It’s official. HMRC confirmed on 31 of January 2017 that Making Tax Digital (MTD), the seismic-shift in the way that taxpayers and their agents deal with HMRC, would be going ahead, albeit with some concessions arising from a period of consultation.
HMRC’s vision underpinning MTD is to make the UK’s tax system one of the most digitally advanced in the developed world.
Those with simple tax affairs
Under current proposals, by 2020 taxpayers will not be required to file a Self-assessment tax return.
HMRC data-gathering abilities are such that those with simple tax affairs, such as those solely in employment and with modest levels of savings and investment income will only have to log on to their Personal Tax Account (PTA) to validate and update in real time the data that the department has obtained via RTI or from banks, building societies and other third-party sources.
Furthermore, through their PTAs taxpayers will be able to:
- View their year-to-date tax position
- View estimates of their tax liability as it accrues
- Make in year adjustments on line
- Communicate with HMRC using secure messaging.
Taxpayers with more complex tax affairs
Following the recent publication of HMRC’s consultation response documents we now know that taxpayers with more complex affairs, around five million, will be required to report under MTD, as follows:
April 2018 Self-employed and unincorporated landlords
April 2019 VAT registered entities
April 2020 Companies and complex partnerships (over £10M turnover) to on-board in the last year.
From the time of on-boarding (enter HMRC’s MTD regime) a taxpaying entity will be required to record all business transactions in digital format, using third-part accounting software, apps and by concession spreadsheets. They will also need to lodge an electronic return with HMRC at least on a quarterly basis.
The information disclosed on the in-year returns will be the same as that reported on the SA 102, the current self-employed schedules that form part of the self-assessment tax return.
Accepting that in most instances the information reported on the in-year returns will be supplied on a provisional basis, most business will need to file a fifth post-end-of-year return to ensure that HMRC have a set of the full and final accounting figures.
As a result of representations made by AAT and others to HMRC’s publication in August 2016 of six consultation documents, a number of concessions to HMRC’s original proposals were announced:
- Spreadsheets will now be considered digital – provided that they can link with independent report filing software.
- HMRC will accept three-line-accounts information on the same basis as now.
- There will no longer be a requirement to keep electronic copies of invoices under MTD.
- The cash basis of accounting threshold to be extended to £150,000.
- For the first time unincorporated landlords will be able to report income and expenditure using a modified cash basis.
- There will be a soft-landing for penalties – none to be charged in the first year.
- The filing window for the fifth return to be extended to the earlier of 10 months after the accounting period end and the 31st of January following the tax year-end.
- The introduction of a voluntary pay-as-you-go scheme – to enable taxpayers to budget in-year for the tax due.
- MTD-VAT returns will follow the same format as now.
No announcement over the reporting thresholds
The 31 January announcements were as noticeable for what they didn’t say as for what they did.
The burning and contentious issue of exemptions was not covered as party of the response. These exemptions included:
- The level below which businesses would not need to report under MTD which HMRC wanted to set at £10K
- The deferred-on-boarding threshold, where the next tier of turnover from £10K to a possible ceiling of £20K / £25K would not have to onboard in the first year.
I believe that the delay is because the setting of the turnover threshold is that they are one of the areas of MTD that are generating the most heat from commentators.
Many, including AAT, wanted the entry threshold to start at £83K (the VAT reporting threshold) and then to decreased over successive years to make it easier for the smallest businesses to get ready for the change.
I have been assured by HMRC that while the final decision over the setting of the thresholds lies with Ministers it will be announced around the time of the March Budget, certainly before the publication of the draft legislation (expected mid-March).
Other aspects of the original proposals yet to be decided
- The provision of assistance for some small businesses to help them meet the costs associated with the regime change.
- HMRC to consult (again) in the spring on a new penalty model.
- In response to stakeholder comments, further consideration is being given to reforming basis period rules and measures to simplify period end reporting requirements.
Public beta testing
From a modest start at the beginning of April 2017 HMRC will pilot the introduction of MTD with the ambition to have 400,000 engaged in the beta testing by the end of the third quarter of the 17/18 tax year.
From the start of April taxpayers will be able to register to take part in the testing phase, with agents being able enroll their clients in June. HMRC have stated that while agents will not be able to enroll their clients from the outset the department recognises that they are a vital component in the delivery of MTD and it will engage with them at all stages.
Will the software houses be ready?
Much of the delivery of HMRC’s MTD strategy is outside of their hands as it lies with the third-party software providers. Firstly, to provide pay-to-use software within an extremely tight delivery window and more importantly for many smaller businesses to provide free-to-use entry-level MTD-compliant software.
It is extremely unlikely that many of the 100 plus software companies will be ready at the start of April. While a handful might, many will bring MTD-compliant software to the market at different stages during the 17/18 tax year.
Will MTD happen?
Ultimately, there is little doubt tax going digital is the right thing. However, key aspects of the policy have still yet to be clarified and questions still need answering., especially around the reporting thresholds with more specific detail required enabling businesses to know when and how they are to navigate this crucial change.
I have merely scratched the surface of MTD and much more has yet to be decided by Ministers and HMRC. If you want to know more about how it will affect you as an agent and what you need to be telling your clients I will be hosting a workshop on MTD at this year’s Annual Conference.
Brian Palmer is the tax policy adviser for AAT.