Self-Assessment was original introduced in the early days of 1799. Taken back by Revenue in 1806 in favour of staff carrying out the calculations, but in 1996 was reintroduced back as self-assessment – meaning you self-assess and report your own income and expenses.
Today more than 12 million people and small businesses are forced to complete self-assessment tax return every year – it is complex, time consuming and costly.
Most communications with HMRC are carried out electronically:-
• Real Time Information
• Corporation Tax
• Filing Accounts
In the 2015 Budget it was announced that the Annual Tax Return will be abolished altogether….
Making Tax Digital (MTD)
Affecting VAT / Property Income / Income Tax & Corporation Tax
Key decisions include:
• Businesses will be able to continue to use spreadsheets for record keeping, but they must ensure that their spreadsheet meets the necessary requirements of Making Tax Digital for Business – this is likely to involve combining the spreadsheet with software
• Businesses eligible to use ‘three line accounts’ will be able to submit quarterly update with only three lines of data (income, expenses and profit)
Why Making Tax Digital Has Come Into Force:-
• To plug the Tax Gap and MTD is estimated to reduce “Failure to take reasonable care” and “Errors By around 10% per annum!
• Digital is the way forward – “Customer” demand
• Resource constraints within HMRC – Particularly the human side
• Improved/more timely business and tax information – At the touch of a button
• More transparency: Having an online tax account business owners will be able to see what information HMRC holds on them. As well as being able to check their details are correct and up-to-date at any time, business owners will also be able to access more-tailored services.
• Real time data: Business owners will no longer have to wait until the end of the year to find out how much tax they have to pay. With a digitalised tax system, HMRC will collect and process tax information in real time to help prevent errors and stop ‘tax due’ or ‘repayments owed’ building up.
• Online banking: Much like the online personal bank account, business owners will be able to view their liabilities and entitlements, as a single financial account.
• More flexibility: Being able to contact HMRC on its website via webchat and secure messaging, as well being able to receive and send data via whatever payment software they use, business owners can interact with HMRC at a time convenient to them.
• Paying tax as you go along!
• HMRC state “respondents were generally supportive of the opportunity to make voluntary payments throughout the year.
• HMRC also agrees that early repayments is better left until Making Tax Digital for Business is fully embedded.”
• HMRC have stated it will not be mandatory to pay tax quarterly – but we strongly believe this is the way it will go.
A little Benefit of MTD?!
What is a benefit however is that this will force business owners to keep their bookwork up to date rather than a panic 2 days before the annual deadline – so this is good thing
Who & When?
• April 18 Live Testing Begins
• April 19 businesses forced (who are above VAT registration threshold of) to keep all records necessary for VAT purposes on line, and to provide their VAT return information to HMRC through compatible software.
• Income Tax & Corporation Tax will Start April 2020 at the earliest
If a business owner is exempt from using any online services, due to disability or because they live in a rural area with poor broadband, they do not have to meet the obligations of Making Tax Digital and can continue to submit information manually.
However, if a business owner with a disability already uses online services via assistive technology, then adhering to Making tax Digital should not impose any additional costs on them.
The onus is on the business to justify why they deserve an exception, and HMRC can challenge their decision, as a result there are very few businesses that are exempt from the current online filing requirements for VAT.It is likely there will be some limited exemptions available, for example, those with annual turnover below a set amount (previously £10,000 was suggested) as well as those who are unable to engage digitally.
Digital Records & Software
It is proposed that the minimum offering from the software would allow business to:
˗ Keep digital records
˗ Generate and send quarterly updates to HMRC
˗ Complete end of year activity to ensure compliance
˗ Include a basic level of built-in-prompts and nudges and basic help functions
˗ Enable information to be sent from HMRC to businesses about their tax liability.
We understand there will be no free software provided by HMRC for agents. This means that in the future, all agents will need to purchase commercial software.
So, if you keep your records in a cashbook or spreadsheet or non-MTD compliant software, you can still use them but you will need to combine them with software that is compliant, as the ability to login to HMRC’s website and key-in the VAT return figures will be removed for businesses with turnover greater than the threshold.
