Gear up for Making Tax Digital

Red technology background and abstract digital tech circle.copy space.

It’s coming for you soon. Ian Tongue explains what is happening and what you can do to plan for it.

The biggest shake-up in the tax system since self-assessment is on its way: Making Tax Digital – or MTD – as the taxman calls it.

HM Revenue and Customs (HMRC) estimates that it loses as much as £9bn in each year due to the inaccurate submission of tax returns.

So its new requirements force taxpayers who are paid outside of the PAYE system to electronically disclose their earnings/income more regularly than the current annual tax return or ‘self-assessment’ system. It also affects other taxes such as VAT.

The measures are sold to us as improving accuracy of the information disclosed by pushing taxpayers onto digital record-keeping.

Eventually, this will allow the taxpayer to see all of their tax information in one place in a similar manner to online banking.

The cynic in me would argue that these measures do little to improve accuracy of data supplied by the vast majority of small businesses and the agenda is to eventually accelerate tax payments for those paying income tax under self-assessment.

Time will tell whether this happens, but HMRC is committed to digital reporting and obtaining more accurate information of a taxpayer’s affairs and on a more timely basis.

This article outlines the new measures and how you can prepare for the changes that will affect you over the coming years.

What’s it all about?

digi-taxmanHistorically, information regarding a taxpayer’s affairs could be submitted manually, whether this be for a self-assessment tax return or other taxes such as VAT.

Most consultants will have moved to some form of digital record-keeping, as it is generally a more efficient way of running the business, but there are those who still keep manual records or just send the source documents for the accountant to sort out.

The new measures effectively prevent you from having anything other than a digital accounting system. Importantly, this software needs to have a direct link to submit the information to HMRC.

The changes were penned for April 2018, but with Brexit and other pressing matters, the time­table was pushed back ­– ­although you could adopt early from 1 April 2018 on an invite-only pilot scheme. Quite sensibly, HMRC also decided to phase in the changes for different taxes.

Much is still outstanding and changes will no doubt be made both in the run-up to implementation and after. Therefore, the information highlighted within this article is as things stand at the time of writing.

Timetable for implementation

The first batch of businesses affected are those that are VAT-registered. For doctors, this usually means those who are engaging in medico-legal work or other non-medical work in excess of the mandatory VAT registration threshold of £85,000 on a 12-month rolling basis. It does, however, affect any VAT-registered business and implementation is set for 1 April 2019.

No doubt, the finalised time­table for other taxes will be made following the introduction of MTD for VAT, but as things stand, HMRC wants to go live for income and corporation taxes from 1 April 2020.

This is the date that most consultants carrying out private work will need to be ready. With the continued uncertainty over Brexit and the inevitable teething problems that will arise, it remains to be seen whether this proposed date is realistic.

What will it involve?

Eventually, HMRC sees each taxpayer and business having a digital portal with all of their tax information visible and largely up to date.

Red technology background and abstract digital tech circle.copy space.

The PAYE system switched to monthly reporting some time ago. But if that system is anything to go by, we are in for a bumpy road, as the supposed up-to-date information is often not available for a long time.

The VAT-registered businesses affected from 1 April 2019 will not be able to manually enter their figures onto the current online reporting platform.

There must be a link from your software direct and if it is not compatible by that date, you will be expected to replace it with a system that is. Otherwise you cannot fulfil these new obligations and will eventually face penalties.

The frequency of submission will vary based on your current submission pattern and any VAT schemes that may be in place. Your accountant will be able to advise you based on your individual circumstances.

The second phase

For the second phase of implementation affecting income and corporation taxes, it is anticipated that you will report your figures to HMRC on a quarterly basis with an opportunity to submit a year- end reconciliation in a similar manner to the annual self-assessment tax return.

It is anticipated that the reporting will be on a cash in-out basis for most businesses, due to the burden and cost of preparing accounts on the usual invoice basis.

The exact detail will be rolled out in due course and no doubt covered within Independent Pract­itioner Today, so keep an eye out for updates in 2019.

Making Tax Digital is going to be a painful transition, as rarely do such radical changes run smoothly.
With VAT-registered doctors being in the minority, it does at least limit the initial numbers affected, but is inevitable that HMRC will move to this system over the coming years.

Ian Tongue B&WThere will be benefits for the taxpayer to understand their tax affairs in more detail, but I suspect that, in the longer term, it will result in paying tax more frequently than the current tax system.

Ian Tongue (right) is a partner with Sandison Easson chartered accountants