Making Tax Digital (“MTD”) is HM Revenue & Customs’ (“HMRC”) drive to close the “Tax Gap” and to make the UK the “most digitally advanced tax authority in the world”. It will mean significant changes to how and when we
all deal with our tax affairs.
Whilst the digitalisation of tax affairs is generally supported, the ambitious timeframe is not. This is due to the considerable lack of detail on how MTD will work in practice and appropriate software simply not being in place. Under current proposals, some businesses may be forced to comply from as early as April 2018. But comply with what?
WHERE ARE WE NOW?
As we were filing the last of the self-assessment tax returns on 31 January, HMRC released their responses to the consultations issued last year, together with the first batch of draft legislation. Whilst some proposals have been put on hold, the majority are being taken forward on the timeline opposite, as updated by the announcements made in the Budget on 8 March:
WHAT DOES MAKING TAX DIGITAL MEAN FOR ME?
If you are an unincorporated business or landlord and your annual income (not profit) from these sources is more than £10,000 and the VAT threshold, you will need to keep your business records digitally from 2018, using either a local or cloud based accounting package capable of uploading certain information electronically to your HMRC Digital Tax Account (“DTA”) each quarter, within one month of each quarter end. If your turnover is less than the VAT threshold, your new record keeping requirements will start from 2019.
Whilst HMRC will not be providing free software, some basic free software should be available from third parties, although this will have limited applications and will be suitable for only the most straight forward businesses. Whilst software houses are working on MTD compliant software, these are all still in their test phases. HMRC are intending to issue a list of suitable software later this year.
Certain information will also be fed into your DTA by third parties, such as bank or building society interest, state and other pension income and any employment income. It will be your responsibility to check this is correct.
It is likely that, in the short term, you will also have to complete a self assessment tax return (“SATR”), as you do now.
If you are not an unincorporated business or landlord, you will still need to complete a return, with some information automatically being fed to your DTA, subject to you checking how correct this is. There is currently no end date for the last SATR to be completed.
WHAT IS A DTA AND DO I ALREADY HAVE ONE?
A DTA is your personal tax record with HMRC and, if you have not already activated it, this needs to be done via the Government Gateway at: www.gov.uk/personal-tax-account. Agents cannot currently access DTAs, although
HMRC are working on this as this will be a fundamental necessity if MTD is to work.
WHAT INFORMATION WILL I HAVE TO UPLOAD?
For unincorporated business owners and landlords, you will have to upload a summary of your business results each quarter, with the help of MTD compliant software which will also incorporate ‘prompts and nudges’ to help you
make the upload.
If your turnover is below the VAT threshold, the submission will simply include your turnover, expenses and net profit for the period. For larger businesses, the submission will include the same level of information that’s currently included on the trading pages of an SATR. This submission will have to be made within one month after the end of your first quarter.
You will then also need to make a year end submission of your business or rental results. This will have to include all accounting adjustments to convert your accounts to the accruals basis (amounts due for the period) and to carry out any tax adjustments (for example, disallowed expenses, capital allowance claims or any other claims for relief) that might be needed. This submission will have to take place at the earliest of 10 months after your accounting period end, or 31 January following the end of the tax year in which your accounts end. Under the initial consultation, the proposal was to file the year-end adjustments within a 9 month period.
HMRC will provide you with an estimate of your tax position at each upload point. Personal allowances will automatically be set against employment or pension income first, but it is not known how the allowance will then
be allocated by HMRC.
It therefore remains questionable as to how meaningful these estimates will be and the value businesses will see from having to update HMRC quarterly, and is likely to increase compliance costs for businesses.
From April 2019, you will also have to provide your VAT information at the same time as your business upload, if VAT registered.
WILL I REALLY HAVE TO CHANGE THE WAY IN WHICH I KEEP MY RECORDS AND REPORT TO HMRC?
Businesses will have to engage with HMRC through Making Tax Digital unless you are among the ‘digitally excluded’ based on factors such as religion and disability, or if your turnover or rental income is less than £10,000 per annum. Whilst the
accounting entries will have to be kept electronically, there will be no requirement to keep digital copies of invoices or receipts, as was first thought.
In a change of heart, HMRC have now said they will accept spreadsheets as satisfying the ‘digital record’ requirement. However, this will involve combining the spreadsheets with software, which will give the software houses a further challenge to overcome.
Even if the timeline changes, MTD will happen, and so if you are not already keeping your business records in a digital format, please do get in touch to see how we can help you. This might involve keeping your records for you,
or showing you how to keep your records yourself.
