Making Tax Digital – Income Tax
“Making Tax Digital is a key part of the government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs.” Discuss.
It sounds like an exam question for the most boring subject of all time. Except if you’re an accountant, of course.
Making Tax Digital (fondly known as MTD) went live for VAT in April 2019 with the date for Income Tax planned to be April 2020. Even before the extensive disruption caused by COVID19, the earliest date for this was pushed back to April 2021 with a pilot scheme running right now.
The first thing that I feel I should stress is that nothing is changing about the way in which tax is calculated. The changes are purely administrative. Tax payment deadlines will remain exactly as they are now – payments on account in January and July with a balancing payment due the January after the end of the tax year.
Those affected by this new filing requirement are the self-employed, whether through a sole trade or a partnership, and people who own rental properties.
Why would HMRC want to do this? I hear you say. HMRC estimates that errors and fraud create a tax “gap” of £9 billion every year. MTD is designed to drive improved accuracy and timelier recording and reduce the scope for dishonesty.
Under the MTD rules, there will be no more Self-assessment tax returns. Hooray*
Only, there will now be 4 quarterly returns per year plus one final declaration. The quarterly returns will need to be filed between 10 days and 1 month after the end of the quarter. The final declaration will still be due on 31 January as the existing self-assessment returns are now.
* Sorry, that was a bit mean.
The legislation does not allow HMRC to require returns more frequently but a business will be able to submit extra, mid-cycle updates. You do have to ask yourself why anyone would want to do this. As yet we do not have any clear information on the interaction between MTD income tax and VAT returns.
The quarterly returns must be filed electronically with HMRC directly from digital accounting records. Paper records will not satisfy MTD rules but you can choose between spreadsheets and software. Whatever product you opt for, it must be capable of accessing HMRC’s Application Program Interfaces (API) platform.
Taxpayers who are exempt e.g. those with total income under £10,000, will be able to use the existing systems.
Legislation sets out what functionality is essential plus the financial information that must be recorded. This includes the amount, date, and nature of income or expense. The level of information actually sent to HMRC is likely to be more summary and there are dispensations, for example retailers who will be allowed to group individual transactions into more manageable batches.
Where a rental property is owned jointly, each part-owner will be required to keep digital records of their share of income and expenditure. Given that record keeping applies to a property business as a whole rather than to individual properties, there is still considerable clarification required in this area, not forgetting Furnished Holiday Lets and non-UK properties which will also be pulled in.
Call me crazy but we believe that MTD is an opportunity, not just another compliance duty. It offers businesses a genuine chance to improve their productivity, accuracy and efficiency. It gives everyone a chance to achieve better control of their finances and prepare for the tax due on their income.
We believe that it would be reckless to wait until MTD becomes compulsory to start keeping digital records. Our clients will therefore have this year to become experts in the software, and work out processes that suit them and their business. They will then be ready for their first quarter while so many other people are stressing out about how they are going to manage this on top of their normal daily lives.
We are working with our clients to take their businesses digital over the next 12 months. By the time that the majority of people catch up, they will have spent a year improving their productivity, spending less time on admin, understanding what drives profit in their business. They will have a better picture of their tax liabilities and be ready for MTD.