From 2018, the UK will have a digital tax system, which means most businesses, self-employed and landlords will need to use software or an app to keep their records digitally and update HMRC quarterly. This is all part of HMRC’s Making Tax Digital and with six consultations now released, here we review the key points you should be aware of. (If you are a small business or landlord you may be particularly interested in the exemptions section of Consultation One).
Consultation One: Bringing business tax into the digital age
This consultation focuses on the practicalities of digital record keeping, including:
- Acquiring and transitioning to digital tools. HMRC considers the practical implications of moving to a digital system and what guidance and support – both practical and financial – it will need to deliver. This includes making free products available for small businesses with straight forward tax affairs and enhancing the support HMRC already offers.
- Process for updating HMRC. Businesses will be expected to use their software or app to record and categorise their day-to-day activity, such as copies of their receipts and expenses. From this information data summaries will then be created, showing the totals of categorised income and expenditure (not transaction records). Businesses will then be required to submit these summaries directly to HMRC from the software when prompted.
- Simplifying Partnership Reporting. HMRC proposes to abolish the current requirement on partners to report their individual profit share in an annual tax return.
- End of Year Activity. HMRC recommends that all businesses get nine months from their year-end to complete a review of all of the data summaries they have submitted to HMRC, before they make a final declaration.
- Exemptions. HMRC suggests making ALL incorporated businesses and landlords with a turnover below £10,000 exempt of the new obligations. And for those small businesses and landlords with a turnover above £10,000 and below a threshold to be determined, they will be given the option to defer the start of Making Tax Digital by one year.
- Side note – those that genuinely cannot use digital tools will not be forced to do so and will be protected and helped. Charities and Community Amateur Sports Clubs are exempt and proposals are being sought on other groups that should be exempt.
Consultation Two: Simplifying tax for unincorporated businesses
For Making Tax Digital to work, HMRC is aware that it needs to reduce the work involved for businesses to comply with all of the current tax obligations. Its proposals are:
- Cash Basis Entry Threshold. HMRC proposes simplifying the way businesses with trading income calculate profit. Currently, businesses enter cash basis if their turnover is below the VAT threshold (£83,000). HMRC is seeking views to raise this threshold to anywhere between £100,000 and £166,000.
- Reforming the distinction between capital and revenue expenditure within cash basis. It is common for businesses to adjust profits for tax purposes, including distinguishing between capital expenditure (one-off expenditure) and revenue expenditure (day-to-day costs). Therefore, to make it easier for businesses to determine which costs can be deducted when calculating taxable profits, HMRC proposes to provide upfront relief for all types of expenditure (other than excluded assets, such as property).
- Reforming reporting periods. It is hoped that in the long-term businesses will be able to choose an accounting period and pattern that suits them. Through more regular updates, either quarterly or more frequently, if the business desires, people will be able to view their tax affairs in a ‘near real time’ basis.
Consultation Three: Simplified cash basis for unincorporated property businesses
The third of the consultations looks at letting certain landlords pick whether they would like to account on a cash or accruals basis. It is thought this will simplify the process for landlords and, by proposing no turnover limit, means every landlord will be able to choose their preferred accounting option.
Consultation Four: Voluntary Pay As You Go (PAYG)
Making Tax Digital will give everyone the opportunity to make voluntary payments throughout the year towards their tax liabilities. This will be of benefit to most as it will give everyone more control over their cash flow and how much and how often they make payments to HMRC. This consultation looks at how these payments would be managed and how the payments will be allocated across the different taxes.
Consultation Five: Tax administration
HMRC is looking at how it will adapt its current tax administration legislation to Making Tax Digital. As part of this they are proposing new penalty methods that will be easier to understand and will give people the chance to rectify mistakes before they are penalised. These include:
- Late Submission Penalties. HMRC proposes a graduated model where points will be given for each non-deliberate failure and a penalty will only be given after several failures. Those that are deliberately non-compliant will face stronger sanctions. It is also worth noting that HMRC will take a softer approach to penalties in the first year of a business’s Making Tax Digital obligations.
- Late Payment Penalties. HMRC are looking for a fair response for late payment of tax and suggests a new penalty interest regime, which gives leeway to those that have accidentally under paid or overlooked their tax liability.
Consultation Six: Transforming the tax system through the better use of information
Here HMRC looks at how it can use the information it already gets from third parties (employers, banks, building societies) to give a more accurate account of an individual’s or businesses tax liabilities. It is thought that a better use of this information will reduce customers who build up under or over payments. HMRC is also looking at ways to use the account to get additional income information from individuals. In this way it is hoped that customers will never have to update HMRC about information it already has.
Once HMRC has an efficient process set up for third party data, new sources of information will then be looked into, such as how to get information of investment income (including dividends and shares, peer to peer lending and income from property) into the digital tax account. It is important to note that HMRC will release a consultation on how to obtain and use this additional information before it comes into fruition.
Making Tax Digital is the future and all businesses, self-employed and landlords will need to abide by the new rules. To be prepared for the changes, I advise that you begin getting your affairs in order now and get used to keeping regular records. You should also be speaking to your accountant on a regular basis to ensure that they are up-to-date with all of your financial information.
If you would like to respond personally to these consultations, please visit www.gov.uk/government/collections/making-tax-digital-consultations. The consultations are open until 7 November 2016.