Making Tax Digital exemption need greater than for online VAT filing.
With the timetable for Making Tax Digital (MTD) confirmed, most smaller businesses must implement full digital record-keeping from April 2019, and those that haven’t begun preparations should certainly get started on getting MTD-ready.
There is, however, provision in the regulations for businesses genuinely unable to comply with the new requirements to apply to HMRC for exemption. The exemption for MTD is modelled very closely on that for online VAT filing, which permits exemption on religious grounds or on the basis of ‘age, disability, remoteness of location or for any other reason’.
Around 4,000 online VAT exemptions have been granted to date, but many more taxpayers than this have no online or digital capacity, and delegate the filing responsibility to an agent. Any business that is currently exempt from online VAT filing will automatically qualify for MTD exemption, if needed.
However, with MTD requiring so much more in the way of digital engagement from the business, some taxpayers will need to delegate the digital record-keeping requirement as well as the online filing. Businesses in this position should establish as quickly as possible whether they are exempt from the MTD record-keeping obligations.
It should be noted that MTD exemption is separate from online filing exemption. If the taxpayer’s agent currently files online for the business, HMRC will expect this practice to continue. It is also worth stressing that because of the way it works, the exemption on religious grounds will not be available for MTD unless the taxpayer already has it for online filing.
Although HMRC has been urged to confirm the position on MTD exemption so that businesses can plan effectively, official guidance is not expected to be published before November. It is possible that the actual application process will not be live until 2019, as HMRC needs to update its systems to distinguish between the differing levels of digital engagement.
However, there are tribunal cases on the online filing exemption which should inform HMRC’s position. The courts have so far interpreted taxpayers’ obligations to be to take reasonable steps to comply with the filing obligation, and it would seem sensible to assume that the same will apply for record-keeping. If it is not possible to ‘reasonably’ keep digital records, then the HMRC commissioners, who have the power to grant exemption, could not reasonably withhold it.
Given the comparatively low profit margins of many businesses which will have the biggest changes to make, and the disruption for larger enterprises which use bespoke business management software that cannot be made MTD-compatible, businesses should carefully and pragmatically assess whether they can make the necessary changes. They should also keep a close eye on HMRC communications in order to apply for exemption at the earliest possible moment if it is simply not practicable for the business to survive the implementation of complete digital record-keeping.