Making Tax Digital - Are you ready for it?
Article appeared in the April issue of SAIF Insight.
Many of you, I hope all of you, will have heard about making tax digital (MTD) but I imagine many of you have considered it is something you need not worry about, your accountant will sort it out for you or it is for businesses bigger than yours. Well except for the middle option you are wrong and even the middle one will require changes.
So what is MTD and why is it happening?. The Government and HMRC are wanting to get more and more information on-line and are suggesting that it will be much easier for us. In some respects they are correct as currently much of what individuals have to put on their tax returns is already being supplied elsewhere.
- If you are employed on PAYE then RTI from the employer sends in that information; and if your only other income is bank or building society interest then that also is sent in by the banks and building societies.
- In some cases HMRC have part of the story such as: they are getting returns from banks and building societies of the interest charged on buy to let mortgages but they don’t know what rent is received for those properties; this is an example of where HMRC believe they may be missing out on people reporting income as there seem to be more buy to let mortgages than there are rental properties on tax returns!
- As for businesses they are only getting annual accounts and in some cases these might not be until almost two years after the year end of the business and there is concern that many small businesses, especially those doing their own accounts and returns, may not be getting the numbers right but short of HMRC enquiring into the numbers submitted there is little that can be done. We know HMRC is short on resource to carry out such enquiries.
So the Government’s story is that it would be better for people if they sent in (or could check what is being submitted by others about them) in a more timely manner than once a year. The first step was the creation of the personal tax account which if you have looked at yours recently you will see your tax account, your national insurance and state pension estimate. But what does it mean for businesses?
Even in the Budget in March 2017 changes to what might be happening were announced but for most businesses which are not companies and have a turnover above the VAT registration threshold MTD is due to start in April 2018, smaller business and landlords with turnover below this threshold but over £10,000 will start in April 2019 and Companies will be joining in 2020.
The basic concept of MTD is that a business will now have to prepare quarterly submissions (it is not entirely clear whether this is the calendar quarters or business quarters if different) and an annual reconciliation. At the moment they are still suggesting businesses can have different year ends but the annual accounts (reconciliation?) will now have to be submitted within 10 months of the year end or 31 January following the year end whichever is earlier.
The quarterly submission is to be done using an approved software and basic software is to be provided free by software suppliers but as yet the software suppliers have not had an agreed format or requirements supplied so we cannot say what the form will be. If you already use an accounting package, as with wages programmes for RTI, there will almost certainly be a new function provided. However, many businesses neither use nor need to use accounting software and this will be a new task, and cost, for them. It has been suggested that for those that might be using spreadsheets there will be some form of interface available.
So businesses need to be aware and be ready to take steps to comply though the House of Lords is suggesting a delay and changes. Why might it be useful – HMRC will then be able easily to look at underlying data within accounts and probably pick up many of the common errors people make when submitting their numbers and this will mean they can collect more tax – they believe there is an £8 billion shortfall due to inaccurate reporting by individuals.
Author - Jonathan Russell is a chartered accountant and partner at ReesRussell in Witney Oxfordshire and Russell Phillips in Gerrards Cross, Buckinghamshire. His firms are members of the UK200Group of Independent Accountants and Lawyers
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