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Making Tax Digital – What you need to know

The world is undergoing rapid digital transformation which is completely altering the way businesses operate on a fundamental level. Where certain processes in the past would have been carried out manually, businesses and organisations are implementing sophisticated, automated operations. As a result, businesses and organisations alike can provide a continuous, tailored service.

But just as businesses are evolving, so must tax in order to support new business models and ensure a transparent and digitally efficient service. In light of this, by 2020 HMRC will have redesigned the tax process to be a digitally competent system with complete transparency.

The reformation of the tax system brings with it a number of changes to the current taxation processes, so what can businesses and organisations expect to see?

How does quarterly reporting work?

HMRC is changing the way tax returns are submitted to provide businesses and taxpayers in general with a view of their tax affairs through a quarterly reporting structure.  One of the main questions about the quarterly reporting process is whether or not taxpayers will have to submit four complete tax returns. The answer? No.

HMRC is asking businesses to submit just one income figure and a combined figure for all their expenses for each quarterly update. However, if the taxpayer wants to upload additional information, they may.

After the fourth quarter, it has been proposed that there will be a period of time (nine months) where taxpayers and businesses can complete their ‘final’ tax return – and this will represent their closing position for the year.

HMRC is presenting it as a relatively simple process, in that you open up your record keeping software, enter your figures and simply send the update to HMRC.

The new digital tax system will integrate all the current information that businesses, self-employed individuals or landlords provide to HMRC in a centralised, online location. The main objective of the quarterly reports is to provide taxpayers with a real-time overview of their current tax affairs showing them:

  • how their tax is calculated
  • what they owe and when they need to pay


This means that instead of providing a large, year-end tax return, businesses can submit quarterly update information relating to their tax affairs. Updating regularly will then allow HMRC to ensure that the information that it is receiving is correct and accurate. In addition, the digital process will give individuals and businesses more certainty over their likely tax bill, which in turn will facilitate better management of expenditure throughout the year.

By implementing a digital tax system, HMRC hopes to provide businesses with greater clarity and control over their tax, by allowing them to see where they currently stand instead of waiting until the end of the year.

Who is exempt from quarterly reporting?

There are a number of exemptions from quarterly reporting. For example, if you’re an unincorporated trader, business or landlord with a turnover or income from your property under £10,000 you will not have to update a digital tax account on a quarterly basis.

However, even if you are exempt from quarterly reporting, you will still be expected by HMRC to upload your figures to your Digital Tax Account on an annual basis as your year-end report, as opposed to doing a paper return. Bear in mind that the old Self-Assessment forms will not be used going forward.

What about deferring quarterly reporting?

Currently, HMRC is yet to decide on the limit at which quarterly reporting can be deferred. It could be the case that businesses or self-employed individuals above the exemption threshold of £10,000 but with turnovers between £10,000 and the VAT registration threshold might be able to defer their quarterly reporting.  Businesses or self-employed individuals who fall within the threshold criteria will be given the option to defer the start of their digital tax reporting by one year. There could also be a case that businesses which are already registered for VAT will not be able to defer their quarterly reports, as they already provide them under the VAT regime anyway.

What about Pay As You Go?

For businesses and individual taxpayers who want to voluntarily make payments throughout the year towards their tax, the option to do so will be available to them. Having the ability to make voluntary payments will provide businesses and taxpayers with greater control over their cash flow as well as frequency of payments to HMRC. There’s currently no demand to pay income tax on a quarterly basis.

What about the old Self-Assessment tax return form?

For taxpayers who fall outside the exemption criteria for quarterly reporting mentioned above, they will need to begin making quarterly reports from the 1 April 2018 / 6 April 2018.

Will there be penalties imposed for late filing?

Unfortunately, there will be penalties for the late filing of quarterly reports, but the current penalty system will be replaced with a points system. Whenever information is submitted late, penalty points will be incurred, one per quarter. Once a certain number of penalty points have been accrued and reached a certain level, a fine will be issued.

There is a level of discretion to this system however. If an individual or business’ inability to file a tax return, or pay tax is deemed as involuntary (meaning you there was no active intent to avoid paying tax obligations) HMRC will instead issue a penalty point. If however, there was deliberate intent to avoid paying tax obligations, a fine will be incurred.  

Penalty points can be reset, but only after two years – and only if a business or individual has submitted all required information throughout that period.

Conversely, with the current system, if an individual misses the end of year self-assessment tax return, there is an automatic £100 fine. The new digital taxation system is more lenient in that it provides people who are unintentionally late with opportunities to rectify their practice and ensure they upload information on a consistent, regular basis.

If you’d like to know more, watch our on-demand webinar here. The webinar is hosted by our Tax Product Manager, Stuart Miller, with guest speakers Kathryn Jones, a Practice Consultant at SWAT UK, and Michael Cameron, part of the Making Tax Digital for Business Team at HMRC. Our experts take a look at the all of the above changes in more detail and offer insight on what businesses need to do to adapt. Click the link below to watch it now:

Webinar: Making Tax Digital - What you Need to Know


More information on these changes is also available on the UK Government website, available here. The consultation period will run until 7 November 2016.