients on tax matters.

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