It will also allow small businesses under the VAT threshold to choose when to adopt MTD.
“Businesses agree that digitising the tax system is the right direction of travel,” said Treasury financial secretary Mel Stride. “However, many have been worried about the scope and pace of reforms.
“We have listened very carefully to their concerns and are making changes so that we can bring the tax system into the digital age in a way that is right for all businesses.”
Under the new MTD timetable, from April 2019, businesses with a turnover above the VAT threshold of £85,000 will be required to keep digital records and then only for VAT purposes. As they already provide quarterly returns for VAT purposes, they should find compliance comparatively easy.
No businesses will be asked to keep digital records, or to provide HMRC with quarterly updates, for other taxes until 2020 at the earliest. So they will have at least two years to adapt to the changes before the deadline.
The government also said that HMRC would start to pilot MTD for business (MTDfB) for VAT by the end of the year. This would be followed up by a wider live pilot starting in Spring 2018. That way, the system will have been tested for at least a year before any businesses are required to comply.
Welcoming the news, ICAEW deputy president and tax practitioner Paul Aplin said, “It’s great that the government has listened to both the voice of business and the profession on MTD.
“Removing mandation for the smallest businesses is a welcome step forward and is one less regulatory burden for SMEs to worry about.
“We now look forward to working closely with HM Treasury and HMRC on creating a world-class digital tax system that businesses of all sizes will want to use.”
Anita Monteith, technical lead and senior policy adviser at the ICAEW tax faculty said that the decision had restored her faith in the consultation process.
“We kept telling them that we didn’t have a problem with digital but needed more time but it began to feel as if people in government thought we were putting obstacles in the way. But we saw so many things that needed to be fixed. I think they underestimated enormously the scale of the task.
"So it is a huge relief and it really does credit to the new government that they have been willing to listen.”
She pointed to the software industry that was investing large amounts in building systems that they couldn’t complete because they were still waiting on HMRC to supply information.
On top of that, there wasn't a Finance Bill in place with the provision in it, so it wasn’t law. "It was such a muddle,” she added. "So yes, we whole-heartedly welcome the news."
Under the new timetable, the government will publish the 2017 Finance Bill as soon as possible after the summer recess. It will legislate for all the policies that were included in the pre-election Finance Bill.
The government also reiterated that any policies originally announced as starting from April 2017 would be effective from that date.