Making tax digital

HMRCs consultation period on digital record keeping drew to a close in November 2016. This was the last of six consultations as part of the Government’s ‘Making Tax Digital’ campaign. The results of the consultation will be released during January 2017*, and we anticipate this will focus on individuals and unincorporated businesses in addition to general concepts.

Whilst HMRCs proposals are far from clear cut, we have summarised exactly what we do know below to keep our clients updated. The information provided is based on HMRCs consultation documents and the final details may change once the results of the consultation are announced later this month (January 2017)*.

*We are awaiting the publication of Making Tax Digital legislation in the Finance Act 2017 which is anticipated later this year. We will provide an update following the publication of the legislation.

So what is “Making Tax Digital”?

In the 2015 Budget, the government committed to transforming the UK’s tax system through the use of digital technology, with the aim of becoming one of the most digitally advanced tax authorities in the world. They plan to do this in two ways:

Software

Traditional accounting practices saw records being kept on paper and filed annually with HMRC, more recently complimented by software i.e. SAGE, and Excel spreadsheets. In recent times, cloud based software and accountancy ‘apps’ have made in roads into the way in which accounts and tax returns are prepared. HMRC intend to take this a step further by requiring almost all businesses to submit their tax information quarterly, as opposed to annually, via accounting software. This will see the end of the annual gathering of invoices, and instead, accountants and their clients will need to be regularly collating and submitting their paperwork through their preferred accounting software.

Quarterly Reporting

Quarterly reporting will be a standard requirement as opposed to once a year. Businesses can also submit even more frequently if they prefer (i.e. on a monthly basis) - this is known as Voluntary Pay As You Go.

Who does it affect?

Self Assessment Individuals

Individuals will no longer be required to produce a self assessment tax return from 6 April 2018. Instead, HMRC intend to provide all individuals with a digital tax account (DTA) which will collect information from a variety of sources, including payroll submissions, bank accounts, pension providers, and quarterly submissions from businesses (see below) to automatically populate that individual’s DTA.

Businesses

Unincorporated businesses and landlords with turnover in excess of £10,000 will be required to submit a summary of their accounting data quarterly to HMRC from 6 April 2018 using suitable accounting software. Thereafter, all businesses (not just unincorporated) will have to submit a summary of their accounting data quarterly from 6 April 2020 using suitable accounting software. An annual tax return will be required for all businesses falling into quarterly submissions 9 months after their accounting period, which will reduce the time available for companies from the current deadline of 12 months after their accounting period end.

Exemptions

Unincorporated businesses and landlords with a turnover of less than £10,000 will be exempt from the plans. However, data will still need to be submitted manually for these businesses to populate the missing fields in an individual’s DTA.

When will it happen?

Now that the consultation period has ended, we anticipate details of HMRCs proposals will be announced shortly, but the original timeframe proposal is as follows:

10. Making Tax Digital Flow ChartSo how will it affect me?

For the taxpayer, it means:

  • The end of the tax return.
  • The ability to pay tax based on your business activity during the year.
  • The ability to upload or update your tax account in real time.
  • All of your tax information in one place.
  • The option to spread tax payments throughout the year to assist cash flow.
  • Ability to estimate tax due during the year.
  • Prompts and nudges to advise of potential tax savings and key deadlines.

For small businesses it means:

  • All of the tax information and interactions are in one place.
  • No separate notifications of change of address or other details.
  • The option to spread tax payments throughout the year to assist cash flow.
  • Ability to estimate tax due during the year.
  • Closer support from advisor through use of real time accounting data.
  • Prompts and nudges to advise of potential tax savings and key deadlines.

How will HMRC benefit?

  • The end of the tax return.
  • Smoother processing of data by removing peaks.
  • Better interaction with taxpayers.
  • Ability to support taxpayers to “get it right first time”.
  • Merging many back end systems to make a seamless front end.
  • “Customer Golden Record” - all of the information about a business in one place.
  • The ability to target information and support much more directly.

Will there be penalties for non-compliance?

HMRC will adopt a flexible approach for the first 12 months after roll out of the changes to allow for companies to become familiar with the revised processes, however a stronger sanction is expected for deliberate non-compliance.

What are we doing about it?

The transition to accounting software will represent a significant change for some clients. Mitchell Charlesworth are working together with leading software providers to ensure a smooth transition to digital tax reporting, improve the efficiency of bookkeeping and accounts preparation, and provide clients with advice and support based on the real time accounting data for their business. Our close partnerships being formed with the key cloud accounting providers will ensure that we have the ideal solution for each client depending on their circumstances. Rest assured that we will notify clients promptly on developments and updates.

Please speak to Adam McGowan or Lorraine Whittaker for further advice.

Registered to carry on audit work in the UK and Ireland by the Institute of Chartered Accountants in England and Wales and authorised and regulated by the Financial Conduct Authority for investment business