HMRC handles over 70% of all government transactions and is embarking upon a huge programme of transformation, with digital services embedded into everything it now does.
By 2020, HMRC is going to require most businesses, self-employed people and landlords to keep their tax affairs digitally, with businesses required to update HMRC at least quarterly with accounts information.
Individuals will find HMRC pre-populating their Personal Tax Accounts with information already reported by employers and banks. And, ultimately, the changes will result in the end of the Tax Return.
Six consultations have been issued by HMRC about Making Tax Digital (MTD), with the closing date for comments 7 November 2016.
The Questions and Answers which follow are designed to give a flavour of the various issues and proposals open for discussion.
Q: What is Making Tax Digital?
A: MTD will see the introduction of personalised digital tax accounts for most businesses and individuals. Businesses will have to keep their business records digitally using MTD compatible software. Accountants will have digital Agent Services.
Q: Why is HMRC bringing MTD in?
A: HMRC has been given £1.3bn by the government to transform into a digitally advanced tax administration and believes digital accounts will improve the ‘customer’ experience, produce cost savings to business and HMRC, as well as help maximise tax yield.
Q: What is the timescale for rollout?
A: Non VAT registered businesses and landlords will be required to move to MTD starting in April 2018, with VAT registered businesses from April 2019 and companies from April 2020.
Q: How will MTD reduce the cost burden to businesses?
A: HMRC believes a lot of businesses are already using digital tools and says 99% of VAT returns are filed online, 98% of company tax returns and 85% of self-assessment returns.
Furthermore, HMRC feels more regular reporting of accounts information will help businesses monitor cash flow better and potentially help with loan applications, as businesses will be able to provide real time accounts information to lenders.
Q: But what about the cost of new MTD compatible software to maintain digital records?
A: This is a highly contentious point. HMRC is not going to provide free software for businesses. It is relying on the accounting software providers to offer free software products. It believes MTD will transform the software market, bringing about increased competition between software providers, with the end result being highly price competitive products.
HMRC has also kept out of providing software itself to reassure software companies that their investment decisions on providing no cost and low cost products will be unaffected by competing HMRC products.
Q: Why can’t I just upload the trading and expenses spreadsheets I am already keeping in my business straight to HMRC?
A: There are a number of reasons why. Businesses around the UK keep bespoke spreadsheets specifically tailored to their own needs, which means the data could not easily be transmitted in a standard form directly into HMRC’s digital software. In addition, HMRC is consulting on what accounts information actually needs to be reported every quarter.
Q: Is there any hope of financial assistance from HMRC to help me invest in new MTD software for my business?
A: There is hope! As part of the consultation process, HMRC is looking for ideas on what financial support would be reasonable for the government to give businesses to invest in new IT, software and training. Additionally, HMRC is considering to whom the support should be aimed and the appropriate form of any such tax relief.
Q: I have kept my business records in paper format for years. I have never been under enquiry with HMRC and my accountant tells me I keep robust records. I am worried I might start making mistakes when I am forced to keep records digitally. Has HMRC considered business owners like me?
A: This is a common concern that has been raised. Previously compliant businesses may turn into non-compliant businesses in HMRC’s eyes, purely because they are being asked to keep their business records in an unfamiliar format. HMRC is intending to help businesses by offering webchat, instant messaging, encouraging the use of trusted helpers in the form of family and friends who may be more tech savvy, as well as working with charities and libraries to provide assistance and WIFI facilities. HMRC is consulting on what other forms of support should be made available to help in the transition.
Q: I run a small business and keeping digital records could be the final straw, with the extra time, effort and cost I will have to devote to getting MTD right. I want to be earning a living rather than getting overwhelmed by accounting software. Are there any proposals to exempt the smallest businesses?
A: HMRC has announced MTD will only apply to unincorporated businesses and landlords with a gross annual income over £10,000.
HMRC is also proposing to defer implementation of MTD for a year, for another group of unincorporated businesses and landlords with an income above that threshold. It is consulting on what that upper threshold should be.
The most popular suggestion so far appears to be for the threshold for the ‘deferred for a year’ group to be in line with the VAT registration threshold. That figure is currently £83,000.
Q: If digital record keeping is forced upon me and I start to make mistakes, what will HMRC do?
A: HMRC is intending to have a 12 month ‘soft landing’ period, where no penalties are charged as people start to get to grips with all the changes. HMRC is currently consulting on a new penalty regime for people who fail to submit their quarterly summaries after that ‘soft landing’ period. The new points based penalty regime would be very similar to driving licence penalty points, with a financial penalty imposed only when points reach a set level. The points slate would be cleared after 24 months of improved filing behaviour.
Author: Guy Smith, Tax Investigations Manager