Making Tax Digital: Your questions answered

The way sole traders and landlords report their income and expenses to HMRC is about to change dramatically. It’s been described as “probably the biggest change to self-assessment since it was introduced 30 years ago”.

Instead of an annual tax return, taxpayers as varied as self-employed plumbers, childminders and copywriters will begin to digitally submit income and expenses every three months. It’s known as Making Tax Digital and it’s currently rolling out for those earning over £50,000 a year from self-employment or property. That means 860,000 people need to sign up now but eventually three million will need to report quarterly numbers.

Many people have questions and so Felicity Hannah presented a special episode of Money Box Live to help taxpayers get to grips with the new system.

Listen to the full episode on BBC Sounds

What is Making Tax Digital?

Sole traders and landlords earning over £50,000 a year will need to keep digital records of their income and expenses using software. The threshold will fall each year until those earning over £20,000 also have to sign up.

Every three months they will use this software to update HMRC and then also complete a tax return at the end of the year. The tax office expects it will make the annual tax return easier as so much information will have already been supplied.

Why is it happening?

Listener Eimear said: “My question is why? Why are self-employed people like me, who works as a freelance editor and writer, being asked to do this?”

Jonathan Athow, HMRC’s Director General of Strategy and Policy, has been spearheading this change. He said there are a number of benefits, including better record keeping: “At the moment, the way self-assessment works, it can be nine or 10 months before you complete your self-assessment return. In that period, we know lots of people either lose records or fail to keep them properly in a good way. So what we're trying to do is encourage people to keep records closer to real time and using digital records less likely to be lost.”

He said one benefit of improving records would be to ensure the tax that is due gets recorded and paid, potentially ensuring more money that’s due is paid to the Treasury. Additionally, HMRC believes that keeping records this way will mean people have a better understanding of the amount of tax they will owe at the end of the year.

Is it on track?

While 860,000 taxpayers will need to begin using this new system this year, by 1st April just 185,000 had registered. However, Jonathan Athow said that’s not worrying the tax office just yet.

There are a number of free offers, or ‘freemium’ offers, some of which are limited in terms of their functionality.
Jonathan Athow, HMRC’s Director General of Strategy and Policy

“The real test for us is August when we have that first quarterly update on the 7th of August. That will be when we really see how many people have already registered, got their software, got everything sorted. The other thing I would say is in this first year, we're not charging any penalty points for missing a quarterly update…. We know for some people it's going to take them a while to get up to speed with this and we're allowing that by not having those penalty points in the first year.”

Do I have to pay for software?

In order to submit quarterly reports to HMRC, taxpayers will need to use third-party software and there is a dedicated page on the gov.uk website where they can find a provider.

Freelance cartoon screenwriter Gillian contacted Money Box Live to say: “They want to do away completely with the online portal and expect me to source and understand third party software. They keep saying it's free, it's not. When you actually look into it, these softwares are only free if you also have a business bank account at cost from various providers.”

Jonathan Athow said it would not have been possible for HMRC to provide a system that worked for everyone but added: “There are a number of free offers there, or ‘freemium’ offers, some of which are limited in terms of their functionality. But there are free offers there for people with simple affairs.”

Can I trust the software companies?

Tony got in touch with the show over security concerns. His question was: “Can I trust the intermediaries that the HMRC is imposing upon me? I mean, they're not imposing a specific intermediary, but they're saying, here's a range of intermediaries, companies I don't know from Adam, and I have to choose one of those and I have to upload my data to them and then have them transfer the data to HMRC. My very personal financial data, like my taxpayer reference, my national insurance number, my income details.”

“Software is not new,” responded Jonathan Athow. “As I said, some people are already using software to comply with their tax obligations. If you are paid as an employee, there's probably a third-party software provider in that system working for your employer to talk to us. So this is not an entirely new market. We take our security very, very seriously.”

He also told listeners: “Before we put somebody on our software pages, we do look to make certain that product meets our standards and can be relied upon. But again, security is a more general issue across digital services, not just those where they're connected with tax.”

Can I get an exemption?

Many people emailed and messaged the programme because they felt they should be offered an exemption. One farmer said he didn’t have an adequate internet connection, several people said they were digitally excluded and couldn’t manage new software.

Ashley said: “I can't follow what's going on… I've actually just written now to see whether I'll be exempt. I thought if I say ‘I'm 85, I've probably got five more years to live’ then will say ‘well, don't bother because it won't come in for everybody until that time’, so that's the only hope I've got.”

HMRC reassured listeners that there is scope for exemptions when people are genuinely prevented from using the new system. So far they have had 3,000 applications for exemptions and have processed 1,800. Of those, around 70% were accepted, so worried taxpayers should ring the helpline or write with evidence so they can be considered.