WHEN DOES THIS ALL START?
HMRC are looking to bring unincorporated businesses and landlords into the new system first, from as early as April 2018, although businesses with turnover of less than the VAT threshold will not have to apply the new rules
until April 2019. Companies (and partnerships with a turnover of more than £10 million) will come in from April 2020.
The first quarter to be uploaded will be the results for the first quarter starting on or after 6 April 2018.
John’s year end is 5 April. His first MTD quarter will be for the period 6 April 2018 to 5 July 2018 and will have to report this by 5 August 2018. The year-end report would have to be made by 5 February 2020, with any other income sources having to be reported on his SATR by 31 January 2020. Sue’s year end is 31 March. Her first MTD quarter will be for the period 1 April 2019 to 30 June 2019. She will not have to make her first quarter’s report until 31 July 2019. The year-end report would have to be made by 31 January 2021, with any other income sources having to be reported on his SATR by the same date.
From the above, businesses with a March year end could currently defer having to comply with MTD and so you might want to consider changing your year end, although this would have to be looked at on a case by case basis.
It is unclear what will happen to non-business income sources and how these will be reported, although it is likely these will continue to be reported on tax returns, at least for the foreseeable future.
DO I STILL NEED TO PREPARE MY ACCOUNTS ON THE ACCRUALS BASIS?
The accruals basis means your accounts are adjusted to bring into account all income and expenses due for the period, regardless of whether or not income has been received or expenses paid for. The accruals basis helps
businesses understand what profits they are earning based on their efforts in any particular period, and also helps smooth profits out. Banks and other lenders will generally require accounts to be prepared under the accruals basis and so other parties’ requirements will also need to be considered.
The accruals basis will remain mandatory for all trading business unless the owners opt into the cash basis. The cash basis broadly calculates profits based on the actual cash flow of receipts and expenses and, whilst can be
helpful for smaller businesses, often results in unexpected fluctuations which can be difficult to plan for in terms of tax consequences. There are also special rules for things like transitioning to the cash basis, relief for capital items and interest relief deductions.
The optional cash basis will only be available to businesses with income of less than £150,000 (previously to the VAT threshold) and the new limit will apply from 6 April 2017.
Landlords also have to currently use the accruals basis. However conversely, from 6 April 2017, there will now be a mandatory requirement to prepare accounts on the cash basis unless the landlord opts to use the accruals basis.
The new restriction for interest relief for residential property landlords will remain as planned.
WILL MAKING TAX DIGITAL MEAN I HAVE TO PAY MY TAX EARLIER?
At the moment, no, although you may be able to make voluntary payments on account from April 2018, if you wish. However, a move to real time reporting suggests that tax payment dates may change in the future.
DO I NEED TO DO ANYTHING NOW?
The Making Tax Digital proposals will not become law until the passing of the Finance Act 2017, with further provisions expected in the 2018 Act. However, if you are not already keeping your accounting records in a digital format, please do get in touch. You may also want to activate your DTA, to familiarise yourself with the information held there, which includes useful information such as state pension entitlement projections.
WILL I BE CHARGED A PENALTY FOR FILING LATE?
HMRC has confirmed that penalties will not be charged during the first 12 months of MTD in respect of any late submissions. HMRC are continuing to consult on what the penalty system for MTD might actually be and in respect
of late payment penalty interest and the alignment of interest charges across all taxes.
WILL HMRC ENQUIRE INTO MY QUARTERLY SUBMISSIONS?
HMRC has confirmed it will still only be entitled to enquire into the year end submission, but this will include access to the full year’s records, as is currently the case.
WHAT IF I DON’T RUN A BUSINESS OR AM NOT A LANDLORD?
More of your tax return information will be sent to HMRC direct from third parties such as banks, employers or pension providers from April 2018, although you will still need to check this information is correct in your DTA. You may also have other income sources to report, such as dividend income, so you may still need to complete an annual tax return.
HOW CAN ALBERT GOODMAN HELP ME?
We can help you get started if you are not already keeping your accounts in digital format, or we can do your bookkeeping for you. We can also help with the quarterly uploads, once these are needed and will be able to prepare
your year-end figures for you ready to meet the new 10-month filing deadline. Once HMRC have resolved the agent access problem to DTAs, we will be able to review your estimated tax position to make sure this is correct and
explain what the estimates actually mean.
We will be here to help you throughout and will be involved in trial phase, which is due to start shortly. We will, therefore, be well placed to guide you through the evolving MTD landscape.