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Making Tax Digital

The biggest change to the UK tax system for a generation?

July 2018 update - VAT Notice 700/22 "Making Tax Digital for VAT

VAT Notice 700/22 sets out who will have to follow the MTD rules and contains the detailed rules concerning timing and digital record keeping. You can access a copy here:

February 2018 update - Confirmation of the current position

From April 2019 VAT Registered businesses with a taxable turnover above the VAT threshold (currently £85,000) must keep their VAT business records digitally and submit their VAT returns through compatible software. It is now extremely unlikely that this implementation will be delayed and Mel Stride MP, who is the Financial Secretary to the Treasury (and as such has responsibility for VAT) has said "what I'm very keen to signal to everybody out there... is that we are serious about it and it will happen, so there will be no question of any further delay on this, so we all need to make sure that we're ready for it"

Currently no deadlines have been set for business below the VAT threshold or for companies but we are now confident that MTD digital will be applied to them as well in due course. So when Mel Stride says "everybody" it really does mean just that!

We will make sure that our clients have systems in place before implementation and we have decided that QuickBooks OnLine is the most effective route to achieving this..

July 2017 update - At last, some common sense!

The government has finally given into pressure from professional bodies, businesses and MPs and announced that it is to defer implementation of Making Tax Digital (MTD) for a year for larger businesses.

It will also allow small businesses under the VAT threshold to choose when to adopt MTD.

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.

May 2017 update - What next for Making Tax Digital?
Expectations are that whoever forms the next government will reintroduce the legislation required to implement MTD. Will it be very different from the picture painted by the summary below? Probably not, although some of the areas which have caused most concern might be changed. Will the introduction be delayed? Hopefully, but time will tell! For now our advice is to get your accounting and systems in order so that when the legislation hits you are ready.

April 2017 update - The 2017 Finance Bill

On Thursday 27th April the 2017 Finance Act received Royal Assent.  Although it contained only 148 of the original 762 pages, and the MTD proposals had been removed, indications are that if a Conservative government is returned then the plans will be resurrected.  Baroness Neville-Rolfe who led the debate for the government said that there had been no policy change and that the a new Conservative government would legislate at the earliest opportunity to bring back in the excluded clauses.

Finance bill update - 2017 Election - MTD plans put on hold!
Legislation to implement the government’s Making Tax Digital initiative has been put on hold!
 
The government plans, which would have required businesses and self-employed to submit multiple tax returns online had been met with widespread criticism.

Following the surprise announcement of a general election, the government has decided to drop 72 out of the 135 clauses from the Finance Bill 2017- including those that relate to Making Tax Digital. Although the legislation may still be passed in the future, many accountants, including ourselves, have welcomed the opportunity to properly discuss and debate the proposed legislation further before it becomes law. 

However this is a major U turn for the time being and the time and money wasted on this initiative must be quite staggering.

2017 Budget update - Unincorporated businesses and those under the VAT threshold will have an extra year before quarterly reporting applies to them.

Making tax digital - summary of what you need to know:
Making tax digital (MTD) is no longer a government aspiration – it’s going to happen. From April 2018 many businesses will have to submit information quarterly to HMRC. Exactly what this means and how it will be done is still a matter of debate. There have already been lengthy consultations with HMRC and answers to some important questions are emerging (see below).

We all know that change can be difficult, and that big changes can be very difficult!  One way to overcome these difficulties is to plan ahead and to start to make changes early so that when the time arrives you are properly prepared. In practice this means you need to keep your accounting records up to date not wait until the end of the year.

MTD means that current ways of working are going to change.  At the moment, for example, we write to clients just after the end of the tax year and ask them for the information that we need to help them complete their tax returns. We process the information and send taxation computations, tax returns and accounts to our clients for approval. The emphasis is on our clients to send us the information that we need and on us to prepare the returns, obtain their approval and then submit the information to HMRC.  Under the new arrangements the government will collect much of the information it requires directly under quarterly reporting (see below) and from other third parties including government departments, banks, pension providers, companies etc. and the tax return will no longer be required.  Instead, we as agents will have to check the information HMRC holds, change or correct it where necessary and provide details of anything that’s missing.

A major part of the changes centre around taxpayers who have property or trading income.  Currently these sources of income are reported on the tax return.  Under the new arrangements there will be digital quarterly reporting and this is a big and controversial change that needs careful planning.

