By the end of the 2020s, the tax landscape will look very different from the way it is today. And the paper personal tax return should be left dead and buried as a result.
We’re already seeing the signs of change in the months since MTD for VAT was introduced, as more businesses take up cloud technology and we get a hint of how automated tax will work.
In a matter of months, MTD has driven adoption of cloud accounting platforms, according to academic research. In turn, cloud software is the biggest single factor in reshaping the role of accountants and bookkeeping professionals.
As the mists surrounding Brexit begin to lift, HMRC will once again be able to focus on driving forward its MTD agenda. And it’s intention of modernising the finance industry.
By 2030, MTD will be well established for VAT and income tax – possibly for other taxes too.
The next phase of MTD
The next milestone will be MTD for income tax. This could in theory be April 2020 but is almost certainly going to April 2021 at the earliest.
“We should be well on our way to having an automated tax system by the end of the coming decade,” says AAT Chief Executive, Mark Farrar.
“Without the more pressing priorities of Brexit, HMRC would have been …moving towards digital Corporation Tax by now. I think the focus for the 2020s will be to make all of the big ticket taxes digital by the decade’s end, then mop up the smaller taxes after that.”
A lot of the details regarding the requirements remain a bit of mystery. “It’s hard to be convinced we’re going to have a reliable system in place in the short term,” said Sarah Saunders, manager at RSM UK Tax and Accounting.
Not everything can be automated in that timeframe, says Farrar – capital gains tax might not be there. “But certainly, the personal tax return as we know it should be a thing of the past.”
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How income tax will work
MTD for income tax will apply to the self-employed, partnerships and trusts, and anyone who receives income from property. Though an exemption will apply to those with an income below a certain threshold, possibly £10,000 total turnover from all sources of self-employment and property income. An exemption might also apply to larger partnerships with a turnover exceeding £10m.
Additionally, and this is a key concern, many taxpayers will be unable to participate in MTD due to lack of digital awareness, poor broadband access and other issues. “This is a long-term problem,” said Saunders.
The nitty gritty
It will be a complex process and currently it’s difficult to see how the new system will be an improvement. “HMRC’s current system has numerous exclusions and issues, and many taxpayers each year are compelled to paper file,” said Saunders. “HMRC’s computational errors add to the complexity for taxpayers, all on a system which has been in place for decades.”
Saunders, who appears sceptical of the roll-out, also noted how MTD is supposed to involve non-self-employment/property income details being pre-populated directly to tax accounts in real-time. “How often do you use the P60 data feed, or look up state pension on the government gateway only to find there’s nothing there? But, apparently soon, information from a multitude of different sources will feed safely through in real-time. Is this a reasonable expectation?”
Tech to the rescue?
Fortunately, progress is being made, with the technology sector preparing for the change. For example, Xero isalready developing its offering to support small businesses and advisors. “The shift towards a fully digital tax system is being driven by the proliferation of regulation that is driving APIs to connect systems together in the form of open banking,” said Damon Anderson, director of Partner & Product at Xero UK & EMEA.
“This shift in connectivity (banks connecting with accounting software and then connecting with HMRC) is rewiring the end-to-end flow of financial information. From the original transaction right through to HMRC, the whole process will become significantly more connected.”
Changes and opportunities
For accountants, compliance will switch from processing to system support, said Chris Conway, co-founder of Multiply Accountancy. “We’re being increasingly called in to help people with software. As an industry, we can no longer just turn bits of paper into tax returns like we used to. MTD, cloud software and automation are taking that away, and rightly so, but with it comes a big opportunity to provide businesses with greater insight and support using the data they have in the cloud.”
Indeed, Conway said he’s already doing a lot more advisory work than would be typical of an accountancy firm. “A growing number of clients use us as outsourced finance directors meaning we need employees with a broader skillset where the emphasis is on commercial acumen, rather than pure number crunching.
Read more on MTD and tax as part of our #AATPowerUp Tax 2020 campaign for September and October;
- Power up your tax knowledge with AAT
- Tackling MTD as a larger organisation
- Find software for Making Tax Digital for VAT
Neil Johnson is a freelance business journalist who contributes regularly to trade publications and member organisations, covering employability, recruitment, business trends and industrial analysis.