Making Tax Digital: timetable and quarterly reporting plans at a glance

Following feedback from consultations, HMRC is to modify key elements of the Making Tax Digital (MTD) plans, but is sticking to the April 2018 deadline for the introduction of new quarterly reporting requirements, despite no decision as yet over whether to go ahead with the £10,000 exemption threshold for small businesses

Small businesses, sole traders, self-employed people and landlords will be required to start using the new digital service from April 2018 if they have profits chargeable to income tax and pay class 4 National Insurance contributions (NICs). The start date is April 2019 to start reoirting VAT through the system, and April 2020 for those that pay corporation tax.

It has not been confirmed what the cut-off threshold for larger companies under Making Tax Digital will be as yet, although tax experts are expecting that businesses with annual revenue over £10m and larger partnerships will not be within the scheme as their tax affairs would be too complicated to report in this way.

Individuals in employment and pensioners will not have to use the digital service unless they have secondary incomes of more than £10,000 per year from self-employment or property.

Latest HMRC estimates include the MTD for business (MTDfB) changes will contribute £945m to the Exchequer by 2020/21 and bring in around £2bn by 2021/22. The estimates represent net tax gap savings arising as a result of more timely and accurate record keeping.

HMRC has published its response to the six MTD consultation documents published in August 2016. Each focused on specific customer groups or specific elements of MTD reforms, and attracted widespread comment and criticism, as well as over 3,000 consultation responses.

1. Bringing business tax into the digital age

HMRC said responses showed ‘overwhelmingly support’ for  the move to a digital tax system, although there were concerns over the pace of change, the capability of the smallest businesses and those who struggle with digital technology to adapt, the business burden, and data security.

One of the most significant changes from the original plans is that businesses will now be able to continue to use spreadsheets for record keeping, although HMRC says this is likely to involve combining the spreadsheet with software.

Free software will be available to businesses with the most straightforward affairs and HMRC has clarified that the requirement to keep digital records does not mean that businesses have to make and store invoices and receipts digitally, acknowledging this was something they were particularly concerned about.

Businesses eligible for three line accounts will now be able to submit a quarterly update with only three lines of data (income, expenses and profit). Activity at the end of the year must now be concluded and sent either by ten months after the last day of the period of account or 31 January, whichever is sooner, allowing for a longer period for filing.

Charities (but not their trading subsidiaries) will not need to keep digital records. For partnerships with a turnover above £10m, Making Tax Digital is deferred until 2020.

However, the government is still considering other critical issues, including the initial exemption threshold for the smallest unincorporated businesses, and whether to defer the mandatory start date by one year for the next tier of small unincorporated businesses and landlords with annual incomes of above £10,000, but below a threshold to be determined. Final decisions will be made before legislation is laid later this year.

In response to calls from the Treasury select committee, among others, for the new approach to be thoroughly tested prior to launch, HMRC says it will begin piloting digital record keeping and quarterly updates for a full year from April 2017, building up to working with hundreds of thousands of businesses and landlords before rolling the services out more widely.

HMRC also claims, in an updated impact assessment, that the administrative burden will be less than critics have indicated, and is calculating a significantly smaller one-off transitional cost of £280 per business, followed by small ongoing annual saving.

2. Tax administration

Having considered the responses to the proposals for late submission penalties, HMRC says it recognises that more work needs to be done and will look again at this. During the transition to MTDfB, taxpayers will be given a period of at least 12 months before they are charged any late submission penalties.

Most respondents considered penalty interest to be the most attractive proposal for a late payment sanction. Current interest rules for income tax and class 4 NICs will continue to apply, and HMRC is to consult further on specific proposals for late payment penalty interest and the alignment of interest rules in 2017.

3. Simplifying tax for unincorporated businesses

The government has chosen to proceed with two of the measures published in the consultation. These are increasing the entry threshold for the cash basis to £150,000, and simplifying the rules on capital and revenue expenditure within the cash basis to make it easier for businesses to work out whether their expenditure is deductible for tax.

As a result of stakeholder comments, further consideration is being given to the reform to the basis period rules and measures to simplify period end reporting requirements.

4. Simplified cash basis for unincorporated property businesses

This consultation considered the extension of cash basis accounting to unincorporated landlords. The government has decided to include a maximum rental income threshold of £150,000 per property business. This excludes only 0.5% of businesses, leaving approximately 2.36m eligible businesses with up to 1.8m expected to benefit from the administrative savings of using cash basis.

5. Voluntary pay as you go

The majority of respondents wanted voluntary payments made to digital accounts to be easily and speedily repayable. HMRC has decided that a repayment will not be repayable shortly before a liability becomes due only if the taxpayer failed to pay on time in the previous 12 months.

HMRC says it agrees that early repayments are better left until MTDfB is fully embedded.

There were some concerns over the proposal that HMRC would allocate voluntary payments against tax liabilities as they arose, instead of the taxpayer choosing how this should be done, and over whether HMRC systems would ensure this was carried out in the taxpayer’s interest. HMRC says it has decided to proceed with its proposal on payment allocation, arguing this will reduce the need for taxpayers to have to access their digital tax account to tell HMRC where payments should go.

HMRC says it will ensure that robust allocation rules are in place and publicly available.

6. Transforming the tax system through the better use of information

In 2017, HMRC will start to use PAYE information during the tax year to calculate whether the right tax is being paid. In the short-term, taxpayers will still receive letters directing them to their digital account to check this, but in future, they will be prompted digitally to check their tax account.

HMRC reports it has been working with third party information providers and individual taxpayers on co-designing a process for resolving queries when someone believes the information provided by a third party is incorrect, but there is no detail so far on this process.

The HMRC Making Tax Digital: consultations - responses are here

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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