Making Tax Digital – The Dawn of a New Era
Last year’s Budget set out the government’s bold vision to transform the tax system and bring an end to the tax return. Government has laid plans to give every individual and business access to their own secure digital tax account, like an online bank account, that enables them to interact with HM Revenue and Customs (HMRC) digitally. The goal is for individual and business taxpayers to register, file, pay and update their information at any point in the year. For the vast majority, there will be no need to fill in an annual tax return.
HMRC will collect and process information affecting tax in as close to real-time as possible, stopping tax due or repayments owed from building up. The benefit being that individual and business taxpayers will not have to wait until the end of each tax year before knowing how much tax they owe, avoiding any surprises and helping them to plan their financial affairs with more certainty. Taxpayers will be presented with a complete financial overview of their tax affairs in their digital account with the ability to see and manage all of their liabilities and entitlements together.
Government hopes to achieve its ground-breaking plans to make the UK one of the most digitally advanced tax systems in the world, by 2020.
The announcement of the flagship Making Tax Digital (MTD) initiative in March 2015 revealed few details as to how the move to online filing might work in practice, and what the impact on individuals and businesses might be. Concerns over the potential increase in costs and administrative burden to individuals and business as a result of this seismic transformation have, to date, divided opinion and attracted considerable debate amongst industry stakeholders.
HMRC unveiled its roadmap for Making Tax Digital in December 2015, setting out its ambitious timeframe to transform the tax system. Despite consultations set for April, deferred until now, Making Tax Digital will wash the first wave of unincorporated businesses into the digital regime from April 2018.
On the 15th August 2016, reflecting the magnitude of the proposals, HMRC published six consultations on Making Tax Digital on the same day. The current consultations focus on sole traders and partnerships, along with specific elements of the MTD reforms. They outline the government’s proposals for these customer groups in greater detail and pose a wider set of questions to affected individuals, businesses, and industry professionals. The consultation period runs until 7th November 2016.
Ease of transition
Encouragingly for many, the consultation documents show HMRC has already made revisions to its initial scope to ease the transition. These changes include the exclusion of the smallest businesses from the responsibility to keep digital records and update quarterly. Unincorporated businesses and landlords with an annual turnover or gross incomes below £10,000 will be exempt from the new system.
Also, small businesses with an annual income close to this level, under a threshold yet to be determined, will be given an additional year to comply.
For those whom ‘’online filing is not reasonably practicable for reasons of disability, age, remoteness of location, or any other reason’’ and ‘’the small minority who genuinely cannot use digital tools will not have to do so’’. Despite these exempt groups, HMRC remains focused on ‘’the end of the tax return by 2020’’.
HMRC has also suggested revisions to help make it easier for businesses to manage their accounts, for example, by extending the cash method of accounting to more businesses. HMRC has proposed doubling the entry threshold for accounting on the cash basis, currently tied to the VAT registration threshold. So based on today’s VAT registration threshold of £83,000, businesses with sales up to £166,000 would be able to start using cash-basis accounting. Aside from a few exceptions, such as whether the digital update requirements for charities and community sports clubs should be voluntary, the recent consultations do not cover incorporated businesses.
Following concerns from professional bodies, HMRC is still reflecting on the practical issues and complexities for larger businesses and how the system will work in practice for this group.
A seventh Making Tax Digital consultation, covering the reporting requirements for incorporated businesses, including SMEs and larger businesses, is planned for later this autumn.
Penalties for those who fail to comply with MTD is also under review in the new proposals. HMRC intends to replace the current penalty regime to a ‘penalty points’ system for failure to submit tax information on time. Each failure to meet the digital reporting requirements would attract penalty points. Only once the points reach a set level would a penalty be charged. This approach is intended to ensure first-time offenders, who are unintentionally late in meeting a submission obligation, do not incur a penalty charge, while taking a tougher stance on those it terms to be ‘deliberately non-compliant’. The current proposal is that the total points would reset to zero once ‘a sustained period of compliance’ of 24 months is achieved.
Despite popular belief, Making Tax Digital will not require businesses to file four tax returns a year. Businesses will instead send summary data to HMRC about their business at quarterly intervals, or more regularly if it prefers.
MTD will be introduced in phases: April 2018 for income tax and National Insurance obligations; April 2019 for VAT obligations; and April 2020 for corporation tax obligations. Changes to the tax administration legislation will reflect this gradual introduction.
HMRC estimates around 92 per cent of those who run a small business, including the self-employed and landlords, have access to the internet and use digital tools, such as social media and apps, in a personal capacity, with a smaller percentage using them routinely for their business. So while the programme fits the trend of how those running small businesses use technology daily, HMRC admit there is a transition to work through.
The move from current record keeping requirements to digital reporting will require businesses to use third-party software that links with HMRC’s APIs to securely transfer financial data. HMRC says it does not expect businesses to purchase software outside of their budget, highlighting: “HMRC will ensure MTD compatible software products are available to suit the budgets and needs of all businesses, including some free products.”
Although HMRC will not provide its own free digital tool, businesses that are concerned about the additional costs could receive ‘reasonable financial support’ from the government to help with the transition. Businesses will need to use software appropriate to their business requirements. For example, a business that is VAT registered will need the software to cope with the VAT scheme it uses or a partnership will need software that can record the partners’ details and profit shares.
Technologically advanced accountancy firms, like First Freelance, have been offering customers automatic bank feeds and a ‘real-time’ online overview of their business and personal finances for some time. The use of cutting-edge technology, accessible from any device, anywhere, anytime, is standard for our client base.
Supportive of HMRC’s plans, First Freelance is already well placed to help individual and business taxpayers meet any future online tax reporting requirements. Additionally, we offer easy-to-use and powerful digital tools to help customers capture their business transactions on the go, with the added benefits of advanced image recognition and automatic allocations.
Coupled with our guidance and support, we can ensure individuals and businesses operate their affairs compliantly and tax efficiently, which will help make meeting new reporting requirements simple. The move to digital tax accounts is expected to raise nearly £1 billion in additional tax revenue.
Despite its ambitious timeframe, having been visited by HMRC’s business tax director general, Jim Harra, and head of policy delivery for Making Tax Digital, Oliver Fisher, First Freelance can confirm that HMRC’s top brass remain confident that, with the £1.3 billion budget, the new digital era will be ushered in as planned.
To find out more about Making Tax Digital, or how First Freelance can help you smoothly transition to the new digital era, contact: Mark Beal-Preston on 0207 148 1580
Published on: 17 October 2016 - By: First Freelance