Following the initial announcement in December 2015, this week HMRC has finally launched a consultation process on the Making Tax Digital (MTD) initiative.
The MTD Roadmap, sets out the government’s plans to deliver a fully digital tax service by 2020. It is widely recognised that the reforms are ambitious and radical and will impact significantly on accountants and their clients. It is important that HMRC consults widely with interested parties to help shape these changes.
The six consultations set out detailed plans on how HMRC propose to make tax digital and to simplify the tax system, covering:
- How digital record keeping and regular updates will operate;
- Options to simplify tax for unincorporated businesses, including how the self-employed map accounting periods onto the tax year, extending cash basis accounting and reducing reporting requirements for unincorporated businesses;
- Extending cash basis accounting to unincorporated property businesses, making life simpler for landlords;
- How the voluntary pay as you go arrangements announced at this year’s Budget will work;
- Changes to tax administration to effectively underpin compliance with MTD and ensure we have a fair and proportionate penalties regime; and
- How HMRC will make better use of the information we currently receive from third parties to provide a more transparent service for customers.
Each consultation focuses on specific elements of the MTD reforms.
The consultation period will run from 9.30am Monday 15 August to midnight Monday 7 November 2016.
So What is Making Tax Digital?
Essentially the MTD initiative falls into four main areas:
1 The Digital Tax Account
Every taxpayer and business in the UK has been provided with a Digital Tax Account. In the case of individual taxpayers, they have a Personal Tax Account and every business, whether sole trader, partnership or limited company, has a Business Tax Account to handle PAYE, VAT, CT, duties and so on.
It is generally considered that this is a good thing in principle ensuring that taxpayers have information at their fingertips.
2 Populating the Digital Tax Account with data
The Digital Tax Accounts will be capable of having data fed to them by various software products. Currently, payroll software, as a result of using RTI, feeds employment data into a Personal Tax Account and the result is that the account can display a payroll history.
In time, HMRC want other sources of information to feed the account to include bank interest, dividends, rental income and self employed income. This would give a taxpayer a broad overview of their income streams in real-time.
3 Quarterly Updates
From April 2018, HMRC want either some or potentially all sole traders and landlords (or those with an employment but also a self employment or property income over £10,000 a year) to keep records in an as yet unspecified digital format and submit headline information to them, online, on a quarterly basis.
These updates are called Quarterly Updates and the administrative overhead has been forced on small businesses, another example of savings for HMRC being funded by small businesses.
HMRC advise that spreadsheets will no longer be an acceptable format to be keeping records.
4 Prediction of liabilities
HMRC would use all of this information to predict a potential tax liability. This has obvious pitfalls, not least that the raw-data from accounting systems will not have been adjusted to take account of legitimate expense claims, capital allowances or even personal tax allowances.
HMRC have issued various publication on MTD, including the initial guidance here. And the consultation documents can be found here.
Making Tax Digital is a revolution in the relationship between HMRC and taxpayers and will give HMRC unparalleled access to business’ trading records. Whilst HMRC seem to think that all of this can be achieved by use of a ‘simple’ smart phone App, the reality is likely to see further investment in technology forced on taxpayers who could unwittingly materially misstate their income and tax liabilities unless professional assistance is obtained.
At Burgis & Bullock we are key partners with Xero, online cloud accounting system, and have invested significantly in technology over the past 10-15 years to put our clients are at the forefront of digital technology and we are well placed to advise on what systems and controls need to be in place before the new regulations come in to force.
For more information on MTD and how we can help you prepare, contact us on 0845 177 5500 get in touch with your usual Burgis & Bullock contact, or use our on-line form.