Commercial software must be able to:-
˗ Keep records in digital form
˗ Preserve Digital Records in a digital form
˗ Create a vat return from the digital records
˗ Provide HMRC with VAT data on a voluntary basis
˗ Receive information from HMRC via API l(application programmes interfaces) platform – this will allow HMRC to send nudges to the business/agent
Please note that HMRC has confirmed that the requirement to keep digital records does not mean that businesses will have to make and store invoices and receipts digitally. Businesses can continue to keep documents in paper form if they prefer, although transactions will need to be stored digitally.
So for VAT registered businesses from April 19
HMRC has stated that the following records will need to be kept digitally:-
1. Your Business Name
2. The Address of your principle place of business
3. Your VAT Registered Number
4. A record of any VAT accounting schemes that you use.
For each supply you make you must record:
1. The time of supply
2. The value of the supply
3. The rate of vat charged
If you make multiple supplies at the same time, these do not need to be recorded separately. You can record the total value of supplies on each invoice. You must also have a record of outputs value for the period split between standard rate, reduced rate, zero rate, exempt and outside the scope.
For each supply you receive you must record:
1. The time of supply
2. The value of the supply including any VAT that is not claimable by you
3. The amount for input tax you will claim.
Mandated from April 2020
The first step for an unincorporated business Sole Trader / Partnerships will be to consider how they will comply with the new requirement to keep electronic accounting records using commercial software.
Three line accounts:- Under the current system, businesses with annual income below the VAT threshold are eligible to use three line accounts, meaning only income, expenses and profit need be reported. Under MTD these small businesses will be able to submit a quarterly update with only three lines of data in the same way.
Businesses will be able to choose their periods of account and their update periods. The basic requirement will be for four quarterly updates a year. Draft legislation does not allow HMRC to require returns more often, but a business can submit extra updates mid-cycle if it wants to submit an extra one.
The time window for submission will be 10 days before the quarter end to one month after.
Someone with multiple businesses will need to file one of each business.
The deadline for finalizing taxable profit for the period will be 31st January following the year of assessment (the existing self-assessment deadline).
The finalisation could be done at the same time as the final regular update of the year, but for businesses making year end adjustments or claims to reliefs it is more likely to be done later.
MTD for corporation tax will not be mandated until April 2020 at the earliest, we are expecting a formal consultation any day now!
Landlords receiving income from property will also be required to maintain electronic accounting records and update HMRC quarterly.
Individuals with property income will be required to comply with MTD requirements. For jointly owned property, each individual must make a digital record for their share of the income and expenditure.
We understand that further to consultation HMRC has decided that a digital record will be required for a property business as a whole rather than property by property. We are awaiting further information about different types of property businesses and how they will work.
So is this really the end of the tax return?
So your new tax account @ HMRC will receive information directly from eg banks for interest / employers for PAYE etc.
What if this Pre-Populated data is wrong?
Non pre-populated data (such as Sole Trader accounts) – how will this work?
Will some form of declaration be needed from everyone?
How will HMRC’s systems cope?
So another consideration is things like power cuts. The bright new digital world will be heavily reliant on power, uninterrupted power, supplies. The UK of today wilts at bit a of snow and a high wind.
Still Many Questions….
But however, the data is placed into your tax account, so it may stop the entries, but will it stop the need to understand the rules and regulations around tax, to know that data is correct and that you have claimed all the allowances available.
Checking will be required!
I leave you with this thought…. So, although Tax Returns have been abolished, if you have self-employment and property rental income – with 4 quarterly reports for each business, plus the property, plus the final overall submission – you could end up submitting 10 times per year to HMRC.
For assistance on any tax related matters do not hesitate to contact Victoria Sharp 01473 558866 to book a no obligation consultation meeting.
Sources:- HMRC / ICAEW
Disclaimer: These notes have been produced for the guidance of delegates at the event for which they were prepared and not a substitute for detailed professional advice. No responsibility can be accepted for the consequence of these notes or the talk for which they were prepared. The Avanti Group (UK) Ltd