Making Tax Digital (MTD) – an ambitious initiative by HM Revenue & Customs which the government sees as producing “a transformed tax system and the end of the tax return” by 2020. For many limited companies and their advisers, MTD will signify the end of the annual tax return, specifically in 2018. By then, there will be only a few exceptions, so just a few groups of taxpayers still able to submit unwieldy tax forms once a year (until 2020).
What is MTD?
The idea behind MTD is to make tax administration more effective, efficient and easier for taxpayers, utilising a fully digital tax system.
The initiative has already begun with the registration of individual digital accounts for each taxpayer through which they can check their records and manage details with HMRC.
Similarly, accountants will be able to manage their clients’ tax accounts through the platform.
The system is expected to be fully implemented by 2020.
However, most businesses and individuals will be reporting quarterly with effect from 2018. It is therefore important that contractors understand the changes and how these changes might impact them now, so that they’re ready.
Making Tax Digital will allow you to:
View a complete picture of your business tax affairs through your digital account and manage all of your liabilities in the same place;
Prevent any tax due building up or request repayments on a more timely basis. (HMRC will collect and process information affecting tax in as close to real-time as possible);
Know how much tax you must pay straight away(so no waiting until the end of the tax year to calculate any liabilities).
Who does MTD apply to?
Almost everybody. The changes under MTD will apply to just about all taxpayers including businesses, all small businesses, the self-employed, individuals and landlords. The system itself will provide real-time tax calculations so that you’re up-to-date with any tax liabilities.
And from 2018, all except landlords and few taxpayers who can’t get online, will be through the system. For PSCs who are already reporting their tax information online however it will continue to be business as usual. Settling up with HMRC this way — digitally — ensures that data is sent straight into HMRC’s systems; ends the bureaucratic form filling, reduces the risk of late filing and loss of forms in the post.
What MTD isn’t
One of the biggest changes thanks to MTD is going to be the removal of the tax return, due to all information being processed online. The system will require information to be maintained on at least a quarterly basis. But this doesn’t mean that full tax returns will be required on at least a quarterly basis; just that you’ll need to provide more regular updates online. We’ve heard from the government that MTD should, eventually, be more “light-touch” for taxpayers than the returns of today.
Through the real-time MTD system, you’ll be able to view and pay your tax liabilities in and throughout the year, rather than wait until the end of the year. This should make it easier to understand how much tax you owe and to budget accordingly.
What’s next with MTD?
If you are a business owner, you’ll be required to use the digital tools (e.g. software, apps, etc) to maintain records of your income and expenditure. HMRC will make available basic apps and software but many businesses and accountants will choose to use more comprehensive commercial software. There’s currently a bit of row about the potential cost to businesses, even though the basic software has been promised to all users free of charge (as detailed in the Government’s MTD paper).
But the same MTD document recognises that the more comprehensive software that businesses and tax advisories will likely opt for (we, for example, are teaming up with cloud accountancy firm FreeAgent), will provide the same MTD reporting capabilities albeit with the added reporting functionality to assist in managing a contractor’s business.
Changes to MTD?
There is currently time for the government to announce changes to MTD, so this overview should be read in conjunction with the latest updates from HMRC.
One change of late is an exemption for lower turnover businesses. Meanwhile, HMRC has been recommended by MPs that, by March 2017, it “should have a credible plan to make savings without causing further failure in customer service”.
The Public Accounts Committee isn’t alone in trying to tweak MTD. Many parties are critical of the timing of MTD, saying it should be delayed (such as by 12 months) to give taxpayers more time to prepare.
However, it definitely could be argued that the Government have had sufficient time and warning to implement the MTD platform successfully. There do exist other concerns. Like many similar projects undertaken by the Government, MTD could unfortunately be left to the last-minute, affording little time to rollout to the taxpayer, agents and software providers and even less time to bed down.
Though the fact that the OTS last week said its new VAT review would consider VAT simplifications under MTD suggest to us that quarterly accounting is going to happen. Indeed, it’s probably going to happen without the big delays that some want.