It is coming, whether you are ready or not. There is plenty in the press about Making Tax Digital (MTD) although some of the finer detail is yet to be established. In total, 1.6 million companies, 2.4 million self-employed individuals and 900,000 landlords will be affected (subject to some exemptions).
MTD was first announced during the March 2015 Budget with the ambition to make it easier for individuals and businesses to keep on top of their affairs and get their tax right.
MTD will mean that the majority of businesses and landlords will have to use software and mobile applications in order to meet tax obligations. The main underlying objectives are:
- tax will be “simplified” and information will be better used. It will be easier for HMRC to check declarations against other information in its possession such as employers, banks, pension providers etc.
- tax will be in real time. HMRC aim to collect and process information for customers (and calculate tax due!) in real time. HMRC tell us that their customers will appreciate the fact they will not have to wait until the end of their year/tax year to know how much tax to pay.
- there will be a single digital account for each taxpayer where a single picture of liabilities and entitlements will be in one place. By 2020, the vision is that all customers will be able to see a comprehensive financial picture of their account.
- from 2018 onwards the current system of self-assessment will be replaced by digital record keeping. This will mean that individuals and businesses (and agents) will provide HMRC with quarterly accounting information digitally and with compatible software, and HMRC will use this to calculate interim tax calculations. An annual statement will also be required.
So is the Government on course to meet its target to put in place reliable systems, produce compatible applications and consult effectively with the industry by 2018? Possibly not. In the 2017 Budget, the Government announced that it would provide 3.1 million small businesses with an extra year (until 2019) before they are required to keep digital records and send HMRC quarterly updates.
But MTD is now a looming reality and businesses, self-assessment taxpayers and landlords should be engaging now with advisors to ensure that digitalization is a smooth transition rather than a bumpy ride. Many of our farmer clients will already be providing monthly or quarterly records to prepare monthly management accounts or VAT reporting and this is a good first step in ensuring that the right information is in place when digitalization “goes live”. But for those businesses or individuals that do not want to engage with this new format, there will need to be a change in their normal procedures. Accountants will be well placed to offer this quarterly reporting service which will be obligatory to all, but a few. Cloud based accounting systems are becoming prevalent and will be a pre-requisite to meet the MTD demands in the future. Lovewell Blake is already successfully collaborating with clients in this area.So where are we now?
Businesses that have an annual turnover below the VAT registration threshold will not be required to start keeping digital records and providing quarterly updates until April 2019, although they can choose to do so voluntarily.
Changes are being implemented on a staggered basis, starting in 2018 with income tax for businesses, self-employed tax payers and landlords with annual turnover above the VAT threshold. In 2019-20 digitalization will also extend the income tax elements of MTD to all businesses, self-employed people and landlords with annual turnover above £10,000.
The Government will remove the smallest businesses, self-employed people and landlords from the scope of the changes by exempting all those with annual turnover of less than £10k from digital record keeping and quarterly updates, if they chose to.
But there are still many invariables and the concern may be that Government systems may prove inadequate (with the expected deluge of information) and taxpayers are not given the level of support and guidance during this period of change. MTD was inevitable. Every area of our lives is touched by the ever increasing need to be digital and making HMRC more effective in collecting tax was always on the cards. The question will be whether HMRC will be ready. My advice would be to contact advisors sooner rather than later if you want to avoid that bumpy ride.This article was written prior to the announcement of a General Election on 8 June. The MTD proposals have now not been included in the 2017 Finance Bill but none of the political parties have said that they are going to be dropped. Therefore they may well be included in a further Finance Bill following the General Election.