During the summer HMRC issued a number of consultation documents about Making Tax Digital (MTD); they are not an easy read. The reader is bombarded with 'we are doing it for the good of our customers' and 'we have been asked by our customers to do this' and it's all going to
be wonderful-type statements.
Much of the text is not aimed at 'customers', their accountants and agents or the other interested parties but appears to be instructions to the software houses who need to bring HMRC's 'dream' of MTD to fruition.
The basic are well known - under MTD
every business owner large or small, VAT registered or not, including landlords, will submit quarterly returns (sorry...'updates) and if any are late by more than one month then penalty points will be levied.
HMRC’s ‘dream’ is of customers purchasing accounting software sophisticated enough to scan and load invoices and receipts automatically, thereby reducing the time required for
manual loading - and then every quarter submit a summary of that information to HMRC. This functionality will obviously be dependent upon the cost of the software. Many small businesses won't want to pay the higher cost simply to get the higher level functions of sophisticated software.
HMRC counter this with the argument that small businesses will save on accountants’ fees in this DIY
world. George Osborne, when he was still Chancellor, said MTD would save small businesses £400m per annum in accountants fees.
Also, HMRC envisage the use of bank-feed software to load data directly from bank accounts into the submission.
End of year activity
report
No more than nine months after the accounting year end the business will be required to make a final submission, termed an 'end of year activity' report. This will confirm the previous submissions and include claims for items such as capital allowances, if they have not already been included in the previous submissions. So in effect there will be five 'updates' in
all.
Will I still need my accountant (Agent in HMRC speak)?
In HMRC's ‘dream’ accountants will only get involved in the preparation of the 'end of year activity' report (annual accounts to you and me). HMRC thinks taxpayers will do the quarterly submissions themselves or do the whole
lot - bookkeeping and all - with accountants (maybe) coming in at the end of the line.
DIY tax assessment
In the DIY world, HMRC believes taxpayers will log onto their own digital tax account where some information will already be loaded. So far this this will be bank interest, P60 figures and CIS
income. Later on dividends from PLCs and rental income from properties let via letting agents will be included. Taxpayers will submit the business's figures. HMRC's tax computer will instantly calculate the taxpayer's potential tax bill and at the same time remind the taxpayer to put some money aside for payments (good luck with that!).
HMRC believes that in this way the
liability won't come as such a shock when the final demand is issued. The intention is to remind ('prompt') taxpayers when payment is due at the time of submission their updates. In HMRC’s ideal world taxpayers knowing their tax bill will immediately lead to accurate tax payments and the instances of late or non-payment will be reduced.
The main MTD consultation document does not say that
spreadsheets cannot be used, they may get a reprieve as discussed here.
Will every business have to use accounting software?
Taxpayers can record business transactions as they wish but they must use accounting software that will either be free (for basic entries -whatever that means – we don’t know yet) or purchased. Submission needs to be in the format that HMRC's computers will understand as HMRC don’t want to spend their money developing additional software, which is why they are so keen to get the accounting software providers on
board.
What will be submitted?
Submissions will be of total figures only and HMRC’s intention is to use set expense headings. They believe that there should be no need to retain the use of three line accounts. The tax software's ability to deliver more detail means that submission of
accounting information will apparently be as easy as submitting three line accounts. There will be no requirement to submit invoices or receipts.
When information will be submitted?
HMRC is adamant that one month after the quarter end and nine months for the final submission is long
enough to comply with the submission of accounts information. They think that taxpayers should be attending to their accounts every week anyway, so the deadline of one month will not be difficult to achieve.
In HMRC's 'dream' each quarters' accounting information will be so accurate that minimal amendments or additions will be needed. Thus the year end submission will be a quick confirmation
of the figures previously submitted.
Will I have to pay my tax earlier?
Payment dates will remain the same (for the time being but most accountants think HMRC will eventually start to accelerate them) meaning more deadlines for taxpayers to remember. HMRC doesn’t think that this will
be a problem as they will be reminding taxpayers of deadlines when the taxpayer logs onto their account.
HMRC assumes that all taxpayers will be checking their account on a regular basis and intends to send reminders to taxpayers via text and email. They recently announced that when a prepopulated entry is added to the taxpayer’s digital tax account, they will receive a text at
the same time.
One stated aim of MTD is better targeted tax enquiries. Enquiries will only be made into the year-end submission and HMRC will have 12 months from the year end submission date to make an enquiry which will be on the final submission and not on any of the quarterly updates.
HMRC
expects that over time the information submitted will create a picture of a taxpayer's business, which will enable more accurate comparisons with other similar businesses than are available currently. This is one of the reasons for HMRC’s dislike of three line accounts. In practice of course this means more information for them to target taxpayers they think are under-declaring their income.
We
will continue to monitor the progress made by MTD and keep you informed. If you would like a free, no obligation discussion about how MTD will affect your business then please book a call with me here.
Noel
Guilford