Making Tax Digital: 12 questions answered
PUBLISHED: 10:43 19 April 2017 | UPDATED: 13:56 19 April 2017
In August 2016, the government issued six consultation papers which explained in more detail how Making Tax Digital will work, and despite doubts voiced by businesses and professionals, plans are still forging ahead to create a digital tax future in the UK. Nuala Beardsall writing for Paish Tooth, accountants and tax advisors based in Cheltenham, answer 12 important questions on the topic
1. What exactly is Making Tax Digital and why is it happening?
Put simply, Making Tax Digital (MTD) is a government initiative to digitise the UK’s tax system, with the aim of making the whole process of administrating tax much simpler and more efficient. All of your tax information and interactions will be in one place, you’ll be able to pay tax based on your business activity during the year and you can upload or update your tax account in real time.
HMRC believes that embarking on this huge programme of digital transformation will improve the customer experience and produce cost savings for both businesses and HMRC. Let’s not forget that these ambitious plans are also aimed at reducing the UK’s tax gap, which currently stands at £34bn.
2. How will it affect me?
If you own a business, you’re self-employed or you’re a landlord and you pay income tax, national insurance, VAT or corporation tax then it’s very likely you’ll be affected. It means you’ll be required to keep track of your tax affairs digitally using MTD compatible software, and to update HMRC at least quarterly via your personalised digital tax account. HMRC’s long term aim is to abolish the annual tax return entirely.
3. What will I have to do?
You’ll be prompted to send summary updates directly to HMRC – quarterly updates will need to be submitted within a month of quarter end, and an end of year activity report will be due within nine months of the end of the accounting year.
You’ll be required to choose the right software, apps and digital tools to maintain your business records and to provide the required information updates to HMRC. Businesses will be able to carry on using spreadsheets for record keeping, however, they must ensure that their spreadsheets can handle the requirements to submit MTD updates. This means that they must be compatible with MTD software, and include digital record-keeping functionality as well as provision for quarterly information updates and end of year activity. It may well prove simpler in the long run to adopt a cheap or free cloud based software solution from the word go, rather than trying to adapt existing spreadsheets.
4. When is all this happening?
If you’re a sole trader or a landlord with a gross turnover over £85,000 then you’ll be required to move to MTD from April 2018. If your turnover is under £85,000 (but over £10,000) or if you’re VAT-registered then you’ll make the transition from April 2019, and if you’re a company from April 2020.
5. What are HMRC’s proposed cost benefits to businesses?
HMRC believes that the majority of businesses already use digital tools to file VAT returns, company tax returns and self-assessment returns. It envisages that MTD will help businesses maintain better control of their cash flow through a more regular reporting of accounts information, and therefore they will be in a stronger position to obtain financing.
6. What about the cost implications for my business?
Inevitably costs will be incurred through moving to the new regime. HMRC is not intending to develop any software itself and will not provide any free software for businesses, relying instead on accounting software providers to offer free or low cost software products. There will also be costs incurred through time spent adhering to MTD – time familiarising yourself with the new processes, gathering data, providing updates etc.
7. Will any financial support be on offer?
As part of the current consultation process, HMRC is considering what financial support should be offered to businesses to aid their transition to MTD. Help may be available for investment in new IT, software and training, but HMRC have yet to decide who should be eligible for this support and what format it should take.
8. What practical support will HMRC offer?
It’s very likely mistakes will be made as businesses get used to filing information in an unfamiliar format. HMRC’s answer to this is to offer webchat and instant messaging support, as well as encouraging you to ask for help from trusted family members and friends who may be more tech savvy. There may be further assistance available via libraries and charities, and HMRC are consulting on what additional support will be required.
9. Will anything get any easier?
Under MTD, businesses who are eligible to use ‘three line accounts’ (those under the VAT threshold) will be able to submit their quarterly updates with only three lines of data (income, expenses and profit).
There has been significant support for the idea of using MTD as an opportunity to simplify the tax system. As a result the government has decided to increase the number of unincorporated businesses who are eligible to pay tax using the cash based accounting method (rather than the accruals approach), and the entry threshold will rise from the current VAT limit of £85,000 to £150,000.
This approach is also being extended to unincorporated landlords, who have a maximum rental income threshold of £150,000 per property business. These landlords will now be able to use cash-basis accounting, which means they will only pay tax on rent received rather than on rent due.
10. Will anyone be exempt from MTD?
HMRC has announced that MTD will not apply to unincorporated businesses or landlords with less than £10,000 gross annual income. HMRC are also defining exemptions for those who are genuinely digitally excluded, for reasons such as disability, age or remoteness of location.
11. What are the proposed penalties for non-compliance?
HMRC is still determining what penalty systems will apply for those who don’t adhere to MTD, but the suggestion is that there will be a 12 month ‘teething stage’, during which time no penalties will be incurred. After that time a new points based penalty regime may be introduced, along the lines of driving licence penalty points which can be cleared after 24 months of improved digital tax filing.
12. What’s next?
HMRC is conducting a number of pilot schemes prior to rolling out the new scheme from next April. Software is currently being developed and trialled ahead of the launch date and there will hopefully be further clarifications as the system is finalised. One thing we know for sure is that the UK’s tax system is going to be digital, whether we like it or not! Rest assured that the team at Paish Tooth will be happy to offer all the advice and technical support you need, whether it be in navigating software, in reconciling bank feeds or in generally ensuring you are MTD compliant. Please get in touch if you’d like to discuss MTD in more detail.
Whether you run a small company or a larger enterprise, Paish Tooth are committed to offering clients a tailor-made service which generates positive and tangible results. They don’t just deliver accountancy and tax advice, but strive to become an essential partner who supports you and your business every day. Visit their website or call 01242 584050 to find out more.