How Making Tax Digital is Similar to Brexit

Britain voted to leave the European Union on 23rd June 2016 and just two months later, on 15th August 2016, the UK government launched a detailed consultation on its plan to digitalise the UK tax system with the Making Tax Digital (MTD) initiative.

If you’re a business owner in the UK, both MTD and Brexit will have been very much on your radar for the last two years and their impact will be something that may have been concerning you. Both represent a massive shake-up to the status quo in this country. The government is transforming the tax system and making it digital with the aim of reducing burdens for taxpayers and building a transparent and accessible tax system. And Brexit (Britain’s exit from the European Union) will see Britain leaving the single market and customs union, which has a multitude of legal, commercial and economic implications.

Not only did the Brexit and MTD come about at the same time, they have a number of other similarities too.

Both Represent An Unprecedented Change

The tax system in the UK is a long-established institution. MTD will create a very different way for individuals and businesses to process their tax affairs. It will introduce digital recordkeeping and quarterly updates for business, the self-employed and landlords for income tax, VAT and corporation tax. This will mean that the tax return will become a thing of the past with everything being done online. MTD will certainly be a learning curve for us all, as we will be liaising with HMRC in a completely new way.

As for Brexit, no other country has ever left the EU before! Britain joined the EU on the 1st January 1973, and so has been part of the EU for 45 years, meaning that although we have had our grumbles over the years, we are fairly institutionalised. Moving away from the EU could impact upon the right of UK citizens to live and work in EU countries, we may see a slowing in the economy during the transition phase and there are all sorts of implications for businesses.

Both Affect Businesses

MTD aims that by 2020, businesses (and individual taxpayers) will be able to register, file, pay and update all their information online. This requires businesses to use MTD approved and compatible software like Xero. It should benefit businesses by reducing costs and errors by helping businesses get their tax right first time. It will also help keep businesses on top of their affairs by allowing them to see a comprehensive picture of their liabilities and entitlements in one place – their digital tax account. They will be able to see the information HMRC holds about them and check and update that information themselves.

Brexit has far-reaching implications for businesses in the UK. Here are just some of them:

• Cost and availability of certain materials and goods may change substantially.
• Tariff and country of origin requirements may affect supply chains.
• Businesses that import and export may need to comply with additional administration and pay additional tariffs.
• EU funding for businesses in the UK is likely to cease.

This Brexit tracker reports on how the multi-dimensional layers of Brexit are impacting your business.

Both Involve A Lot Of Negotiation

In 2016 the government embarked upon an extensive period of consultation with businesses about MTD and the proposed digitalisation of the tax system. In August 2016 it published 6 consultation documents, each focusing on specific customer groups or specific elements of the Making Tax Digital reforms. The consultation outcomes were published in January 2017.

Article 50 of the Lisbon Treaty says that the UK has two years to leave the EU. The Brexit negotiations are complex and span a number of areas ranging from issues like farming and aviation rights, to legal sovereignty and citizens’ rights with the aim of the exit plan being to avoid as much disruption as possible and get a positive outcome. The Telegraph has

Both Are Trying To Create Autonomy

MTD will enable individual businesses to have more control over their tax affairs. Businesses will be able to interact with HMRC digitally and at a time to suit them. Over time, business owners will no longer have to complete tax returns at the end of the year, freeing them up to focus more on their business. The digital tax system will also help reduce errors, lower the need for compliance checks and give businesses greater certainty they are getting things right. Another benefit of this autonomy for both businesses and individuals is that information is collected and processed in real time. This means no more waiting until the end of the year to find out how much tax is owed. This also stops tax due or repayments owed building up.

Similarly, for Brexit, leaving the EU will allow Britain to have more control over its trade policy, as a consequence, Britain will be able to develop new commercial links to countries outside of the EU. Some say this autonomy will give us more power to negotiate better trade deals and less bureaucracy.

Both Involve Communication With A Central Point

With MTD businesses are communicating directly with HMRC using digital record-keeping software linked directly to HMRC systems. Furthermore, a digital tax accounts system will mean that taxpayers will not have to give HMRC information it already has, or that it is able to get from elsewhere, e.g. from employers, banks and other government departments. In other words, it is a two-way direct communication between the business owner and HMRC, as any additional information is pulled into the software automatically. This will result in improved accuracy and reduced costs for both businesses and the government. Unfortunately, for some this may mean more work or more costs from their advisors.

Likewise, with Brexit, the central point of communication and decision making will be the British government rather than the European Parliament.

Both Create Uncertainty

MTD is causing a lot of uncertainty among business owners, who are not sure of the implications for them and what they need to do to get ready for MTD. For example, some businesses are still not sure which is the best MTD-ready software for them to use to enable digital communication with HMRC, as some businesses are still using software that is not cloud-based.

In the same way, we are in a period of regulatory and legal uncertainty around Brexit. New UK regulations are likely to replace EU laws and bring into effect future trade arrangements – and legal uncertainty is likely up until 2021 and beyond while these changes take effect.

View a comprehensive breakdown of the implications for VAT if the UK leaves the EU with no deal here. Requirements may also change for trading. Read information published by the government here.

Both Have Been Delayed

MTD was first announced by the UK government in 2015 to reduce the complexity of the UK tax system and improve its efficiency and effectiveness. The government originally planned a phased introduction of MTD between the 2018-19 and 2020-21 tax years. However, in July 2017, the government announced it would delay the introduction of MTD to April 2019 at which date the scheme would only apply to VAT registered businesses over the VAT threshold. The government then said that it would extend the initiative to taxes other than VAT by 2020 at the earliest when the plan is that by 2020, businesses and individual taxpayers will be able to register, file, pay and update all their information online.

As for Brexit, the original plan was to have left the European Union within 2 years of the date of the referendum in June 2016. As preparations by the UK government have been protracted, in August 2018, we are now past the expected date. The current expectation, however, is that the UK will cease to be a member of the EU on 29th March 2019, two years after Theresa May presented a letter to Donald Tusk,European Council President, formally announcing Britain’s intention to withdraw from the EU. For a full breakdown of the Brexit timescale, click here. And ironically, it is likely that Brexit will delay MTD further.