Making Tax Digital

During the March 2015 Budget, the Government first announced its intentions to revolutionise the reporting process for taxpayers.

In the Budget document, they cited their plans to “introduce digital tax accounts for all five million small businesses and the first 10 million individuals by early 2016”, and published a document entitled ‘Making Tax Easier’.

In December 2015, HM Revenue & Customs (HMRC) released more information under the banner ‘Making Tax Digital’ this time. In the documents, digital tax accounts are likened to an ‘online bank account’, enabling taxpayers and businesses to see all of the information HMRC is holding for them and for them to interact with HMRC remotely.

Employment income, pension income and bank and building society interest will be prepopulated by HMRC from the information it holds. Businesses will be required to use software or apps to keep tabs on their income and expenditure, because the data will eventually feed straight into the digital tax account. Taxpayers will need to update and approve the figures in their digital tax accounts every quarter and as a result they will, in HMRC’s own words, mark “the end of the tax return” over the next five years.

The upshot of more regular reporting is likely to be more frequent payments and in the most recent Budget 2016, it stated that from April 2018 small business owners and landlords will “be able to adopt pay-as-you-go tax payments”.

The Government has confirmed they would consult on payments of taxes though, including whether to align payment dates more closely with when profits are arising.

Timeline

A timeline is available in HMRC’s ‘Making Tax Digital’, but the key milestones from the document are:

• By April 2016, every individual and small business will have access to a digital tax account. The digital accounts will present individual taxpayers with a personalised picture of their tax affairs, along with prompts, advice and support through web-chat and secure messaging
• From April 2018, businesses, including everyone who is self-employed and those letting out property, will update HMRC at least quarterly where it is their main source of income (or a secondary source of income above £10,000 and their main income is from employment or a pension)
• By 2020, taxpayers will be able to see their complete financial picture in their digital account, just like they do in their online banking. And they will be able to set an over-payment of one tax against the under-payment of another: it will feel like paying a single tax.

£1.3bn of investment has been pledged, so the Government is clearly serious about this initiative.

HMRC was planning to launch a public consultation in Spring 2016, but have just recently announced that these will be postponed until after the EU Referendum.

At the time of writing, it is therefore difficult to forecast exactly what digital tax accounts will entail for small business owners, because the detailed proposals are missing. But based on what we know now, we have tried to set out how different taxpayers might be affected by digital tax accounts:

Individuals

For a lot of individuals, digital tax accounts will probably reduce their administrative burden. Their employment or pension income will be prepopulated in their digital tax account; as will any bank or building society interest.

With more up to date information, taxpayers should no longer be at the mercy of poorly calculated tax codes either and there are even plans to allow taxpayers to choose how their personal allowance is allocated via their digital tax account.

However, individuals with a secondary income in excess of £10,000, such as property income, will also be required to update their digital tax accounts quarterly. So landlords with modest portfolios who have been maintaining their records manually in a cashbook once a year, will have to use software or apps for recordkeeping that can feed straight into the digital tax account.

VAT-registered businesses

Since 2012, virtually all VAT-registered businesses have been required to file their VAT returns and pay any VAT liability electronically. As a result, VAT-registered businesses are likely to have the least amount of adjustment to do for the introduction of digital tax accounts. Whether in-house or outsourced, their records are also probably maintained using software suited to quarterly reporting.

But otherwise, the biggest change VAT-registered businesses could see will be on their cashflow. If more regular tax payments are required, this could have a big impact on seasonal businesses in particular. In contrast, some business owners may favour the steady payments because they should avoid any large year-end tax bills.

Businesses under the VAT registration threshold

This group will see the biggest disruption of all three groups affected by digital tax accounts. They may not be using bookkeeping software, because they do not have the burden of quarterly VAT returns.

Under digital tax accounts, they will have no choice but to use software if their self-employment income is over £10,000. HMRC has promised that free software and apps will be available, but these will undoubtedly be missing a few bells and whistles that the paid-for products have.

There is a silver lining for these businesses though, in that they may find their expense claims increase because less invoices should go missing over the course of a quarter.

Nonetheless, the obligation to use software and report four times a year, will be a significant burden for small businesses to shoulder.

Start-up Businesses

Another issue, is that some businesses may only be under the VAT registration threshold because they are a start-up and trying to grow their business. Thanks to the current basis period rules, they might not pay any tax for up to 21 months after their year-end which could be a lifeline for cash-strapped, fledgling businesses.

With the introduction of digital tax accounts if self-employment income (not profits) hits £10,000 they will need to report quarterly and if tax payments are expected more frequently in the future, this could severely hamper the growth of new businesses. 

Recent developments

The Making Tax Digital for Business private beta was launched mid-May, so HMRC is driving this initiative forward.

As mentioned earlier, HMRC has unfortunately announced that the consultation on digital tax accounts is to be delayed until after the EU Referendum on 23 June 2016. This raises concerns that the consultation process could be rushed, given that advisers are due to start managing clients’ digital tax accounts from December.

In conclusion

Digital tax accounts could be just what everyone has been looking for! They should save business owners and taxpayers time, because automation and software will be driving the data input. The regularity of submissions should cause error rates to fall, although it will be interesting to see what the consequences are for taxpayers that over-claim their expenses and how long each submission takes.

Preparing records on a timely basis will also allow business owners and taxpayers to have more of a handle on their affairs and their subsequent tax bill; both of which are good for planning cashflow.

But it is imperative that we see more details and that both the accountancy profession and taxpayers must be closely involved in shaping digital tax accounts. The Government has repeatedly talked about its desire to reduce the amount of red tape that businesses are bound by, but there is a real risk that digital tax accounts could contribute to the ever-increasing burden.

Care and thought, communication, plenty of support and needless-to-say technology will be paramount to making digital tax accounts a success. 

We'll be keeping a close eye on developments and keeping our clients up to date.

Date published 25 May 2016

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.