Making Tax Digital

On 31 January 2017, HMRC published their response to the Making Tax Digital (MTD) consultation process which took place in Autumn 2016.

Although they have taken on board some of the concerns raised by the profession, the delay to start in April 2019 has been ignored.

Here is a summary of what we know so far:

What is it?

Making tax digital is a complete change to the way businesses currently report their income and expenditure to HMRC.

Under the current system, businesses prepare one set of accounts and report the information on the annual tax return, so there is one submission of information to HMRC.

Under the new system, there will be quarterly reporting of income and expenses and then a further annual declaration making a minimum of five submissions to HMRC each year.

When does it start?

It starts in April 2018 for individuals, unincorporated businesses and most partnerships.

It had been hoped that the start date would be delayed until April 2019 to give tax payers, the profession and software providers time to get ready. However, it has been confirmed that the start date will be April 2018. The requirement to make quarterly submissions will begin with effect from your first accounting period beginning after 5 April 2018.

It is possible that the smallest businesses may be able to defer until April 2019, but for most unincorporated business and landlords, the start will be April 2018.

Who will be affected from April 2018?

Unincorporated businesses and landlords will have to apply MTD from April 2018.

Quarterly reporting is not confined to businesses. Landlords will also be required to report quarterly if annual rents are high enough. Limited companies and larger partnerships (turnover above £10 million) will be included later – in April 2020.

There will be a low income exemption which was proposed as £10,000 in the consultation documents. This figure has been strongly opposed with many responses favouring the VAT threshold (£83,000) as a more suitable figure.

However, if your annual turnover is over £83,000 it is safe to assume that you will be required to start submitting quarterly updates to HMRC for your first accounting period which begins after 5 April 2018.

What will you have to do?

Quarterly Reporting

You will need to use software or apps to keep your business records and provide quarterly updates of information to HMRC. These updates will be a summary of income and expenditure only – each transaction will not be shown. It is proposed that the categories of information will be similar to the current level of detail on the self assessment tax return.

You will have the option to include the usual adjustments to arrive at taxable profit to get a more accurate picture when submitting your quarterly update or this can be done at the period end if preferred.

It will be possible to change your update periods to suit you best, for example to align the income tax update cycle with your VAT cycle.

One piece of good news from the consultation response is that you can keep spreadsheets as your records, as long as they meet the necessary requirements for MTD. Originally, it had been thought that spreadsheets would not be an acceptable way to keep records. It is likely that the spreadsheet function will be combined with the MTD software.

Annual Reconciliation

You will have to submit an end of year statement to include additional categories of information not included in the quarterly updates and to make any adjustments needed to calculate the taxable profit for the year. It will also include a requirement to make a declaration that the end of year statement is correct.

When will you have to do it?

Quarterly updates – 1 month from the end of the period.

The end of period statement will need to be submitted by the earlier of:

  • 10 months after the end of the period to which the statement relates, or
  • The 31 January following the tax year in which the relevant period ends

So, if you have a 31 March year end, the submission deadline for your end of period declaration will be 31 January the following year. This is the same as the current tax return deadline.

However, if you have a 30 April year end, you will be required to submit your end of period declaration by 28 February the following year, being 10 months after the year end. This is a substantial change from the current system where you would have until the following 31 January (another 11 months to provide the information).

Therefore, for many year ends, this is a significant acceleration of when information is due.

What we don’t know yet

  • The starting threshold for quarterly reporting
  • Who will be able to defer until April 2019
  • How businesses and taxpayers who are not required to report quarterly will have to report their income to HMRC

Is anyone exempt?

  • Those with turnover of under £10,000 or a higher figure still to be decided by HMRC
  • Charities and Community Amateur Sports Clubs (but notably not trading subsidiaries of charities of CASCs)
  • Those who “cannot engage digitally”. This means people whose religious beliefs prevent them from using electronic communications and people for whom online filing is not reasonably practical e.g. for reasons of disability or age

What do you need to do now?

You need to consider your specific needs to move over to the new record keeping requirements.

We can advise on how matters will change for you and how to get best benefit from MTD.

Are there any benefits of Making Tax Digital?

It is possible that the time you take in preparing your records will reduce, depending on the software you choose.

By having an adviser such as Tait Walker preparing your quarterly updates, they will have a clear view of current profitability. This information will allow us to give you timely advice on tax planning.

HMRC public BETA testing

HMRC is to begin public testing of the MTD process from April 2017 and we intend to take part in the process.

Anyone who is involved from the start will have advance sight of the software and reporting mechanism. This will mean that they are ahead of the game when the process actually starts in April 2018, making adapting to the change a much less stressful process.

We are very keen to be involved because the closer we are to the development of the new system, the more chance we will have to influence the new processes before they are finalised. In addition, being involved from the start and having advance sight of the software and reporting mechanism will give us the opportunity to help our clients prepare for the new regime with the least amount of disruption to their businesses.

As more information becomes available we will provide you with regular updates, so watch this space.

If you would like any further advice, please contact Dorothy Johnston.