Extension of Making Tax Digital is a key moment in tax history

30th Jul 2020

Following the announcement that Making Tax Digital (MTD) will apply to all VAT registered businesses from 1 April 2022 Glyn Edwards, VAT Director at MHA MacIntyre Hudson says the change casts doubt on the sustainability of the UK’s high VAT registration threshold.

“This is a key moment in tax history. HMRC’s desire for greater transparency of taxpayer’s records and affairs is leading us towards a very different tax system.

“The bad news is that the costs of MTD compliance for micro businesses will inevitably be proportionately greater than for larger businesses. For some small companies, whose turnover is low enough they don’t have to register for VAT, the additional costs could outweigh the benefits of voluntary VAT registration. This would be a loss for smaller companies as the benefit of VAT registration is the ability to reclaim VAT on costs without VAT on sales being a cost burden to customers (if these customers are themselves VAT registered).

“If the extension of MTD leads to a drop in voluntary VAT registrations it will cast further doubt on the future of the UK’s relatively high VAT registration threshold. If HMRC believe that small businesses can cope with the demands of MTD, then the argument that a VAT registration threshold is required to simplify accounting for small businesses becomes less tenable.

“HMRC’s long-term aim is to be able to view transaction level data in real time. VAT enquiries will move even further away from the traditional ‘VAT visit’ and telephone and email queries will become more prevalent. As we progress to real time reporting, taxpayers may encounter more frequent HMRC interventions relating to individual unexpected transactions. This should assist HMRC in tackling fraud, by tracing transactions between multiple taxpayers. HMRC also hopes MTD will boost innovation and productivity among software and tax-related service providers.”

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If you would like to discuss how Making Tax Digital may impact your business, please contact one of our VAT specialists here

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