‘Making Tax Digital’ is a new approach proposed by HMRC to the reporting of business accounts so that the correct tax can be collected. In essence, rather than the annual requirement to submit a tax return, HMRC now wants a return to be done once a quarter, although the tax due will only be paid annually as at present. Businesses of all types, will have to use compatible software to keep their records, and they will, in most cases, need to pay for this software. As awareness of these changes grows, it is starting to cause many business owners some concern.
HMRC issued ‘Making Tax Digital’ consultation documents in August. In response to these documents, Stewart McKinnon and Wendy Cheung from M&S Accountancy and Taxation attended a meeting with members of HMRC’s Making Tax Digital Team in Edinburgh on 12 September. The Institute of Chartered Accountants in Scotland (ICAS) and the Chartered Institute of Management Accountants (CIMA) were represented at the meeting but unfortunately there were only about another 8 people in attendance. Given the major and far-reaching changes to the tax rules that are now imminent for businesses, the turn out from accountants and tax advisers was hugely disappointing. We can’t help but feel that millions of people are effectively sleep-walking into ‘Making Tax Digital’ - which is currently due to come into place in about 18 months’ time (6 April 2018) for most non-corporate businesses.
So, following the representations made to HMRC after the last consultation exercise in January what are the current plans being put forward by HMRC?
For all but the smallest of businesses (those with a turnover – not profit - of £10,000 or less) they will be required to submit in a digital format, on a quarterly basis, details of the business income and expenses. Failure to do this will lead to automatic penalties being charged.
Manual business records, Excel or other forms of spreadsheets will not be acceptable to HMRC. For most sole trader or partnership businesses this will be compulsory from 6 April 2018.
At the end of an accounting period, a taxpayer will be required to submit an ‘end of year activity’ reconciling their tax position (yes a tax return although it won’t be called that) and continue to pay tax in much the same way as now.
The potential to extend the ‘cash basis’ to businesses with larger turnover than the current threshold of £83,000 is being considered. Although in theory this may avoid the need for adjusting for stock, work-in-progress, bad debts etc., if this basis is adopted for tax purposes it could effectively mean another set of accounts, in a different format, having to be prepared for lenders, banks etc. so there would not be much in the way of cost savings for business here.
It is proposed that the ‘cash basis’ would apply for those letting properties and here we do agree that this would be a practical change.
Limited companies will have to start filing quarterly on a digital basis from April 2020 and there are also changes on the way for VAT, which will impact from 6 April 2019.
Interventions by HMRC, as just now, will continue, although it was indicated that they may issue ‘prompts’ to taxpayers during the year if the summary data on a quarterly basis looks odd! This would suggest that there is the prospect of more businesses being asked about their figures more regularly if they don’t meet the expected ‘computer model’. HMRC would probably prefer to call it ‘guidance’.
At least the prospect of compulsory quarterly tax payments that we were initially led to believe many businesses wanted is to be dropped. However, there will be a method of allowing voluntary tax payments to be made in advance if desired.
HMRC even suggested that a taxpayer may be able to choose to have variable accounting periods within a tax year - which we couldn’t quite believe as it would allow tax on profits to be legally deferred until a different tax year. We thought it only fair to point this out to HMRC and we would not expect this option to remain in its proposed format when the actual legislation is introduced.
One point that HMRC don’t seem to accept is the cost burden for businesses who will at the very least be required to incur the cost of having appropriate software for recording their business income, but given taxpayers’ natural fear of making mistakes and being harshly penalised by HMRC, it is likely that this activity will be passed by many clients to their accountants or tax advisers to complete and submit, leading to extra costs.
HMRC’s estimate is that Making Tax Digital will help towards their budgeted annual savings of £400 million per annum but our estimate is that depending on how much detail businesses are required to report they could incur additional costs of £billions per annum in software costs and possibly professional fees.
On this point, our current thinking is, depending on the level of information that needs to be provided in the quarterly return, for HMRC, where clients do record their business income and expenses on digital software, M&S will provide the quarterly service as part of the existing annual charge for clients so no extra costs will be incurred. The only danger to this will be if HMRC insist on information being provided which requires a detailed summary of income and expenses each quarter. Instead we would anticipate carrying out the detailed summary and tax analysis only as part of the ‘end of year activity’ in much the same way as we currently do when completing a client’s annual tax return.
We will be submitting our formal response to the Consultation document to HMRC by the deadline of 7 November. One of our biggest concerns is that the sector of taxpayers who are to be used as the guinea pigs are many of those least well equipped to take on these major changes and that the smaller businesses should in fact be the last to make the change.
We would encourage as many business owners as possible to make their views known on these proposals through their trade organisation or representative bodies such as the Chamber of Commerce or Federation of Small Businesses. Alternatively if you would like to provide us with your thoughts and responses we would be happy to co-ordinate these and include them as part of our response.
More detail is due to be announced as part of the Autumn Statement on 23 November and a further update will be provided then.
After that, we would expect the next stage would be to hold seminars for our many clients who will be affected by these changes.