AAT calls on government to re-think the Making Tax Digital exemption threshold

The Association of Accounting Technicians (AAT) has called on HM Revenue and Customs (HMRC) to make changes to its Making Tax Digital (MTD) programme, ahead of extending it to cover businesses below the VAT threshold and individuals filing income tax self-assessments.

HMRC aims to begin introducing the programme to businesses with a turnover below the £85,000 VAT threshold in April 2022. In April 2023, it will also apply to taxpayers who file income tax self-assessments for business or property income of more than £10,000 a year.

AAT head of public affairs and public policy Phil Hall said in a blog post the accountant membership body believes the threshold of £10,000 is too low.

He said that the AAT recommends that the threshold should be set at the same level as the personal allowance, which is currently set at £12,500.

“AAT understands the importance of reducing the exemption level below the current VAT threshold (£85,000) given HMRC estimates 43% of the tax gap (£13.4bn) is attributable to small businesses; the obvious need to tackle this, and the suggestion that MTD can play a part in doing so,” he said.

“Yet the reduction must not be to the figure of £10,000 and instead should be brought into line with the personal allowance. This £2,500 gap may appear small, but would make a big difference.”

He added that the £10,000 figure “appears to be entirely arbitrary” and that setting the threshold at the personal allowance level will “avoid the need to regularly revisit the limits of an arbitrary figure and will reduce fiscal drag”.

“The £10,000 figure, set below the personal allowance, means that non-taxpayers will have to register for MTD and provide quarterly updates despite having no tax liability,” he said.

The AAT first made the recommendations for the threshold to be £12,500 in 2016. According to Hall, the government originally promised to review the exemption threshold, but was then “silent on the issue” before announcing that anyone with income above £10,000 would need to follow the rules for MTD from April 2023.

“So, a threshold criticised as being too low in 2016 will be introduced at the same £10,000 level seven years later, in 2023. If it was too low in 2016, it will certainly be too low in 2023,” he said.

“As well as creating considerable unnecessary bureaucracy for those with no tax liability – and more work for an already under pressure HMRC – the £10,000 threshold is an inherently unfair and unjustifiable measure that needlessly undermines the credibility and user acceptance of MTD.”

The Public Accounts Committee (PAC) has also raised concerns around MTD. A report by the PAC found that although the programme is an ambitious and logical plan, the committee is uncertain of its success.

The PAC report said that “the effectiveness of the programme is not yet known”, although HMRC is confident it will achieve its goals of “improving compliance rates, increasing productivity of businesses and allowing HMRC to realise savings”.

“It is not clear that MTD will help reduce the tax gap or taxpayer costs at a time when individual taxpayers and small businesses are under considerable pressure,” the PAC said.

The committee is now calling on HMRC to “assess whether the administrative burden it is imposing on taxpayers is reasonable and affordable” before it continues with further national roll out of the programme.