1. What is “Making Tax Digital”
Making tax digital was an initiative introduced by the government in the March 2015 Budget and was heralded at the time as the “death of the tax return”. It is the biggest shake up in the tax system since self assessment was introduced 20 years ago and is probably the overall biggest change to the tax system since income tax was introduced in 1799 by the then Prime Minister Will Pitt the Younger, as a temporary measure to cover the cost of the Napoleonic Wars.
2.Will “Making Tax Digital” affect me?
If you submit a personal tax return then “Making Tax Digital” will affect you so it will affect all sole traders, landlords, partners in partnerships, directors of limited companies and the limited companies themselves.
3.Where are we the now with “Making Tax Digital”?
There are currently 6 consultation documents in the public domain which explains how HMRC sees “Making Tax Digital” will work which invites small business owners and their accountants to comment on the proposals. The consultation documents doesn’t cover directors or limited companies who will have separate consultation documents later in the year. The consultation documents are fairly bulky (over 240 pages across the 6 documents) plus they aren’t the most exciting reading. If you can’t read the 6 consultation documents then we would urge you to read the summary document “Making Tax Digital for Business – An overview for small businesses, the self-employed and smaller landlords”. The 6 consultation documents and the summary document can be found by clicking the link https://www.gov.uk/government/collections/making-tax-digital-consultations.
The consultation documents are open for comment until the 7 November 2016 so there isnt long to make your views known to HMRC.
4.When do I need to do something?
The changes will start from April 2018. First to be affected will be sole traders and landlords that are not VAT registered. From April 2019 sole traders and landlords that are VAT registered will need to comply and from April 2020 Limited Companies will need to adhere to “Making Tax Digital” rules. There is proposed to be an exemption for small sole traders with turnover of up to £10,000 per year. These dates are not yet set in stone and given the government has some other major issues on its plate over the next couple of years we wouldn’t be surprised to see these dates put back.
5.So what will be different about “Making Tax Digital” and what I currently do?
At the moment if you submit a tax return you have to prepare your tax return for the tax year (6 April – 5 April) and disclose all your income and any reliefs/deductions you are claiming. You then submit this information to HMRC which might be by post or electronic submission. You might use HMRC free online software or use third party software to make the electronic submission. You might engage the services of a firm of chartered accountants like ourselves, or some other agent, to prepare and submit your tax return on your behalf. You submit your tax return once a year and generally it needs to be submitted by 31 October after the tax year if submitted by paper or 31 January after the tax year if submitting electronically.
“Making Tax Digital” is changing the way that you supply your information to HMRC. Instead of one tax return a year you will make 4 quarterly submissions over the year and it is proposed you will have a month after the quarter end to submit. The submission will need to be made using “software and apps” and the submission will be made electronically and will not be made by post. HMRC will not provide their own bookkeeping/accounting software. Instead they will provide the facility for submissions to be made via 3rd party software and apps via APIs.
How we expect this will work will be you will be able to submit your information quarterly using online software such as Xero, Kashflow and Quickbooks Online (these are the 3 cloud accounting packages that we work with). HMRC are currently working with a number of software/app providers.
6.Does that mean I will need to do 4 tax returns a year?
We don’t see it being like that. The information that you will have to submit quarterly will be just summary information. We expect that to mean; total sales, total costs (broken down by category eg travel and advertising) and profits. From this HMRC will be able to calculate your tax liability as it is building up during the year. At the year end you will need to make an “end of year declaration” and it is proposed that each business will have 9 months after the year end to do this and submit final figures for the year. This is slightly shorter than the current tax return filing deadline of just under 10 months if you have a year end of 5 April.
7.I keep my accounting records manually in a book or on a spreadsheet, can I still do that?
If you keep your accounting records manually then this will not be possible going forward under “Making Tax Digital”. You will need to keep your accounting records using either software or apps. It is not clear at the moment whether excel spreadsheets will be an acceptable form of software. If you currently use excel spreadsheets and would like to carry on using them then we would urge you to respond to that effect to the consultation documents before the closing date of 7 November.
8.Do I need to keep my invoices and expenses electronically?
There is no indication in the consultation documents that you will need to keep your invoices and expenses electronically. The only requirement will be to keep your accounting records using digital tools such as software and apps. However there is now many software tools such as receipt bank, autoentry, 1tap receipts where you can scan or take pictures of the invoice on your smartphone and the software will read all the data from your invoice and post it to the correct place in your software automatically. There is of course a cost to using the software however we have started using auto entry over the last 6 months and will provide it free of charge to clients where we do the bookkeeping. The app to take pictures using your smartphone on auto entry is expected to be out shortly.
9.Is anything else changing?
Currently you are due to pay your tax by 31 January after the tax year unless you make payments on account during the year end January or July. The consultations are proposing a voluntary quarterly payment option where you would pay your tax liability when you make your quarterly submission. We can’t see many people taking up this option of paying quarterly when you currently don’t need to pay until at least 10 months after your year end. However, we wouldn’t be surprised to see the voluntary quarterly payment become mandatory in the next few years so you have to pay your tax on a more regular basis and when you earned your profits rather than getting credit for at least 10 months.
The penalty rules are also proposed to be changed and will be akin to your driving licence penalty points system where you would be charged a penalty once you had accumulated a certain number of points.
10.The above seems a lot, can you summarise the main changes?
- “Making Tax Digital” will start from April 2018 and everyone will be in the system by April 2020.
- Proposed you will need to keep your accounting records using digital tools such as software and apps.
- Proposed you will make a quarterly submission of your headline sales and costs rather than a return once a year.
- Proposed you will have 9 months after your year end to make your final “end of year declaration”
- Voluntary quarterly payments of tax are proposed to be introduced
- Changes to the penalty system are proposed
The above is all subject to consultation at the moment and we would urge you to read the consultations if you wish more in depth information.
We will of course keep you abreast of developments and will advise you of what action you need to take in due course.
Our advice at the moment would be to wait until the consultation period is over to see what the outcome is.
If you currently are VAT registered and you use online accounts software and apps to maintain your accounting records then you are not likely to see much change compared to what you do at the moment. The quarterly accounts submission will be similar to the quarterly VAT return submission that you already do.
Those most affected we see as businesses that maintain their accounting records manually or on spreadsheets and just deal with their records once a year. You will have to use software and apps going forward and maintain your records on at least a quarterly basis.
We will of course be able to assist with support or training to ensure the move to “Making Tax Digital” is as seamless as possible.
Get in touch
Want to know more, get in touch with Mark on 01259 721156 or email firstname.lastname@example.org.