Making Tax Digital Explained

The government may have changed but plans to implement a fully digital tax system – known as the Making Tax Digital (MTD) initiative – by 2020, are unaltered. A few weeks ago the first consultation documents on these proposals were published, providing details of how partnerships and unincorporated businesses will be affected. Note that amongst those affected will be landlords with unincorporated property portfolios.

In this article, Lesley Stalker a Partner at Surrey Accountants RJP LLP outlines what the latest government recommendations are and the implications for those involved.

Background to the new digital tax system

Implementing a digital tax system is part of a wider government vision to enable all taxpayers – businesses and individuals – to pay their taxes and view and manage their tax information online, via a range of digital channels.

There are four aims within the MTD vision, (known as ‘foundations’), which the government has set out as follows:

1. Tax compliance will become simpler. It will be easier to access the information HMRC holds about you through your Digital Tax Account and ensure your details are always correct.

2. Information will be held to enable tax liabilities to be calculated more quickly. Taxpayers will be made aware of their annual tax liabilities in real-time and as a result, will be in a better position to manage their financial obligations, thus avoiding the potential of falling into arrears.

3. Information will be held in one place. Rather like an online bank account, all taxes will be consolidated into a single digital tax account.

4. Interaction with HMRC will become easier. Communication with HMRC will become predominantly digital which will mean it can be conducted at the most convenient time for the taxpayer.

The most obvious initial change will be the abolition of the current annual self-assessment tax return system. This will become redundant because the taxes payable will be calculated and paid on an ongoing basis, throughout the year.

Opportunities to have your say and get involved

Although a digital tax system is definitely on the horizon for 2020, the exact details are still being worked on. Since the proposed changes are still at the consultation stage, there is scope for the relevant stakeholders – partnerships, unincorporated business owners and landlords – to respond to HMRC with suggestions and objections before 7^th November 2016. A further consultation will be launched when proposals for incorporated businesses are released later in the year.

At this initial stage, viewpoints from taxpayers involved in partnerships and unincorporated property businesses can be shared, and suggestions about the proposed changes can be made on the following areas:

• Record keeping and updates

Business owners will potentially have the option to reduce their reporting requirements, eliminating complex accounting adjustments required at period ends and making a more frequent reporting framework less onerous. For example, a shop that values its stock at the end of the year will not have to value its stock more frequently for Making Tax Digital;

• Changes to the ‘basis period rules’

The ‘basis period rules’ which set out accounting periods for partnerships and the self-employed may be changed, enabling greater flexibility for seasonal businesses. Under the proposed rules, taxpayers will be able to set their accounting dates to fit in with other reporting obligations and individual preferences, and anyone wishing to remain on an annual accounting period for tax may do so. The same will apply for unincorporated landlords;

• Reporting expenses

The rules for reporting capital and revenue expenditure will be simplified, ensuring that assets bought for use in a business and which lose their value over time, e.g. computers or furniture, will continue to be treated as capital items and attract up-front tax relief.

• Higher cash basis accounting threshold

The turnover threshold of cash basis accounting could be extended to make it available to larger businesses and also landlords, in order to ease the transition to quarterly reporting. It should be noted that partnerships with corporate members, limited liability partnerships and other similar, more complex partnership entities would not be able to use the cash basis;

• Voluntary pay as you go

The introduction of voluntary pay as you go options across all tax categories will mean taxpayers can spread tax payments to avoid either getting into arrears, or being unable to pay their tax bills;

Other changes proposed include:

• Alignment of the tax administration framework including a simplification of late filing and late payment penalties;

• Use of third party information to calculate tax liabilities more accurately.

Start dates proposed for Making Tax Digital

According to the proposals, the following dates will be important starting points for the new digital tax accounts reporting regime:

• Quarterly reporting will commence from April 2018 for all unincorporated businesses, partnerships and buy-to-let landlords, which will render forms SA100, SA800 and SA900 redundant;

• Quarterly reporting will commence for VAT registered businesses by April 2018;

• Quarterly reporting for incorporated businesses will commence from April 2020.

Other important aspects of the reforms under consultation include:

• The initial creation process of a digital tax account; whether it will need to be created initially by the individual taxpayer, or if it can be created and then accessed by a professional accountant or tax advisor acting on the taxpayer’s behalf.

• The ability for an individual to challenge third party data held by HMRC directly with the third party, with HMRC having no active role in the discussions.

A positive change for all

Whilst it is clear there will be some initial additional work involved in meeting these MTD proposals, hopefully their long term implementation will bring positive changes other than providing HMRC with an opportunity to collect tax more quickly. If the proposals work as envisaged, they should simplify reporting requirements and provide a greater opportunity for accountants to develop a closer ongoing working relationship with their clients. This in turn will enable accountants to give more regular advice on cash flow or management accounting issues.

Further information

To access HMRC’s consultation documents for unincorporated landlords, click here.

To access HMRCs consultation documents for unincorporated businesses including partnerships, click here.

Lesley Stalker is a partner at Surrey accountants RJP.