Update July 2017 - Since writing this blog HMRC have updated the timetable for Making Tax Digital.
Under the new timetable:
- only businesses with a turnover above the VAT threshold (currently £85,000) will have to keep digital VAT records from 2019
- businesses will not be asked to keep digital records, or to update HMRC quarterly, for other taxes until at least 2020
Making Tax Digital will be available on a voluntary basis for the smallest businesses, and for other taxes. This means that businesses and landlords with a turnover below the VAT threshold will be able to choose when to move to the new digital system.
MTD is one of the biggest changes to the administration of the tax system in a generation.
It is being introduced between April 2018 and April 2020 and is a completely new method of tax collection and administration. It will significantly change the way that businesses and landlords keep their accounting records and report their income and expenses to HMRC.
The exact date of entry into MTD will depend on a businesses/landlords level of turnover and whether they are a company or individual taxpayer.
Why is MTD being Introduced?
The main focus of MTD is to reduce the “tax gap”, which is the difference between the total amount of taxes collected by the Government compared to what is due.
The tax gap is caused by a number of factors, including taxpayer error (whether deliberate or through innocent mistakes). MTD is tasked with closing that tax gap to reduce errors and allow HMRC to better police the tax system.
The Government are also contending that businesses will make administrative savings once MTD is implemented. This remains to be seen.
What is MTD?
MTD will introduce the concept of digital quarterly reporting of income and expenses for relevant taxpayers (see below) through MTD approved software. HMRC have now conceded that spreadsheets can be used to report under MTD, but it is likely that the uploading of information through spreadsheets will require use of MTD compliant software.
Each trade or business undertaken by the taxpayer will require separate quarterly reports, therefore if a self-employed taxpayer also has a buy to let property, or the self-employed taxpayer has two trades, they will have to submit a set of quarterly reports for each self-employed business or another set of quarterly updates for their letting income.
The quarterly reports must be filed with HMRC within one month of the quarter end.
Businesses/landlords will also have to file an End of Period Statement (EoPS) to complete any annual tax adjustments (capital allowance claims, tax adjustments etc). The deadline for submission of this is likely be ten months from the end of the accounting year.
In addition to all the above taxpayers will be required to make a Final Declaration, the MTD equivalent of a self-assessment tax return. The Final Declaration will report income (and deductions) not reported through the quarterly reports e.g. investment income, dividends, employment income, pension contributions etc. The deadline for submitting the Final Declaration will be 31st January as now.
Businesses, self-employed individuals and landlords are required to start using the new digital service from a set date depending on the level of their turnover and business entity (sole trade, company etc) as follows:
- 6th April 2018 - Businesses and landlords that have profits chargeable to income tax where turnover is above the VAT threshold (currently £85,000) will be required to report under MTD from the start of the first accounting period after 5th April 2018. So, for example, a business with a 30th April year end will come into MTD from 1st May 2018.
- 6th April 2019 - Businesses and landlords that have profits chargeable to income tax where turnover is below the VAT threshold (currently £85,000) will be required to report under MTD.
- 6th April 2019 - Businesses which are registered for VAT will also have to submit their VAT returns through their MTD software.
- 6th April 2020 - Companies within the scope of the corporation tax regime will be required to report under MTD.
The VAT threshold is used as the MTD reporting threshold. Businesses with turnover in excess of the VAT threshold who are not required to be VAT registered (for example an exempt business) would be required to report under MTD from 6th April 2018.
There is an exemption for the need to report if income is below £10,000 (based on current rules), and Trustees can elect into the new regime if they choose.
Despite the Government insisting MTD will go live from April 2018, the pilot scheme has only recently been launched, and it is anticipated that the first MTD compliant software will not be ready until the end of the summer.
These factors alone bring a huge amount of uncertainty to the project, and don’t leave, in our opinion, sufficient time to iron out any problems encountered through the pilot scheme.
It is entirely possible the Government will decide to postpone the introduction of MTD for another year, but at present this isn’t something which we can rely on, and we have to plan for an April 2018 introduction date.
You can be rest assured that Hallidays will be monitoring the pilot scheme and any associated representations made during the process very closely. This will ensure that we are fully up to speed on the MTD process meaning we can support our clients through this significant change to the tax system, allowing them to plan with confidence for the new regime.
How can Hallidays help?
Please contact us on 0161 476 8276 or email email@example.com to discuss how these changes will affect your business and receive expert advice.
Posted 13th June 2017