What will digital tax returns entail?
Making Tax Digital is here already, but when do you need to comply? Following our lead story last month, Vanessa Sanders takes you through the changes.
Doctors’ eyes often glaze over and their minds wander when the rudiments of tax and accounting are discussed, but attention must be paid to Making Tax Digital (MTD).
This is a fundamental change to the UK tax system affecting how businesses and individuals communicate their accounting and tax records to HM Revenue and Customs (HMRC).
MTD compliance is being introduced through a series of changes that have already started for some independent practitioners.
Since April 2019, VAT-registered businesses with a taxable turnover in excess of £85,000 have been keeping their accounting records and submitting VAT returns digitally. From April 2022, all VAT-registered businesses, irrespective of turnover, will be forced into digitisation.
Now the digitisation date has arrived for the self-employed, including individual members in limited liability partnerships and landlords – those individuals and partnerships renting property.
The date is 6 April 2024. Those within the corporation tax regime are waiting to have a date confirmed, although April 2026 is earmarked.
Your advisers should already be working towards assisting you to meet your legal requirements and statutory obligations by offering an approved – and it must be approved – system for maintaining the records of all medics in business or who have a rental property business.
As ever, if medics leave it too late, they are likely to find themselves left behind or faced with inflated costs as demand for expertise increases.
MTD for income tax
From 6 April 2024 comes MTD for income tax. It will apply to unincorporated businesses and landlords with an annual gross income in excess of £10,000.
The change will affect as many as 4.7m people, according to HMRC estimates, as digital record-keeping means leaving paper records and spreadsheets behind.
Given the administrative burden of learning new systems, all self-employed doctors should be planning now to move to digital accounting through approved tax software in order to benefit from experience and familiarity with systems ahead of HMRC’s deadline.
It is unlikely that, given the notice period, there will be a soft landing in terms of penalties for those who fail to comply.
Business implications
Some independent practitioners have engaged already with the process because they can appreciate the benefits of adopting real-time digital information provision.
Benefits include:
Timely debt-collection improving cash flow;
Budgeting for both business and personal expenditure;
Planning for the payment of taxes as cumulative figures allow proper estimations of liabilities.
Some doctors are taking the opportunity to review their business administrative and financial functions in order to rationalise
as the burden of compliance becomes increasingly onerous.
Streamlining all of the functions from raising invoices through to debt collection and live bank information, all feeding into tax planning, is particularly attractive if this can all be completed under one roof.
Robust software
Familiarity with new software is always a challenge and it will be tough for doctors who often rely on several different and unconnected sources of information, such as secretaries operating practice management software or liaising with billing operatives who are unfamiliar with digital accounting software.
Choosing robust software able to cope with future changes will be a must, as HMRC has to approve the digital links necessary.
The major challenge is in how businesses approach the adoption of the software, because many may be reluctant to change processes which have worked for a number of years.
As a first step, doctors will need to assess their business’s technical abilities to know what software, staffing and training requirements need to be implemented for this milestone change to tax filing.
Price sensitivity and the continuous struggle to keep costs under control means doctors should be investigating comprehensive packages which offer added benefits, such as business planning advice, augmented by partnering with others, such as financial advisers, to ensure personal financial objectives guide actions.
Problem for landlords
A stumbling block for landlords generating gross rental receipts over £10,000 is that many do not separate their rental business from their private affairs.
As live bank feeds will be required to link into the MTD software, separate accounts will become a necessity, unless doctors want HMRC to see their spending patterns – which is one of the ways they build a financial picture for inquiry purposes.
MTD forces change
With the introduction of MTD for income tax from April 2024 (MTD ITSA), the reporting of accounting data is to be aligned exactly with the tax year.
The Finance Bill 2022 will contain legislation to abolish basis periods for businesses, meaning that, regardless of the year-end, MTD will apply to the fiscal year (FY) ending 5 April.
The law will not require businesses to alter their accounting period if it is not in alignment; however, from a practical perspective, this is likely to be the action taken.
Without change to reporting periods, taxpayers with several sources of income would need to file MTD reports for differing quarterly periods in the tax year, which would be impracticable to manage – up to 13 returns if VAT is included.
The law will deem accounting periods ending on dates between 31 March to 4 April as ending on the tax year-end: 5 April. Any income/expenses arising after the end of the accounting period will fall into the next tax year. This will apply to both trading and property businesses.
Businesses which already draw up accounts to 31 March or 5 April will see no practical difference from 2023-24, the transition year.
Property-letting businesses already have to report to the tax year, but, in practice, many draw up their accounts to 31 March, which, by concession, is treated as a period ending on 5 April.
Under the tax-year basis, the self-employed will file MTD reports for all their sources of income by the same date each quarter, with a possible deviation for VAT if their VAT returns do not align with the normal quarter dates: March, June, September and December.
If you are VAT-registered as a sole trader or partnership, you may wish to change your VAT periods to align to these dates.
The estimated tax liabilities, based on those quarterly MTD reports should make more sense, as the income reported in the quarter will be what drives the tax due for the year instead of being behind and confused with the ‘payments on account’ system.
HMRC has recently consulted on accelerating tax payment dates for both companies and unincorporated businesses, which means that while tax payment dates remain as they are currently, advancing closer to the earnings’ time-frame in the future would clearly only be a small step.
Transitional relief
Businesses with a 30 April year-end will be particularly hit in the transition year (2024), as they will have to report profits for the period from 1 May 2022 to 5 April 2024 in FY 2024.
There will be a transitional relief to spread the extra income falling in FY 2024 over five years to FY 2028, but this bringing into real time could push people into higher tax bands for those years. This is worrying with rates of tax being increased through the new levies announced
Where businesses are carrying overlap relief arising from when trading commenced because a period was taxed twice, that over-lap relief will be offset against profits in FY 2023.
Digital record-keeping
Taxpayers must provide HMRC with returns of their income and expenditure every three months. Separate reports will be required for each type of property business; for example, furnished holiday lets, long-term lets and overseas property businesses.
Four reports in respect of each business will need to be made within one month of each business quarter-end; plus an end-of-period statement at the end of the accounting period or tax year. These may not be the same if you choose not to alter the year end to 31 March-5 April.
HMRC has wide powers to choose what financial information is relevant to calculating profits, losses or income of the business, including information about receipts and expenses.
This means actions will need to be decided in real time for inclusion in the appropriate return periods.
For companies, this will need some consideration about budgeting for spending habits in terms of when dividends are declared and paid to shareholders, but there is time yet to form good habits, as MTD for corporation tax is not scheduled until April 2026.
The regulations will set out the account categories for each type of business including adjustments for ‘private use’ and to claim any relief available. HMRC will require summarised totals of each account to be submitted in the periodic updates.
Conclusion
The success of MTD is critical to the Government, especially given the pandemic and our decision as the UK to leave the EU. MTD will not fail.
For everyone, the road ahead is long and likely to be bumpy. The message is: do not procrastinate.
The efficiency gains for private practice are not to be underestimated, although it will be a hard and concentrated slog.
Ultimately, going digital will help doctors operating in the private sector, when a better understanding of business will be vital to its survival.
Vanessa Sanders (right) is a partner at Stanbridge Associates, specialist medical accountants
