Making Tax Digital – charities exempt but trading subsidiaries will be affected

Chris Yeates

Making Tax Digital – charities exempt but trading subsidiaries will be affected

The Government has confirmed that it will introduce legislation to exempt charities from the Making Tax Digital requirements. This is welcome and will protect smaller charities and those with limited digital capability.

However, it is important to note that charities are exempt only from these new reporting requirements. The process for charities to manage their existing ongoing tax reporting requirements, including the submission of nil-returns, is as yet unclear. Other online reporting mechanisms, for example, for the Apprenticeship Levy (where relevant), PAYE and Charities Online, will continue to be in a digital form, and the interplay between this and Making Tax Digital is not yet fully understood.

Unhelpfully, the Government has decided that charity trading subsidiaries should be within the scope of the Making Tax Digital obligations. Presumably this means that the charity would have to operate two systems (which adds complexity) or consider maintaining digital records for the whole charity group, undermining the proposed exemption. And with a charity registered with its subsidiary in a VAT group, there is potential for further complexity.

We hope that the Government will take forward recommendations to consider options to integrate Gift Aid operations for both charities and donors (including higher rate relief through Personal Tax Accounts) as systems develop as part of the Making Tax Digital agenda.

Other proposals include that:

  • businesses will be able to continue to use spreadsheets to record receipts and expenditure, which they can then link to software to automatically generate and send their updates to HMRC
  • free software will be available to the majority of the smallest businesses
  • businesses that cannot go digital will not be required to do so
  • all self-employed businesses and landlords with a turnover under £10,000 a year will not have to keep their records digitally or make quarterly updates, but can do so if they wish
  • the option to account for income and expenditure on a simple ‘cash in, cash out’ basis will be extended, helping an extra 2.5 million self-employed businesses and unincorporated landlords
  • customers will have at least 12 months to become familiar with the changes before any late submission penalties will be applied; following feedback from respondents, HMRC will also consult again in the spring on a new penalty model
  • HMRC will pilot these digital systems with hundreds of thousands of businesses before rolling them out to ensure that the software is user friendly, and to give businesses and landlords time to prepare and adapt
  • the requirement to keep digital records will not mean that organisations will have to make and store invoices and receipts digitally
  • activity at the end of the year will have to be concluded and sent either by ten months after the last day of the period of account or 31 January, whichever of these is soonest

HMRC have also confirmed that the Government will need to consider further issues, such as the initial exemption threshold and deferring the changes for some small businesses alongside their cost, with final decisions to be made before legislation is introduced later this year.

We are proud to be a member of the Charity Tax Group and are grateful for their analysis and for lobbying on behalf of the sector.

If you have any queries please do not hesitate to contact a member of the Larking Gowen Not for Profit Team on 01603 624181 or please email