Making Tax Digital: current exemptions
About the author: Emily Coltman, FCA is the Chief Accountant for FreeAgent, who make accounting software for small businesses, freelancers and their accountants.
With Making Tax Digital (MTD) pilot schemes well under way and the initiative set to roll out in full from 2020, it's certainly not too early to find out how MTD will affect you and your business, or if it will affect you at all. So far, HMRC has identified a few groups who the new digital tax initiative will not apply to - so who is exempt from Making Tax Digital?
Current exemptions from Making Tax Digital
Many respondents to HMRC’s 2016 consultations were concerned about the practicality of Making Tax Digital (MTD) for smaller businesses and the inability of some businesses and individuals to use accounting software. While the difficulties for smaller businesses are still being considered, HMRC has decided that the following groups will be exempt:
The digitally excluded
ONS statistics on internet use in the UK show that internet adoption is increasing: in 2016, 82% of adults used the internet daily and 70% of adults accessed the internet on the go from a mobile device. However, HMRC recognises that a minority of people genuinely cannot use digital tools and has agreed to legislate for an exemption.
This minority, referred to as the ‘digitally excluded’, are defined as those who cannot engage with accounting software or apps for reasons of:
- remoteness of location
In its summary of responses, HMRC also stated “any other reason” for being digitally excluded as a justification for exemption to MTD and suggested that it will consider exemptions on a “case-by-case basis”.
Despite suggesting the benefits of digital record keeping and digital tax for charities, HMRC has confirmed legislation will be introduced to exempt charities from Making Tax Digital obligations. However, trading subsidiaries of charities will not be exempt.
As the primary goal of trading subsidiaries is to make profit which often “puts their business activities on a closer footing with non-charitable businesses”, HMRC took the view that trading subsidiaries should be within the scope of Making Tax Digital.
Exemption threshold for MTD
HMRC has confirmed an exemption from Making Tax Digital for unincorporated businesses and landlords with a gross income/annual turnover below £10,000. In the consultation, many respondents considered this threshold to be too low and felt it would be unreasonable to impose MTD obligations on businesses this small. As a result, the Chancellor announced in the 2017 Spring Budget that unincorporated businesses with annual sales between £10,000 and the VAT threshold would be given an extra year to prepare for MTD.
The specifics of MTD remain up in the air and, until pilot schemes are trialled and definitive legislation is published, accountants, businesses and individuals (as well as HMRC itself) won’t know exactly how MTD will work and who it will involve.
If you're an accountant, we've created a handy version for you to share with your small business clients.