Most people have heard Benjamin Franklin’s quote that in this world nothing can be said to be certain, except death and taxes.Well what is certain right now is that tax in the UK is changing.
The driver behind this seismic change is HMRC’s Making Tax Digital (MTD) strategy, which is aimed at allowing them to interact digitally with all tax payers by 2020 and remove the current self-assessment tax return.
The exact details of this are sketchy. We are awaiting Consultation documents (condocs) to add meat to the bones. These documents have been drafted by the Treasury but their view is not to detract from the EU Referendum and therefore the condocs will not be released until after then.
Why is it being introduced?
The Treasury alleges that there is a £6.5bn tax gap from the SME taxpayer base. Very broadly that equates to each SME under declaring profits of £6,000 to HMRC. The MTD initiative is aimed at making inroads into that tax gap, although the Treasury reckon it will only recoup £6m of the missing £6.5bn!
What we do know so far?
From April 2018, HMRC intend for the majority of sole traders and landlords (including those in employment but also have a secondary source of £10,000 or more per annum) to keep records in some form of digital format and submit the high level information online – at the very least on a quarterly basis.
Following this timeframe, it will be rolled out to SME businesses by 2020 with intentions of reporting VAT and corporation tax obligations. The objective being that HMRC no longer feels spreadsheets are an adequate form of record keeping. By introducing this as mandatory, they feel it will make paying taxes and reporting information closer to real-time and therefore less room for error.
What will be reported?
The Condocs will hopefully provide the detail but it will probably be turnover (i.e. sales); and costs as and when they are incurred. Matters needing further clarity include:
- HMRC’s stated intention is that not every transaction will need to be reported. Where will the line be drawn?
- Will small businesses have the hardware to do this?
- How will errors, deliberate and innocent, be policed by HMRC?
- After four quarters reporting, will there be a final adjustment report to amend previous quarters figures or make any tax adjustments (for example for capital allowances, pension contributions)?
Problems
- New tax law is needed to lay down the statutory basis for this new process of tax filing. It is planned to start in April 2018 and in order for there to be sufficient lead-in time that law should be in place in a Finance Bill in early 2017. That means that the new legislation will need to drafted between August 2016 (when the consultation will end) and November/December 2016 (when the Chancellor usually delivers his Autumn statement previewing the new tax changes to be introduced). With the greatest will in the world, having only five to six months to draft new tax law to introduce such a fundamental change is ambitious.
- Figures from the Treasury indicate that MTD will be applicable to 5.4m of the UK’s population. Of that figure they estimate that 1.9m (35% of total) will be what they call, Assisted Digital. These are people and businesses that may be expected to need some assistance to interact with Government online. Out of that number, approximately 800,000 (15% of total) are classed as Digitally Excluded – with broadly 305,000 being unable to interact with Government online (i.e. no internet access) and 495,000 stating that they would never use the internet to interact with Government even if they could. What provision will they make for those taxpayers who are genuinely unable to use digital means?
The Way Ahead
As illustrated above there are some major issues to overcome before MTD can be rolled out in a proper fashion. The proposals in their current format are burdensome and could lead to increased costs and resource for businesses. With this in mind, professional organisations like the FSB and ACCA have counter-proposals to submit as part of the Consultation process.
We will watch with interest to see how this develops. Here at Robson Laidler we see ourselves being able to support our clients through this change in a number of ways. We already have numerous clients using Cloud-based accounting software and are therefore well-schooled in how this operates. Adopting a Cloud-based accounting software solution puts you in a prime position for a seamless switch to Digital Tax reporting but more importantly using such software provides you with your business’s up-to-date financial information. The ability to have this real time data at your fingertips is incredibly valuable – our team of business advisors can help you measure your progress against your goals, identify problems within the business early and so on.