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Making Tax digital

The Government published a series of six consultation documents yesterday on their Making Tax Digital (MTD) strategy. The consultations close on 7 November 2016.

KS comments

These changes will require taxpayers and their advisors to fundamentally change the way they operate and report incomes, profits and gains for tax purposes. Some people who are digitally ‘savvy’ will cope more easily than others.

HMRC believe that the impact of MTD will lead to significant savings for businesses, of up to £400 million by the end of 2019/20. Our initial view is that there will inevitable be a set up cost for tax payers who will need to acquire new software and change their systems to meet the requirement of MTD.

Some detail

The first thing to note is the timescale for the changes. The intention is for the system to be fully implemented by April 2020. The changes will be phased in with business income tax and NIC reporting being digital from April 2018, VAT from April 2019 and the remainder the following year.

In outline, the way this will work is that businesses and individuals will acquire software or Apps which will allow their digital tax account with HMRC to be updated with details of their taxable income or detailed accounting entries for businesses.

Taxpayers will be encouraged to update their digital tax accounts on a quarterly basis, with annual or quarterly adjustments for tax purposes. It is thought that this will save costs and that it will help taxpayers monitor more accurately their likely tax liabilities. This will be linked to a new enforcement regime and will introduce the ability to make voluntary tax payments on account – Pay As You Go.

The main proposals include:

Exempting the smallest unincorporated businesses from MTD completely. A turnover/gross income limit of £10,000 is suggested for this.
Deferring the start of MTD for the next tier of small businesses by one year.
Help for business to make the transition to MTD. This will include making simpler software and Apps free.
Some businesses will be ‘digitally excluded’ and will be exempt from MTD.
A new “points based” penalty regime for late filing of self assessment declarations
Higher penalties for late payment of tax, either through penalty interest or surcharges
Consultation on potential exemptions for charities and Community Amateur Sports Clubs.
Allowing cash based reporting for some smaller businesses as a simplification.
Having a cash basis for unincorporated property businesses.
Reform of the basis periods for the self employed so as to simplify the system.
Making changes to the capital/revenue divide in determining expenditure that is tax deductible.

Taxpayers’ agents will be able to access the digital tax account and make adjustments to the tax returns as required for say year end adjustments or tax adjustments. It is intended that the software and Apps will be developed so as to automatically add back such items as entertaining and depreciation which are not tax deductible. There will be on-line help integrated into the software that will help tax payers with the process.