The tax system is going through one of its biggest ever shake ups with HMRC’s Making Tax Digital scheme. First announced by former Chancellor George Osborne in his March 2016 Budget, the government is planning to have moved all businesses and individuals onto digital tax accounts by 2020. The end of the tax return, but many need to already start preparing for the change over the next year.
What is Making Tax Digital (MTD)?
The aim of Making Tax Digital is to give everyone an up to date real-time view of their tax affairs, rather than waiting for rush towards the self-assessment deadline to work out how much they owe.
Instead, most businesses, self-employed people and landlords will need to keep records digitally and will update HMRC on a quarterly basis using software and apps.
Who does MTD apply to?
Several consultations on the changes, focusing on unincorporated firms, closed in November 2016 and legislation and policy still needs to be finalised, but eventually all types of business will fall into the scope of MTD.
The changes will apply to businesses’ income tax and national insurance obligations from April 2018, VAT from April 2019 and corporation tax from April 2020.
What do I need to report to HMRC?
Businesses will need to provide summary data about their trading on a quarterly basis to HMRC. So rather than a full tax return, you could submit the totals of categorised income or expenditure.
You will need to record and categorise receipts and expenses in HMRC-linked record keeping software or apps and will be prompted to send a summary update when its due. Everything will need to be stored digitally, this could mean taking a picture of a receipt or scanning paper invoices into your chosen software.
HMRC is proposing that a business should provide their regular updates no later than one month after the end of an update cycle. The taxman is also suggesting that all businesses should have nine months, from the end of their period of account, to calculate and pay their taxable profit using an End of Year activity report.
Details are still being finalised on how the reporting year would work for each business, but HMRC has suggested it would prefer a businesses’ update cycle to begin on the first day after their first accounting date that follows 5 April 2018.
What support is available?
HMRC offers guides and worked examples on its website and an accountant should also be able to help guide you through the change and make sure you are still paying the right tax and claiming the correct allowances.
Businesses with turnover below £10,000 will be exempt and those with income above that who are still small can also apply to defer for a year. There will also be allowances made for charities, those with disabilities and those who genuinely can’t use digital tools.
HMRC is also showing some understanding on the complexity of the changes, so there won’t be any immediate fines for missed updates, but instead there will be a points penalty system that applies penalties after several failures.
This won’t start in full until after the first year, giving businesses what HMRC describes as a “soft landing” while they get used to the changes.