Making Tax Digital – What you need to know.
The plan to make the UK tax system more effective, efficient and easier is in progress.
Three million of the smallest businesses and landlords will be able to move to the new digital system for keeping tax records at a pace that is right for them.
Millions of businesses are already banking, paying bills, and interacting with each other and their customers online. Making Tax Digital will help businesses to get their tax bills right the first time and reduce the £8 billion tax gap resulting from avoidable errors.
What is Making Tax Digital and how will you benefit?
HMRC’s Making Tax Digital is expected to be the most significant change to impact taxpayers since the introduction of self assessment.
What is Making Tax Digital?
- A project to remove the need to complete an annual tax return
- Involves the transformation of the entire UK tax system from forms based to online.
- Includes income tax, corporation tax and VAT
- Includes a proposed requirement for all businesses and landlords to report quarterly accounting data online
- HMRC are consulting heavily with taxpayers, agents and software developers to identify the risks and challenges of the project, to help them to build appropriate solutions.
What benefits should the project bring?
- A personal tax account which gives taxpayers a single picture of all tax liabilities and entitlements in one place.
- Improved and up to date management information.
- Give businesses and landlords greater clarity on tax liabilities
What will this mean for you?
- A change to the method of reporting financial information to HMRC
- All businesses and landlords will be required to report transactions in a digital format to HMRC on a quarterly basis which will have cost implications.
- HMRC will pre-populate tax accounts with information they already hold – employment income, bank interest and dividends from quoted investments.
When will you be affected?
Under the new timetable outlined by HMRC:
- Only businesses with a turnover above the VAT threshold (£85,000 for 2017/18 tax year) will have to keep digital records for VAT purposes (and only VAT) from April 2019
- Businesses and landlords will not be required to keep digital records, and update HMRC quarterly, for other taxes until at least 2020.
- As VAT already requires quarterly returns, no business will need to provide any more information to HMRC more regularly than they do now.
- Making Tax Digital will be available on a voluntary basis for the smallest businesses with a turnover below the VAT threshold, and for other taxes.
- All businesses and landlords will have at least 2 years to adapt to the changes before being asked to keep their tax records digitally.
What is digital record keeping?
HMRC have indicated that you will be required to retain your transaction summaries in a digital format.
It is still not clear exactly what must be kept or the form it should take but what you will need is software capable of collating the business transactions and transmitting them to HMRC on a quarterly basis. The Government has agreed that the digital record-keeping and quarterly reporting requirement might be handled by the use of spreadsheets but how the data will be transmitted by an MTD compliant app is still to be worked out.
For businesses, income and expenditure quarterly reporting will broadly follow the categories used on the self-assessment tax return eg turnover, cost of goods, wages, repairs, motor expenses etc.
Landlords with rental income above the VAT threshold will need to report quarterly on their rental income, and expenditure on rates, insurance, repairs, loan interest, legal fees, services and other expenses. Three line reporting might be available for landlords below the threshold and they would just submit rental income, rental expenses and net rental profit for each quarter.
Change at a Manageable pace
Mel Stride, financial secretary to the Treasury and paymaster general, said:
“We have listened very carefully to their concerns and are making changes so we can bring the tax system into the digital age in a way that is right for all businesses.”
Mike Cherry, chairman of the Federation of Small Businesses, added:
“This promises to make the rollout far more manageable for all small firms. We look forward to receiving more detail from the Treasury on requirements for those small firms above the threshold that will have to comply from 2019.”
HMRC are fully committed to supporting businesses in the transition to digital record keeping.
HMRC has already begun piloting the Making Tax Digital services and will continue to do so, testing the system extensively with businesses. It will start to pilot MTDfB for VAT by the end of 2017, starting with small-scale, private testing, followed by a wider, live pilot starting in Spring 2018. This will allow for well over a year of testing before any businesses are required to keep records digitally.
A Treasury source said that ‘the main concern is the pace of the change. We recognise that businesses need longer to adapt and so that is why we are saying that businesses will not have to use quarterly reporting until at least 2020. VAT reporting under Making Tax Digital will be mandatory from 2019 but as businesses already report VAT on a quarterly basis this will not be a major change.’
HMRC have stated that software houses will provide free software to small businesses but that might be wishful thinking! One thing is certain, HMRC will not be providing free software to accountants and tax advisers.
Quarterly updates and final declaration
The digital records will automatically generate the transaction summaries and report upon them quarterly. Four in-year updates will be required followed by an end of year finalisation update, (sounds similar to a tax return!). The final update will deal with year-end adjustments eg capital allowances, accruals and debtors. It will also include details of investment income and capital gains not already reported to HMRC on the digital account.
Ten month deadline
The end of year statement will need to be filed generally by the sooner of ten months after the end of the accounting period or 31 January following the tax year in which the accounting date falls. So, if your accounting date is 30 June 2019, the due date will be 30 April 2020. However, you would have a due date of 31 January after the end of the tax year if your accounting date is 5 April.
Partnerships have their own rules and their end of period statement will remain as it is under self-assessment being 31 January following the tax year in which the accounting date falls.
Will you be ready?
The ICAEW has raised concerns about difficulties businesses will have dealing with their MTD obligations. For example, farmers may have poor broadband availability and could also have diversified business interests. In addition, farmers will have stock valuation issues and complex tax rules for averaging of profits.
More generally, many people are just not engaged with the digital world and they will need help from friends, family members or accountants to comply with the obligations.
Presently, the Government recognises there will be cases where going digital will not be an option but the digital exclusion condition has been drawn very tightly and it mirrors the existing regime for VAT. Namely, those with religious beliefs that are incompatible with the use of digital technology and those for whom electronic communication is not practical for reasons of disability, age or remoteness of location.
Personal Tax Account
Everyone now has access to their own personalised digital tax account. You can set up your account at his link www.gov.uk/personal-tax-account
It can be used to :
- Check your income tax estimate and tax code
- Complete a tax return
- Claim a tax refund
- Manage your tax credits
- Check your state pension
- Check or update your marriage allowance
- Check or update your employer taxable benefits
In due course, HMRC will update your personal tax account with information in their possession so that you will not have to do his yourself. Having said that, it would be wise to check the data HMRC enter on your account and you will have an opportunity to correct any errors they make.
These changes are expected to be passed through Finance Bill 2017, which is set to be announced as soon as possible after parliament returns on 5 September 2017. This will legislate for all policies that were included in the pre-election Finance Bill, raising over £16 billion across the next five years to fund our vital public services.
One thing is certain: MTD is on its way and we will do our best to help you get ready as best we can.
All of the Making Tax Digital changes are intended to provide an improved insight into your tax affairs. When used in conjunction with the pro-active advice provided by Hunter Gee Holroyd, a simpler and more real time view of your tax affairs will be available for planning purposes.
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