The whole premise of Making Tax Digital (MTD) from HMRC’s standpoint is to reduce the tax gap and increase tax yield by limiting the scope for error.

By forcing businesses and landlords to record accounts information digitally and to upload accounts summaries every quarter, tax reporting is moving closer to real time. HMRC believes digital record keeping and the submission of frequent quarterly updates will mean fewer mistakes are made and more tax is paid.

However, HMRC is also going to use a series of ‘prompts and nudges’ to maintain the regular flow of data and to improve the quality and accuracy of accounts information being uploaded.
 

What is a prompt?

In simple terms a prompt is a reminder to do something.

In the context of MTD, HMRC may send a prompt to a business or landlord to upload a quarterly summary or to submit an End of Year declaration or to make payment.
 

What is a nudge?

Again, in simple terms, it is a reminder to check something.

In the context of MTD, HMRC is likely to send a nudge to a business or landlord if a figure appears to be wrong in a quarterly update. The nudge may also refer the business owner or landlord to guidance on the GOV.UK website, such as HMRC’s manuals or factsheets.
 
Example
Ellie is a mobile hairdresser. Her car is used for a mixture of business and private mileage. She drives her car to see her customers in their homes. She also uses her car for the school run and to go to the shops.

In her first quarterly update, Ellie calculates her motor expenditure claim based on 80% of her mileage relating to business travel, with the remaining 20% being private in nature.

In her next quarterly update, Ellie applies the same percentage split. HMRC sends a nudge to Ellie asking if the 80:20 apportionment is correct for a second successive quarter.
 

Does a nudge constitute a tax enquiry?

No. A nudge from HMRC does not mean a tax enquiry has begun. It is HMRC asking for a figure to be checked to see if it is correct.

Under MTD, HMRC’s enquiry powers are going to apply to the End of Year declaration. An End of Year declaration has to be submitted after all four quarterly updates have been provided to HMRC.
 

Will nudges only come from HMRC?

Not necessarily.

HMRC has been analysing the common mistakes made by businesses and landlords and is sharing that information with software companies to build into MTD products.

As businesses and landlords upload accounts data, the MTD software may well nudge for a figure to be checked as it is being entered.

In other words, the software may nudge for a figure to be checked first and then HMRC may well send a further separate nudge after the quarterly update has been received. 

As time goes by and MTD becomes bedded in, HMRC’s prompts and nudges are likely to become more personalised as HMRC builds a fuller behavioural history of each business and landlord.
 

Can we help?

If you have any questions about Making Tax Digital please contact our Head of Technical Research, Guy Smith, on 0345 223 2727 or at g.smith@abbeytax.co.uk.