The long awaited HMRC Making Tax Digital (MTD) papers are finally out and in the public domain.
In all there are six documents covering:
- Bringing business tax into the digital age
- Simplifying tax for unincorporated businesses
- Simplifying cash basis for unincorporated property businesses
- Tax administration
- Voluntary pay as you go
- Transforming the tax system through the better use of information
In response to pre-consultation engagement HMRC have introduced three concessions to their original proposals:
- A plan to remove 1.3m persons, whose primary source of income is below £10k and is either from self-employment or from the renting of property, from a requirement to report on a quarterly basis.
- A further tranche of persons whose primary source of income is either from self-employment or property rental and is between £10K and a yet to be determined threshold will, also, not initially be required to report on a quarterly basis.
- The provision of financial assistance to those with unincorporated businesses and the micro and nano end of the scale in order to mitigate the costs that they might otherwise incur in achieving their compliance.
What is MTD all about?
MTD is HMRC’s plan to transform the UK tax system. Government ring-fenced spending of £1.3bn is to be invested in overhauling HMRC’s many legacy IT systems so that taxpayers will be able to see details of their tax affairs in one place.
Those with simple affairs
For those with the simplest affairs, such as an employed person with little or no other sources of income, HMRC will have obtained most, if not all, of the data they require from third parties.
All that will be needed is for a taxpayer (or their agent) to reconcile the information that HMRC holds with their own information. Making any adjustments required online, leaving HMRC to make a repayment or raise a demand.
Somewhat counter intuitively from April 2018 the first businesses to be on-boarded are sole traders, partnerships and unincorporated residential landlords. HMRC justify this on the basis that they need more time to work through limited company requirements.
VAT registered entities will be required to file their VAT returns under MTD from 2019 and limited companies will be expected to follow from April 2020.
The radical part (quarterly reporting)
HMRC believe that by requiring the majority of taxpayers in business to capture, digitally record and store their transactions using software and smart phone apps that talk to HMRC’s back-end-systems they will greatly improve taxpayer compliance.
After taking into account the concessions (mentioned earlier) the most radical part of the proposals is a requirement for those in business or acting as landlords to file quarterly in-year reports, based upon the data captured. Post year end a final balancing return will be required.
It should be noted that content and format of the quarterly returns is still up for grabs and is to be determined as part of the consultation process.
HMRC are of the view that it will be “cash accounting” for as many businesses as possible. They consider that the 100% annual investment allowance should make it simple for most business.
The current cash accounting threshold is £83,000 and HMRC is consulting to see if this should be raised further.
It is expected that limited companies will continue to report using UK GAAP, with a further consultation document setting out corporate tax simplification proposals expected in the next six months.
The Tax administration consultation document sets out HMRC’s wish to introduce a graduated approach to penalties, whereby each failure would initially attract penalty points and only once the points reach a set level would a penalty be charged.
It also includes a proposal that customers within scope of the new submission obligations introduced by MTD should have a period to gain familiarity with their new obligations before the penalty regime is introduced.
Payments of tax
As part of the move to MTD HMRC is to offer business people an opportunity to settle their tax liabilities as they report them. The voluntary pay as go consultation paper sets out how such payments will be made and managed, and how repayments are also dealt with.
What will the brave new world look like for accountants?
It is still early to say but….as the MTD was first announced by George Osborne in his March 15 Budget Speech as “the death of the tax return” it is safe to say that the current self-assessment regime will no longer exist.
I foresee that in the short term the onus to make MTD work will fall squarely on the shoulders of accountants and tax advisers. In the longer run, much of the drudgery that is tax compliance, as we currently know it, will no longer be there.
While inevitably, as with the change to self-assessment, some accountants will chose not to continue in practice, I believe that for those that remain there will be a tremendous opportunity for them to refocus their businesses in order to provide more added-value support to their clients.
Brian Palmer is the tax policy adviser for AAT.