Making Tax Digital (MTD)
For those of you who haven’t seen the press or read our newsletters, Making Tax Digital (MTD) is the most fundamental change to the administration of the UK tax system for a generation, revolutionising the way in which businesses, landlords, individuals and tax agents interact with HMRC.
- Under MTD HMRC aims to join up its internal systems and so create one account for each taxpayer, for all their different taxes within HMRC.
- Via their ‘digital account’ taxpayers will be able to view all their payments, and offset over-payments in one tax against underpayments in others.
- MTD imposes new quarterly filing and potentially payment obligations for businesses and landlords.
- The first phase of MTD affects small unincorporated businesses and landlords.
- The second phase is for VAT
- The third phase will affect companies, although not until 2020.
- A new late filing and payment penalty system will eventually apply to quarterly returns and annual declarations.
Accounts and tax returns? Although HMRC claims that the annual tax return will go, businesses will still need to prepare year end accounts in order to reconcile their quarterly payments and claim various reliefs and make accounting adjustments.
They will be required to file a year end declaration, instead of a Self Assessment (SA) return/ Corporation Tax (CT) return.
The key difference between the year end declaration and a tax return, other than in name, appears to be that HMRC will pre-populate some of the return figures, e.g. bank interest, income from employment, pensions, etc.
For the self employed, it is assumed that HMRC might attempt to pre-populate the year-end declaration with data submitted in the quarterly return figures. As it is already the case with VAT, a businesses will still need to reconcile their quarterly returns to their year-end accounts and so all must reconcile to the end of year declaration.
All taxpayers will need to check that pre-populated data is correct. Businesses that do not use smartphones, software or computers may be obliged to do so.
HMRC will be providing free software. MTD is likely to be expensive for many micro and small businesses. Some 2 million businesses are not represented by agents and they will have to learn the new systems.
Exemptions: To Be Announced, it is already indicated that some 1.3 nano businesses (turnover below £10k) will be exempt from the new regime. They may be brought into the regime later.
HMRC expects that apps will ‘prompt’ taxpayers when they purchase goods and services so that taxpayers will learn the tax deduction rules on a day to day basis. HMRC expects taxpayers to obtain their guidance online and not via the telephone: it will be developing online resources to reduce human interaction by telephone.
MTD Update – Hot News From Avanti
The government has caved into pressure over Making Tax Digital and has delayed rollout by ‘at least’ two years until 2020 with the deferral confirmed by the Treasury, although quarterly VAT reporting using the system will be mandatory from 2019
The original plan from the government and HMRC would have forced the smallest businesses and sole traders to start quarterly reporting from April 2017, but those below the VAT threshold (currently £85,000) will now be exempt from requirements to quarterly report until the government can reassess the plans.
Vociferous opposition to the rollout timetable from MPs, business and the influential Treasury Committee has resulted in the climbdown.
There will also be a one-year delay for the wider rollout, with an April 2019 start date for businesses with a turnover above the VAT threshold (currently £85,000) to start keeping digital records but only for VAT purposes.
Full-blown quarterly reporting will not start before ‘at least 2020’ according to the ministerial statement.
Changes at the Treasury after the election seem to have resulted in a more sensible approach to the whole Making Tax Digital debacle.
The new minister in charge of Making Tax Digital, Mel Stride, financial secretary to the Treasury said: ‘Businesses agree that digitising the tax system is the right direction of travel. However, many have been worried about the scope and pace of reforms.
‘We have listened very carefully to their concerns and are making changes so that we can bring the tax system into the digital age in a way that is right for all businesses.’
It is likely that at least until 2020 Making Tax Digital will not be mandatory, and nearer the time (2020) the Treasury plans to reassess the situation and review mandatory requirements.
This will leave HMRC with a hole to fill as it had expected Making Tax Digital to generate an additional £500m in tax revenues a year, although many tax experts doubted whether this could be achieved, unless there was widespread abuse of the current system which the new digital reporting closed down.
The deferral will give more time for testing the system and HMRC will start the pilot for Making Tax Digital for VAT by the end of this year – this will give the tax profession time to test run a year’s worth of reporting before the VAT system goes live.
A Treasury source said that ‘the main concern is the pace of the change. We recognise that businesses need longer to adapt and so that is why we are saying that companies will not have to use quarterly reporting until at least 2020. VAT reporting under Making Tax Digital will be mandatory from 2019 but as companies already report VAT on a quarterly basis this will not be a major change.’
While the Treasury is totally behind the plans for digital tax reporting it is in listening mode and so has decided to back off the rather rapid timetable for introduction originally set out by HMRC and government officials.
This will also give HMRC more time to pilot quarterly reporting as there is only a limited pilot at the moment and some testing by software developers with their clients.
Software companies have welcomed the delay but warn that the government must not be complacent; the general lack of communications about the rollout of Making Tax Digital raised concerns with recent surveys of software clients showing low levels of awareness of the plans for Making Tax Digital.
In terms of quarterly reporting for incorporated businesses and large partnerships, ‘larger businesses will have to use Making Tax Digital for VAT only, regardless of the type of business, but not before at least 2020. Larger businesses will not have use Making Tax Digital for corporation tax reporting before at least 2020, although it is still not wholly clear whether they will ever have to enter the system due to the complexity of their tax compliance requirements.
Making Tax Digital will be available on a voluntary basis for the smallest businesses, and for other taxes. Businesses and landlords with a turnover below the VAT threshold will be able to opt to use the new digital reporting system but it will not be mandatory until ‘at least’ 2020.
The Treasury document states that under the new timetable:
- only businesses with a turnover above the VAT threshold (currently £85,000) will have to keep digital records and only for VAT purposes;
- they will only need to do so from 2019; and businesses will not be asked to keep digital records, or to update HMRC quarterly, for other taxes until at least 2020.
- As VAT already requires quarterly returns, no business will need to provide information to HMRC more regularly during this initial phase than they do now.
All businesses and landlords will have at least two years to adapt to the changes before being asked to keep digital records for other taxes.
HMRC will start to pilot Making Tax Digital for VAT by the end of this year, starting with small-scale, private testing, followed by a wider, live pilot starting in spring 2018. This will allow for over a year of testing before any businesses are mandated to use the system.
The current pilots for non-VAT Making Tax Digital and quarterly reporting have been criticised as being too slow and lacking depth so the decision to delay the programme for at three years will be a major relief for tax advisers, accountants and small businesses.
John Preston, CIOT president, said: ‘Whilst we are supportive of the government’s long-term ambitions for digitalising the tax system, we have always called for this to be achieved in a measured and manageable way.
‘This deferral will give much more time for businesses, supported by their advisers, to identify for themselves, at their own pace, the benefits of digital record keeping. It will also ensure that many more software products can be developed and tested before mandation is reconsidered.’
Ministers also confirmed that the Finance Bill will be introduced as soon as possible after the summer recess. This will legislate for all policies that were included in the pre-election Finance Bill, raising over £16bn across the next five years to fund our vital public services. The wash-up Finance Act before the snap general election in June was a slimmed down version of the planned legislation, stripping out all but the most critical changes to tax rates and reliefs, and removing any complex tax changes due to the lack of time for effective scrutiny in parliament and through select committees.
The government has also re-confirmed that all policies originally announced to start from April 2017 will be effective from that date, including the changes to non dom rules and loss relief reform.
Source: Wolters Kluwer
How Can Avanti Help You?
We provide a full comprehensive bookkeeping service using online bookkeeping software so that MTD will be straightforward, we also offer a Checking Service, whereby we can check the work you have completed, prior to your quarterly submissions to make sure everything is in order and correct.
For further details contact firstname.lastname@example.org