Making Tax Digital For Businesses
Announced in 2015, Making Tax Digital (MTD), will see fundamental changes to tax reporting and record keeping for all U.K. taxpayers. MTD will introduce digital tax accounts for all, a system of quarterly reporting in addition to a year-end return, and a requirement for taxpayers to keep digital records. For now at least, the tax payment dates will not change.
HMRC's aims are ambitious, and focus on collecting a higher proportion of tax due through the digitalisation of records and earlier reporting, mandating the use of technology in most cases, and reducing the level of reporting to HMRC of information it already holds e.g. P60 salary details reported through an RTI payroll. HMRC expects MTD to contribute £1.9bn of additional tax revenues by 2021/22.
The project represents a huge challenge for HMRC, the taxpayer, software providers and advisers, and should be welcomed, provided it is done so on a reasonable timetable and the promised technology tools and interfaces are made available on time.
The Spring 2017 Budget confirmed April 2018 as the commencement date for MTD, but also included a very welcome delay until April 2019 for unincorporated businesses and landlords with income of less than the VAT threshold.
Who will MTD apply to and when?
MTD will apply as follows:
- April 2018: unincorporated businesses and landlords with turnover in excess of the VAT threshold (£85k for 2017-18);
- April 2019: unincorporated businesses and landlords with turnover below the VAT threshold and all businesses registered for VAT; and
- April 2020: businesses which are subject to Corporation Tax.
Partnerships with turnover of £10m or more need not comply with MTD until April 2020, and individual partners will no longer be required to separately provide HMRC with their share of partnership profits or losses.
Taxpayers will be required to comply with existing tax reporting deadlines, in addition to the new MTD requirements, as MTD is introduced. For example, the reporting schedule for an unincorporated business with a 5 April year end and turnover above the VAT threshold will be:
- MTD applies from 6 April 2018;
- First MTD quarterly submission to 5 July 2018, to be filed by 5 August 2018 (and thereafter 5 November, 5 February and 5 May);
- Last Self-Assessment return for the year to 5 April 2018, to be submitted by 31 January 2019; and
- First MTD year-end filing for the year to 5 April 2019, to be submitted by 31 January 2020.
Businesses, self-employed people and landlords with turnover of less than £10k will be exempt. Further exemptions will be available for those whose religious beliefs are incompatible with the use of electronic communications and for those for whom MTD is not practical as a result of disability, age, remoteness of location etc.
What will be required?
Taxpayers will be required to:
- Keep digital trading and transaction records, and categorise expenses in a prescribed format;
- Provide HMRC with quarterly updates of income and expenses, within one month of each quarter end, using digital tools; and
- Submit a year-end return, within ten months of the year end, again using digital tools.
For VAT, the quarterly updates will effectively replace the VAT return.
Regulations (still to be published) will prescribe how this will work in detail, including:
- How and when reliefs and allowances will be claimed and adjustments made; and
- The level of detail required in quarterly updates.
Penalties will be imposed for late or inaccurate submissions. HMRC has however promised a “soft landing” for one year. We expect a further consultation paper to be published in due course.
The success of HMRC’s plans for MTD is wholly dependent on significant developments to HMRC’s tax software and third party digital tools and software. HMRC is relying on the provision, by commercial software companies, of free digital tools for taxpayers. Smartphone apps and online tools which interface directly with HMRC’s digital tax accounts and with the tax software used by advisers are envisaged. We are working with our software providers to ensure a smooth transition to MTD.
Making tax simpler?
To assist with the move to MTD, HMRC has also announced:
- That the cash accounting threshold will increase to turnover of £150,000, with an exit level of £300,000. This means that unincorporated businesses with turnover of up to £300,000 can prepare their accounts on a cash, rather than accruals basis; and
- A consultation on the simplification of basis periods and overlap relief.
We await further details and clarity on the practical application of the rules and the proposed digital tools, and will contact all clients required to implement MTD from April 2018 directly.
If you have any queries in the meantime, please contact Katharine Arthur or any member of our tax team.