On first reading of HMRC’s published responses to the six Making Tax Digital (MTD) consultation documents, it is clear that the department is still set to continue along its published roadmap to implementation, but some key questions remain unanswered.
HMRC is assuring businesses that the Government is committed to a safe introduction on MTD, ensuring thorough testing of the software, a user-friendly approach and a softer landing for the introduction of penalties.
That said, HMRC has not tackled the issue of the exemption threshold (those with turnover under £10K) and the delayed on-boarding for those with turnover over £10K up to a ceiling that AAT had suggested should start at the VAT threshold (£83k) and reduce to the personal allowance (£11,000) over a phased implementation period.
HMRC published the following:
“HMRC also confirmed that the government will need to consider further issues, such as the initial exemption threshold and deferring the changes for some small businesses alongside their cost, with final decisions to be made before legislation is introduced later this year.”
On several occasions HMRC asserted its commitment to ensuring “free software will be available to the majority of the smallest businesses”. However, in response to pressure, not least from AAT members during a number of HMRC/AAT roundtables, changes have been made and the use of spreadsheets will be permitted:
“Businesses will now be able to continue to use spreadsheets to record receipts and expenditure, which they can then link to software to automatically generate and send their updates to HMRC. This was requested by a wide range of stakeholders, particularly small businesses and the Treasury Select Committee”.
HMRC also restated its commitment to piloting these digital systems with hundreds of thousands of businesses, before rolling them out to ensure the software is user friendly, and to give businesses and landlords time to prepare and adapt.
For the first 12 months of operation, HMRC will not impose penalties. This falls well short of what AAT members sought – 44% wanted at least two years – none supported anything less than 12 months – but it is nevertheless a step in the right direction.
Additional key points arising from HMRC’s responses
- HMRC continues to pledge that free software will be available to the majority of the smallest businesses.
- Businesses that cannot go digital (digitally excluded) will not be required to do so.
- The option to account for income and expenditure on a simple ‘cash in, cash out’ basis will be extended, to an extra 2.5 million self-employed businesses and unincorporated landlords.
- Charities will not be required to keep their records digitally or make quarterly updates.
- Businesses eligible to use ‘three line accounts’ will be able to submit a quarterly update with only three lines of data (income, expenses and profit).
- The requirement to keep digital records will not mean that businesses have to make and store invoices and receipts digitally.
- Activity at the end of a financial year must be concluded and sent either by 10 months after the last day of the period of account or 31 January, whichever is sooner.
- Despite opposition HMRC is to proceed with its proposal on payment allocation as they “believe this will reduce the need for customers to have to access their digital tax account to tell HMRC where payments should go.”
- For partnerships with a turnover above £10 million, MTD for Business is deferred until 2020.
- HMRC is to give further consideration to the initial exemption threshold and deferring the changes for some small businesses alongside their cost, with final decisions to be made before legislation is introduced later this year.
- 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.
- HMRC will pilot these digital systems with hundreds of thousands of businesses before rolling them out to ensure the software is user friendly, and to give businesses and landlords time to prepare and adapt.
Ultimately, there is little doubt tax going digital is the right thing. However, key aspects of the policy have yet to be clarified and questions still need answering. This is especially the case with the reporting thresholds, with specific detail required to enable businesses to know when and how they are to navigate these changes.
Brian Palmer is the tax policy adviser for AAT.