The change is huge. It involves massive changes to HMRC’s computer systems.  It also means that accounting and tax software companies will have to change their products so that quarterly returns can be made and so that they can extract information from the new digital tax accounts that HMRC will use to collate taxpayers information.  The government has a history of disasters when it comes to large computer projects and it remains to be seen whether they can pull these proposed changes off within the proposed timescales.

We will continue to work with clients, but the work flow will change. We will work with them to ensure that quarterly returns are made on time and that the HMRC information and calculations are correct.

HMRC Consultation
Last year HMRC published 6 consultation documents.  Responses to the consultations have been published and some of the major concerns raised have now been clarified. A summary of the points of interest published by HMRC in January 2017 appears below.

Originally HMRC said that the use of spreadsheets would not meet its needs. They have now said that spreadsheets can be used but that they will have to be linked to other software that will allow the required information to be submitted quarterly.

HMRC are committed to making available free software for use by ‘simpler businesses’.

HMRC will maintain a register of software which is compatible with MTD but they will not recommend any particular software.

Digital record keeping is a requirement of MTD.  This means that the details of transactions must be kept digitally – it does not mean that copies of individual invoices, vouchers etc have to be kept digitally.  However we believe that keeping digital copies of business records and backing them up to the cloud provides many advantages over keeping paper copies.

HMRC’s original proposals were that landlords would have to make a quarterly return for each property.  They have listened to the concerns expressed and now say that a single return which covers all properties will be sufficient as long as the software can store the addresses of each individual property.

Accounting adjustments, for example stock valuations, accruals and prepayments, will be made at the year end.  This means that for many taxpayers the quarterly reporting will essentially be a record of cash in and cash out.

Partnerships may report the partners ‘profits’ quarterly and this would update the partners individual tax accounts.  But they do not have to do this and can instead make a single report of partners profits at the year end.

It had been proposed that when contractors made their quarterly returns they would provide details of payments to subcontractors and that this information would be used to automatically update the subcontractors’ individual tax accounts.  HMRC have now said that this will not be implemented at the start of quarterly reporting and that each subcontractor will now be responsible for making quarterly returns which include all income (ie which includes the payments received from contractors).

The quarterly returns will be a summary of the transactions undertaken in the quarter.  The transactions themselves will not be reported.  The summary will provide information under the same headings as the currently used on Self-Assessment taxation returns.  HMRC had previously said that the ‘three line’ accounts currently used by some businesses would not be allowed but they now say that this will be possible.

The quarterly reporting dates will be set having regard to your accounts date.  Although it will not be possible to change the reporting month it will be possible to change the day within the month of reporting.  This may be of interest to retail businesses s that the quarter end day is always a Sunday for example.

Quarterly reports will have to be made within one month of the quarter date.  Errors can be corrected in the quarter following discovery of the error.

Under the current proposals, exemption from quarterly reporting will apply to taxpayers with trading or property income of less than £10,000 per annum.

Simplifying tax for unincorporated businesses
Currently the ‘cash basis’ is aligned to the VAT threshold.  It is proposed to increase this to £150,000. For property income the cash basis will be the default position but there will be an ability to opt out of it.

During the 1st 12 months of operation HMRC will not impose penalties for failing to make quarterly returns on time.  We can however expect penalties to be applied after the first year of operation and we would suggest that any business that fails to make quarterly returns would run a higher risk of investigation by HMRC.

Making better use of information
A cornerstone of MTD is that HMRC will receive information from ‘third parties’.  Every time they do so they will update the tax payers individual tax account and send the tax payer a notification that they have done so. Exactly how this will happen is not yet clear but it will have to incorporate some sort of data protection otherwise there is a risk that highly confidential information may go astray.

The information included on the tax account will be sufficiently detailed to allow it to be checked.

The treatment of joint income represents a problem because each tax payer may not have an equal right to it.  Clarification on how such income is to be treated in the tax accounts is not yet available.

Importantly, HMRC will rely on the third party information and it will be up to the tax payer or their agent to correct it.  The level of a source of income will have to be challenged with the party that provided the information not with HMRC.  However this arrangement falls down where the source of the income is not understood by the taxpayer because the third party is unlikely to discuss details and in these circumstances the income will have to be queried with HMRC.

 

"One way to overcome these difficulties is to plan ahead and to start to make changes early"