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Making Tax Digital

Update July 13th 2017

Ministers have today confirmed a new timetable for Making Tax Digital. Businesses with a turnover above the VAT threshold will now be required to keep digital records from 2019, a delay of 12 months on previous proposals. See the full link below;

https://www.gov.uk/government/news/next-steps-on-the-finance-bill-and-making-tax-digital

Update May 2017

Following the government’s removal of the Making Tax Digital clauses from the Finance Bill, Darnells Making Tax Digital Team will be monitoring the situation closely over the next few months and updating our clients as to any significant changes.

Making Tax Digital – Update March 2017

Following the Spring budget there have been a couple of announcements regarding the new tax system, MTD:

  1. Quarterly reporting will be postponed for a year (April 2019) for those individuals and businesses whose turnovers are less than the current VAT threshold (£85,000) – so any one with turnover above this limit will still be required to commence quarterly reporting from April 2018
  2. HMRC will accept excel spreadsheets but they must be digitally compatible.
  3. HMRC have released their consultation document for interest and penalties for late submission and payments. The options put forward are focused on the tax payer’s behaviour over a set period of time then punishing each individual offense. The consultation period closes on 11 June 2017.

 

How did Making Tax Digital come about?

Back in March 2015 George Osborne announced the end of the personal tax return as we know it with the introduction of Making Tax Digital (MTD). The goal is for this new system to go live from April 2018. For Companies (Limited and PLC) this will be from 2020.

The aim of this proposal was simple; to simplify an outdated and overly complicated regime with a digitalised, modern, more effective and easier to use system that utilised modern technology. The one yearly return will be replaced by 4 quarterly statements plus a final summary that consolidates the previous quarter’s statements showing the tax position for the whole year.

Who will this affect?

The short answer is everyone; individuals, unincorporated businesses (partnerships and sole traders) who have income above £10,000.

Individuals who have only small amounts of investment income and PAYE income should not have to report their earnings to HMRC as this is already done via the relevant payroll department and bank, similar to the current situation where not everyone is required to complete a self-assessment tax return.  Those businesses and individuals with income less than £10,000 who are already required to declare their earnings (i.e. rental income, untaxed income…) will still be required to complete an annual return, but not the 4 quarterly statements. At the moment our interpretation is that if the business currently requires a separate tax return i.e. in the case of a partnership then both the partnership and the individual will be required to submit the quarterly documents.

Why?

Other than to bring the system into the modern digital age, one of HMRC’s main goal, unsurprisingly, is to make the tax collection system more efficient by individuals and businesses by being able to know in advance what their tax is likely to be.

In connection to this and likely to come in at the same time, HMRC are looking to introduce a Voluntary pay-as-you-go which will be similar to the current PAYE system with business and individuals being able to pay their tax due quarterly instead of 9 months after the end of the year or via 2 payments on account based on a previous year’s information.

HMRC have said these quarterly payments will not become mandatory during this current parliament, but due to the current political climate and the ever increasing need for tax revenue, we would expect this to become compulsory at some point in the near future.

Another hope by HMRC is that with more regular reporting, everyone will comply with their reporting obligations therefore HMRC will receive their information earlier and almost as it happens so in theory it will be more accurate.

How will records be kept and submitted?

Each person and business will have their own account with HMRC to which they will transmit their quarterly and annual accounts/returns. This idea is not too dissimilar to what we currently have in place – all tax returns we prepare (unless HMRC specified) are submitted online, it’s just more of them now! However, you will NOT be able to complete the necessary statements via the tax accounts. External software will need to be used that is compatible with HMRC software.

This will mean records will need to be maintained on apps and software that are compatible with HMRCs systems. Therefore any records kept manually or on Excel will not be accepted and must be changed. HMRC have confirmed Excel will not be compatible with their software.

However, HMRC currently, are not going to supply any free software that people could use – they are expecting everyone to find and use a software that is compatible with HMRC. This could mean greater costs or the risk that a free software does not offer the options required. This is one of the main concern of the professional bodies: that free software will not be up to the same standard, for both usability and security, as the costly alternatives.

