Making Tax Digital is the most fundamental change to the administration of the tax system for at least 20 years.
The essential elements for businesses and landlords are:
- Paper records will no longer be sufficient: It will become mandatory for almost all businesses and landlords (self-employed, partnerships and limited companies) to use software or a spreadsheet to keep accounting records. Paper accounting records will cease to meet the requirements of tax law.
- Quarterly reporting: There will be a requirement to submit updates to HMRC each quarter directly from accounting software, within one month of the end of each quarter.
As your accountants we will support you through these changes and provide the ongoing services that you need. However, the changes are so fundamental that it will be necessary to review your current record keeping systems and to reconsider what work you decide to do yourself and which activities you wish to include in the service we provide.
Making Tax Digital – When does it start?
Your start date for Making Tax Digital depends on the size and structure of your business and your accounting year end. We will discuss your specific start date with you, but in general:
Income Tax (self-employed, partnerships, trusts and landlords who compete self assessment tax returns):
- Making Tax Digital will become mandatory from April 2018 for businesses and landlords with gross income over the VAT threshold (currently £85,000 per annum).
- Making Tax Digital will become mandatory for those below this threshold from April 2019.
From April 2019 all VAT registered businesses (including limited companies) will have to file their VAT returns directly from accounting software. The current online VAT return will cease to be available.
Corporation Tax (limited companies):
Making Tax Digital will become mandatory for corporation tax reporting from April 2020.
What are the exemptions?
The smallest businesses and landlords with gross income of less than £10,000 will be exempt. Also exempt are those who are not able to engage digitally for religious reasons or due to a factor such as age, disability or location (e.g., no availability of broadband).
Making Tax Digital – What do I need to do now?
The action required depends on the size and structure of your business and how you currently keep your records – we will need to discuss your transition to Making Tax Digital with you.
- Consideration may need to be given to the possibility of an exemption.
- If you currently use accounting software it will need to be upgraded. If you are considering acquiring software or joining the pilot, please discuss this with us first.
- If you currently maintain records on paper or a spreadsheet, your processes will need to change. You will need to make your own quarterly submissions to HMRC or provide records to us promptly after each quarter-end and engage us to do the bookkeeping and quarterly reporting.
Comments in tax press
It has been well documented in the tax press that the timetable for the introduction of Making Tax Digital is extremely tight and gives little time for tax payer, agent, software provider and HMRC to be ready to implement such change. The announcement of the general election has put yet more pressure on this timetable and at the time of writing it is not clear whether the clauses in the Finance Bill putting Making Tax Digital on a legal footing will survive the ‘wash-up’ process. Further, the leader of the opposition has called for the scrapping of quarterly reporting.
If the planned implementation dates remain as they are, this squeezes yet again the time for the system to be properly designed, legislated for and tested. The 2020 date for the full implementation of Making Tax Digital seemed to be linked to the planned end of this parliamentary cycle. Since that date is no longer politically relevant, does it give cover for a new government to allow more time for the project to be phased in?
Regardless, HMRC will continue to push a digital agenda: effective use of modern technology will bring greater efficiency into the operation of the tax system. But the proposed timetable is incredibly challenging. Let’s hope that all involved use the unexpected breathing space created by the prime minister’s announcement to have a long, hard think about creating a realistic roll-out plan.