Making Tax Digital

You may remember that couple of years ago, in Budget 2015, George Osborne announced “The death of the tax return”.

At the time he wasn’t at all clear about what this meant, but over the last couple of years things have been clarified.  It’s all still something of a work in progress, but the outlines of the new system are now laid out and so it seems a good time to let you know broadly how things will go.

The new system is called “Making Tax Digital”, or MTD, and it has two main aspects.  Both are around exchanging information with HMRC: there will be a new online portal for doing this, and there will be a new requirement to report business income more regularly (see below for details).

The implications for a lot of small businesses could be quite radical, as you may need to change how you keep your books and records.  The problem is that nobody yet knows quite what the changes will be.

We are therefore keeping closely in touch with HMRC to monitor developments.  We are also actively consulting with HMRC and other groups, to do as much as we can to ensure that the final system is as sensible as possible.

As things move on, we’ll keep you up to date.  In the meantime, if you have any questions please do give us a call.

Digital tax accounts

The first part of MTD is that all taxpayers will get a Digital Tax Account.  This will be an online portal run by HMRC which will bring together everything that HMRC know about you, and allow you to update it.

The information will be gathered from a variety of sources, such as employers, banks, and relevant Government departments.  Most of it is already available to HMRC, although it’s not been centralised and made available to taxpayers before.

Digital reporting

The information HMRC don’t currently have is about any business income.  This is the second aspect of MTD: all businesses (including partnerships, companies, and landlords) will need to start reporting a summary of their results to HMRC.

This means keeping the business accounts on a specialised accounting software package, submitting an update to HMRC every quarter, and then submitting the final accounts when they’ve been prepared (after the year end).

The main suppliers of accounting software are all preparing MTD-ready versions of their packages, but they’re not expected to be ready until the autumn. Part of the problem is that HMRC hasn’t yet decided exactly what information that they want to be provided and in what format.

There are going to be some exceptions from this reporting, but at the moment this is only definitely going to be available for businesses with a turnover under £10,000.  This means that even landlords with a single property may well be caught.

Otherwise most businesses will need to start this digital reporting from April 2018, although some are deferred for a year or two.

Future of tax returns

It’s not quite clear yet how this means “the death of the tax return”.  At the moment, HMRC are suggesting that all you will need to do is complete and file an online form each year confirming that all the data they have is correct, and telling them anything they don’t already know – which all seems rather like doing a tax return.

What is clear is that the reporting for the business is separate from your personal tax affairs.  This means that a sole trader will have to do at least six reports to HMRC every year – four quarterly updates for the business, one end of year summary for the business, and another one for your own personal tax position.

That’s just for income tax, so doesn’t include PAYE or VAT.

Things to do

If you’re not actively in business, but just have income from employment or investments, then you probably don’t need to do much just yet.  You’ll get a Digital Tax Account at some stage, which should make it easier to keep track of where you are.

If you’re a small business owner, then you need to start looking at your accounting package.  If you have one already, be prepared to upgrade it to an MTD-ready version in due course.  If you don’t have one, then you will need to think about moving over to digital record-keeping.

How we can help

We can advise you on the most appropriate accounts software to be using and that your set-up is appropriate in order to produce information in a format that is both compatible and appropriate for you to be sharing with HMRC.

You are likely to need business and tax advisory services on an ongoing basis throughout the year and not just at year end. We are gearing up our staff training and resources in preparation for this.