HM Revenue & Customs (HMRC) are in the process of transforming the administration of the tax system via their Making Tax Digital (MTD) initiative. It is an inevitable and progressive move towards a more modern tax system that is purported to be ‘more effective, more efficient and easier’ for taxpayers. HMRC also aim to reduce the £8bn per year in tax lost from avoidable taxpayer errors.
All unincorporated businesses and landlords with annual income above £10,000 will be required to comply with the new digital quarterly reporting obligations under MTD from April 2018 or April 2019 if turnover is below the VAT threshold. This allows smaller businesses an extra year to get to grips with the new mandatory requirements. However, there are concerns that this is still an ambitious timescale for implementation of the programme and that the changes will have an unwelcome impact for those who already find it challenging to keep on top of their administrative obligations.
While incorporated businesses remain unaffected until 2020, this will apply to you if you are a sole trader, operate as part of a farming or business partnership, act as trustee (or manage finances for trustees) of a landed estate or are a landlord with rental income.
The way in which MTD will work is that taxpayers will need to acquire approved software to record their income and expenditure digitally and a key summary of these figures will be sent to HMRC every three months. There will be a nine month window after the year end to make any necessary adjustments to their full accounts. Recently, it has been clarified that spreadsheets can still be used as a form of digital record keeping and that certain spreadsheets with the function and capability to send data directly to HMRC will be acceptable. Therefore, it may be easier for businesses who are already using spreadsheets to transfer their data over to a different type of spreadsheet that is compatible with HMRC systems.
However, many landlords and small businesses will view MTD quarterly digital reporting as an unnecessary burden or will be reluctant to modify their own tailor made record keeping system in order to accommodate the requirements of MTD. Taxpayers who are not digitally confident or technologically able may struggle the most and will require greater levels of support and reassurance as they begin to implement MTD within their business. There are also concerns around emotional and practical pressures of having to meet four tax deadlines per year, compared to the current annual tax return submission. In particular, we have discussed with clients the worry (and potential risk) of them submitting their own internally generated ‘live’ figures to HMRC that might in fact be reported and accounted for differently when we receive those figures and finalise their tax return. By way of example, many clients do not attempt to assess whether expenditure in connection with their rental property is allowable for income tax purposes or not – they simply send to us the figures and we carry out this analysis.
We suspect that many taxpayers will consider appointing an agent (whether their existing accountant or someone new) on their behalf to manage their affairs which might increase their outgoings but will provide essential peace of mind that they will be compliant with the new rules and that all figures presented to HMRC on a quarterly basis are in line with the final tax position. The frequency of required submissions to HMRC will mean that there will be more collaboration between client and agent than ever and agents will have access to information on their clients digital accounts but will not have access to update their clients records directly. HMRC allude that people who are genuinely not able to use digital tools will be offered alternatives such as providing information by telephone or appointing someone else to act on their behalf.
Looking at the positive aspects, MTD may benefit taxpayers in relation to improved record keeping and improved understanding of their ongoing tax positions. This could provide greater certainty around their likely tax bill which in turn would enable them to make better provision to pay and manage their own cash flow position better. HMRC are also proposing to offer a voluntary ‘pay-as-you-go’ quarterly payment option to assist with relieving the burden of an end of year tax bill. This may be a welcome offer to certain clients who find it difficult to budget for the current lump sum payments; however, there is a definite cash flow disadvantage for the taxpayer who chooses this route of payment, especially if their quarterly figures indicate a much higher tax bill compared to the appropriately adjusted year end accounts.
The tax team at Michelmores offer full tax compliance and advisory services for clients such as landlords, entrepreneurs, farming partnerships, landed estates and high net worth individuals (including those with complex foreign affairs). We provide a responsive and personalised service, based on your needs and are able to advise and support those who will be affected by the new MTD programme outlined above.
Please contact Jenna Fyfe if you would like further details of our services.