In response to these changes, Cloud based accounting systems will start to become one the main ways of reporting and maintaining the accounts to ensure compliance with HMRC MTD.

What does this mean in practice?

From April 2018, quarterly returns will need to be submitted digitally and within a month of the quarter end. This will bring the reporting closer to real-time and PAYE. It is not yet known when the voluntary pay as you go will be payable but we expect it to become due the same date as the submission deadline. The final year summary will be due within 9 months of the year end, which is when we expect the final balance owing to become due.

To give you an idea of what the reporting requirements would be for those who work on either a March year end or a tax year basis, below is a table which shows the statement dates and the submission deadline for this period to give you an idea of what we are dealing with:

Period covered Submission deadline
Q1 – 1 Apr 18 – 30 Jun 18 31 July 2018
Q2 – 1 Jul 18 – 30 Sep 18 31 October 2018
Q3 – 1 Oct 18 – 31 Dec 18 31 January 2019
Q4 – 1 Jan 19 – 31 Mar 19 30 April 2019
Year – 1 Apr 18 – 31 Mar 19 31 December 2019

This will then be repeated each year. Therefore every year you will be reporting on two years’ worth of information – the quarterly statements for the current year and then the annual statement for the year just gone.

If this is brought in from April 2018, the 2018/19 tax year will consist of the quarter statements for the 2018/19 year plus the original self-assessment tax returns for 2017/18 with the filing deadline of 31 January 2019. A very busy 10 months!

For those who submit quarterly VAT returns, these will be combined with the quarterly accounting statements so only one submission will be required. It is unknown how this will work in practice.

HMRC have said that the quarterly statements would be more like updates informing HMRC of income and expenses which have arisen during the last 3 months, pretty much the same information that is declared on the current tax return, just a less formal way of presenting the information. HMRC are promoting one of the benefits of this is that any expenditure that qualifies for Annual Investment Allowance (AIA) can be reported straight away. But there is no guidance on how and when relief will be obtained – possibly a rising loss in one quarter despite overall making a taxable profit for the year. Also how will they permit capital allowances claims – quarterly or annually? HMRC have not yet provided explanations on how tax adjustments will be treated – we assume in the end of year fifth tax return submission which makes adjustments to the previous four quarter documents.

Reporting – on an accruals basis or cash basis?

The majority of businesses use the accruals basis of accounting and account for any creditors and debtors that have arisen but not yet paid by the end of the accounting year. Accounting for this each quarter with just one month to gather all the information, calculate any accruals, prepare the submission, send for approval then finally submit to HMRC is going to be tricky.
One of HMRC suggestions is to increase the cash basis of accounting so ‘larger’ businesses will qualify. The current idea is to double the current threshold to £166,000. For many businesses, their income already exceeds this limit, therefore they will still have to use the accruals basis, not the cash basis so this proposal will not help everyone.

Another point to note is regarding partnerships where their accounts are not a March year end. How will existing, new and leaving partners report the income generated? HMRC have not released their final decisions on this or whether overlap will still exist. This could also apply to sole traders who also do not make up their accounts to 31 March. Will they be forced to change their year ends? Will they submit reports regarding their sole trader business on the accounting year AND then reports on a tax year basis for their personal income and expenses? These finer details HMRC have not yet confirmed.

What are we waiting for?

Consultations between HMRC and a number of different organisations, such as accountants, professional bodies (CIOT, ICAEW etc.) took place last year. These have now ended with the last one being in November. We are now waiting on HMRC’s response to these discussions and for them to release the final details of how this will work and what they expect individuals and businesses to report to them.
One thing is certain, this will happen and everyone needs to be aware of the changes and how it will affect them. We are currently working closely with software providers to ensure that when this goes live, it is business as usual and our service to clients remains at the high standard that we have already set.

Samantha Bilcliff

Making Tax Digital Tax Manager

13 January 2017

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