Accountants and business owners have two years to prepare for the next milestone stage in Making Tax Digital (MTD). But do they know enough from HMRC’s road map to prepare for that deadline?
MTD for income tax will see self-employed businesses and landlords with earnings above £10,000 annually required to make tax filings quarterly, starting on or after 6 April 2023.
However, some accountants are concerned that HMRC underestimates the size of the challenge compared to the successfully implemented VAT phase. They also find that a lack of information from HMRC is hampering their efforts to plan for the transformation.
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“As far as MTD for income tax is concerned, all we’ve had so far is that HMRC wants to move to this from April 2023,” explains Ian Jarvis, director of Vertis Accountants. “We haven’t seen the detail of what that involves, how it will be reported and how the returns will be done. There’s still a lot of gaps there and April 2023 is just under two years away and people need to be getting ready for it.”
The gaps Jarvis highlights are:
- Whether income tax returns will need to be filed quarterly, or if they will instead be quarterly top-line reports with an end-of-year reconciliation
- Will any specific software be required
- If so, what criteria does the software need to meet?
“Maybe HMRC doesn’t have the answers yet, and I’m not seeking to be critical of it,” says Jarvis. “We just need to see what the size and shape of the task is if we’re going to have a smooth launch and get through it comfortably in April 2023.”
“From a regulatory point of view, HMRC should have some sort of outline which is clear so the people this affects are aware of what they should be doing, even if it’s what they are already doing,” says AAT licensed member Furqan Baig. “This hasn’t been communicated about. Even software vendors haven’t talked about it much. What kind of digital records need to be kept? Are the major software players going to have the functionality required?”
Overconfidence after MTD for VAT?
Despite being a supporter of MTD, George Bull, senior tax partner at RSM UK, harbours deep concerns about the prospects of extending MTD to income tax and self-assessment based on the performance of MTD for VAT.
“HMRC has not given sufficient time and trials before extending it to a different tax and a wider population,” he says. “Independent bodies which have reported on the experience of MTD for VAT have recorded concern from businesses affected. The system didn’t meet their needs. It was too onerous.
“If you look at HMRC’s reports and look at the data it has published, those broadly in favour of MTD for VAT only slightly outweigh those who feel they’ve had a bad experience,” Bull adds. “If we then come to what’s being proposed for the broader digitalisation of the tax system, we can draw some parallels. Exactly what is the system required to do? We don’t yet know. Exactly how is it going to be required to do it? We don’t yet know. I think there’s very profound concern that HMRC is rushing to implement a broader MTD without having learned the lessons of the past. If it doesn’t, it’s going to be exceptionally difficult for both for the department and for taxpayers.”
Bull is also keen to highlight that even in the current self-assessment system for personal tax, there several manual workarounds which HMRC has had to publish as it doesn’t meet all the statutory requirements.
“If we’re looking at the next steppingstone for MTD, it is imperative that the software copes with all the issues in the income tax and self-assessment system. It would be absolutely unacceptable to have a system that cannot cope with all the nuances of UK tax legislation and requires the same workarounds as at present.”
Cost and challenges of implementation
In addition to these questions, there is the issue of cost. While information about MTD for income tax and corporation tax remains relatively thin, a report for HMRC conducted by Kantar found that adapting to HMRC’s MTD for VAT regime could cost small businesses up to £3,500. In particular, it found those costs occur when investigating software options, purchasing software and upgrading IT systems, along with paying for accountants’ services – tasks businesses falling between the £10,000 threshold and the VAT threshold will undoubtedly have to undertake.
With awareness of the project low among small businesses, the risk for HMRC is that it will need to extend its deadline, says Baig.
“VAT-paying businesses are bigger, are generally well-resourced and can quickly adopt a regulation. Smaller businesses and the self-employed are more likely to be behind. Being smaller, it’s easier to bring things in line, they also have a lot more to manage on their own,” says Baig.
“If HMRC doesn’t get its messaging right, it may have to extend the MTD deadline again, and that could damage taxpayers’ confidence in it. It’s just not a good way to implement things.”
That’s a sentiment echoed by Bull.
“It’s fantastically important that HMRC maintains public support, and by and large it’s doing that successfully,” he says. “At the moment, people who are dissatisfied with HMRC’s service generally recognise it’s not to do with HMRC as such and to do with a lack of funding from the Treasury. But if the day-to-day, month-to-month experience is not good, that trust will be broken.”
For those adopting MTD for income tax, the risk is in costs in attempting to comply, compounded by their work to recover from the effects of the pandemic.
“It’s a lot of extra stress for them,” explains Baig. “They’re going to have to put extra time and resources into complying, and if HMRC extends MTD again, they’ll ask why they’d rushed to adhere to it. They’ll look at the cost spent in complying as something that could have been spent on the business itself. I expect, as practitioners, we’ll find we have two camps among our clients – those who look to comply on time and those who will need more work.”
When approached about these questions, HMRC told AAT Comment that taxpayers registered for MTD for income tax “will provide quarterly updates that are not equivalent to returns”.
“When businesses submit quarterly summary updates of their income and expenses they will receive a calculation showing them their emerging tax position, helping them budget for their tax throughout the year.
Over the full cycle of a business year, the integration of tax compliance into day-to-day record keeping will aid the reconciliation of accounts at the end of each year.”
On software, HMRC said: “We expect there to be a wide range of different products available for MTD for income tax and self assessment, including bridging products that allow the transfer of data from spreadsheets. Customers will experience the greatest benefits when using full MTD software. We work closely with software providers to ensure their software meets our criteria in many areas including data security.”
Calum Fuller Calum Fuller is editor of AT and 20 magazines. He's previously served as editor of Credit Strategy, assistant editor Accountancy and began his career at Accountancy Age..