The changes will affect most businesses, including micro and small businesses. This includes over three million self-employed individuals (including around 900,000 buy-to-let landlords), 1.6m companies, over 400,000 ordinary partnerships, and about 600,000 businesses with income from different sources (for example, both self-employment and property).

The requirement for quarterly reporting and a subsequent year end reconciliation will be mandatory for all businesses by 2021, although the introduction is being staggered depending on the size of business so that larger incorporated businesses will not be drawn into the system before 2019 at the earliest.

Quarterly reporting for landlords and the self employed will start from 6 April 2018 although the threshold of £10,000, suggested in the original proposal documents, is still up for review, with the government yet to confirm whether this will be raised to exclude more of the smallest unincorporated businesses and sole traders. This arbitrary figure has come in for criticism as it is even below the current tax free threshold for individual taxpayers.

There is also some discussion about whether the deferral threshold will also be changed which would give a one-year exemption to some businesses.

A decision on both threshold issues will be made by the middle of the year at the latest, but it will definitely have to be taken before the Finance Bill 2017 is laid in July. There is likely to be more consultation on this particularly complex issue.

Theresa Middleton, HMRC director of Business Customer and Strategy told CCH Daily: ‘We have not included the exemption threshold and deferral threshold as the government has decided that it needs more time to consider these issues, but they will be confirmed before July 2017 when the legislation is laid.’

From next year – 6 April 2018 - businesses, self-employed people and landlords will be required to start using the new digital service. The key dates are:

• April 2018 if profits chargeable to income tax and pay Class 4 national insurance contributions (NICs);
• April 2019 onwards VAT falls under Making Tax Digital, so anyone registered for VAT will report and pay this through the new system; and
• April 2020 for corporation tax payers.

Individuals in employment and pensioners will be exempt from digital tax reporting unless they have secondary incomes of more than £10,000 per year from self-employment or property.

It has not been confirmed what the cut-off threshold for larger companies under Making Tax Digital will be as yet, although tax experts are expecting that businesses with annual revenue over £10m and larger partnerships will not be within the scheme as their tax affairs would be too complicated to report in this way.

It was also considering deferring the mandatory start date of Making Tax Digital (MTD) by one year for the next tier of small unincorporated businesses and landlords with annual incomes of above £10,000, but below a threshold to be determined. Final decisions will be made before legislation is laid later this year.

Transition costs to hit £1bn

There will be higher costs for businesses with the annual licensing charges for use of dedicated tax reporting software, as well as initial training and deployment costs. The HMRC impact assessment estimates that transition year costs will be £100m in the run-up to the rollout in 2018 and a subsequent £500m in 2018-19, and up to £350m in 2019-20. In total, the full rollout is likely to cost businesses in the region of £1bn assuming free software is available.

Legislation will be introduced in Finance Bill 2017 that will set out:

• Digital record keeping - how to keep records of trading and transactions digitally, and categorise expenses with help from prompts and guidance in the software.
• Establishing taxable profit - how Making Tax Digital will be used to establish taxable profit, including details on how the self-employed and landlords will have to record accounting and tax adjustments for the purposes of arriving at a taxable profit and reporting procedures for reliefs and allowances.
• Quarterly reporting – the process for quarterly updates, including level of detail, time periods and deadlines for submissions. This includes:
  (1) for VAT, these quarterly updates will effectively replace the VAT return; and
• (2) for income tax and corporate tax, these updates will cumulatively build an in-year picture of the business’ tax position, while also giving HMRC a much deeper view of the overall tax position of individual businesses.

On the contentious fifth return, defined as ‘End of Year’ activity by the government and HMRC, there are further details about how businesses will have to finalise their taxable profit for a period, as well as reporting deadlines.

The year end reconciliation will have to be submitted within 10 months after the fourth quarter end and will crystallise the taxable profits of that business for the previous year:

• for many businesses, this will involve checking and agreeing the total for that year, based on the information which they have provided in the relevant four quarters; and
• businesses with more complex affairs will be able to add and apply annualised reliefs and allowances for the period as these would not have been reflected in the quarterly reporting updates.

Individual partners in partnerships will no longer have to separately provide HMRC with details of their share of the profits or losses from the partnership.

The introduction of digitised tax reporting is expected to raise an additional £945m in tax revenues by 2020-21, with this rising to £2bn by 2021-22. The estimates represent net tax gap savings arising as a result of more timely and accurate record keeping. These revenue benefits are calculated following the general approach that is: revenue benefit = tax base x proportion of tax base covered x behavioural response.

As yet, the consultation on incorporated businesses has not been published, but is likely to be released later this year.

The HMRC policy paper, Making Tax Digital for business, is available here

The seven pages of draft legislation on quarterly reporting requirements is available here

Comment on the legislation must be submitted by 28 February 2017.