In August 2016 HMRC released six consultation documents on Making Tax Digital.
From 2018 the tax system will become increasingly digital and most businesses will need to use software or apps to keep their business records and update HMRC on a quarterly basis. Watch our free seminar to see the potential impact on businesses.
In December 2015 HMRC published their MTD Roadmap that sets out their plans to make tax digital by 2020. This has been followed by six consultation documents that were published on 15 August 2016 and we have until 7 November 2016 to submit our comments.
Consultation document 1: Bringing tax into the digital age
This document applies to all self-employed individuals, landlords and unincorporated businesses. These businesses will need to acquire approved software to keep their records in a digital format with the headline figures from these records then being filed with HMRC. As part of the consultation HMRC are consulting over transitional help for paper record and spreadsheet users. Agents will have software that will interface rather than directly access their clients’ affairs. Under the proposals key figures must be submitted to HMRC quarterly, with year-end adjustments being made by nine months after the year-end. Businesses with turnover of less than £10,000 per annum will be exempt but HMRC are also consulting as to whether a wider group should be given an extra year to prepare.
Consultation document 2: Simplifying tax for unincorporated businesses
A number of simplifications are being considered:
- Making the cash basis available for businesses with turnover of up to £166,000 per annum or twice the VAT registration threshold;
- Upfront relief for most non-property expenditure to help simplify the capital versus revenue distinction;
- Removal of the tax year-end once perpetual quarterly filing is up and running and a way has been identified to map income and expenditure directly to tax years instead. HMRC are considering the removal of overlap relief brought forward.
Consultation document 3: Cash basis for unincorporated property businesses
HMRC are considering extending the cash basis to most types of landlords. irrespective of turnover.
Consultation document 4: Voluntary pay as you go
Currently there is no mention of changing the required payment dates. However, HMRC believe that some taxpayers may like to opt to make regular payments towards their tax liabilities. This consultation documents considers how to manage and allocate the different taxes under such a system.
Consultation document 5: Tax administration
HMRC are considering the introduction of a points system for non-deliberate failure to submit information online with an opportunity to correct information before sanctions are imposed. There will be a stronger sanction for deliberate failure, a new penalty interest regime is proposed as well as two possible models for aligning existing late payment dates. Additionally HMRC are looking at a phased approach to align interest regimes across the taxes.
Consultation documents 6: Better use of information
HMRC are looking at how to improve the use of existing information from third parties by prepopulating this information into taxpayers’ digital tax accounts. This might include PAYE information from employers, bank interest and dividends.
What does the taxpayer want?
Taxpayers want to be confident that they have complied with their tax obligations and also to know how likely HMRC are to start an enquiry or investigation into their affairs. Ideally they want to be left alone. They also want to know that they have paid the correct amount of tax, having claimed all of the reliefs and allowances that they are entitled to.
How will data be used?
In time we made be asked to file our information using specific industry codes. HMRC will know for each type of business the levels of tax and national insurance that they are expecting to receive. Results that fall outside of the expected amounts could be used to trigger an HMRC enquiry. Equally advisors may be able to use the same information to identify clients who may not be claiming all of their expenses and relief.
Under making tax digital, tax advisors will need to add value to the tax compliance process. We will need to check information that has been input by clients to make sure that it is correct and complete. Practices will need to look for new ways to add value.
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