Within the accountancy world the Making Tax Digital project has been exercising our minds for some time now, but until very recently we have been unable to advise on how this is going to impact our clients because there has been too much uncertainty. Following a lengthy and involved consultation period, HMRC have now pronounced on many of the uncertainties, although we still don’t have the complete picture.
What is going to change?
We are now able to operate large parts of our lives via the internet – we manage our financial affairs, book holidays and travel, renew our car tax and purchase just about anything you can think of – so it was becoming increasingly incongruous not to be able to organise and view our tax affairs online. Making Tax Digital is a project to create online tax accounts for all taxpayers and to enable businesses to report their performance to HMRC on a quarterly basis via electronic means.
Of course, by ‘enable’ what we really mean is ‘require’. HMRC sees this project as an opportunity to a) bring businesses out of the black economy into taxpaying compliance and b) obtain better quality financial reporting in order to ‘help’ taxpayers to pay the right amount of tax.
For our clients, whilst there will be major changes in how HMRC administer the tax system, most of this will be behind the scenes, so in many cases, little significant change will be felt. There is, however, one class of taxpayers that will experience a major change in how they interact with HMRC – those that are used to keeping informal accounting records who will now be required to report quarterly.
The first group of taxpayers being brought within the quarterly reporting regime will be small sole traders, small partnerships and individuals with reasonably significant investment property portfolios. The upper size criteria will be those businesses that are not required to be VAT registered, whilst the entry level has not yet been decided, but is anticipated to be annual turnover/gross rental income of at least £10,000. For accounting periods commencing after 5th April 2018, these businesses will be required to maintain their accounting records electronically and to report their results on a quarterly basis to HMRC.
For some of our clients this is inevitably going to lead to more formal record keeping, but this should be seen as an opportunity rather than a headache. Accounting software has improved immeasurably in recent years and is now capable of being based in The Cloud so can be accessed from any device from anywhere that a reasonable internet connection can be obtained. Whilst HMRC have committed to make free software available, Dafferns advocate the use of the software packages offered by Xero and we can strongly vouch for the user-friendliness of their products. Accounting records can be kept up to date with minimal effort using Xero once a little time has been invested on initial set-up. This will allow reports to be run which will give an almost up to the minute assessment of how your business is performing, thus enabling decisions to be made based on accurate information and giving the visibility to plan ahead for bumps in the road such as tax liabilities.
Further implementation timetable
- From 2019/20 VAT registered businesses will be required to report quarterly
- From 2020/21 companies will be required to report quarterly
- It is anticipated that businesses with an annual turnover below £10,000 (threshold to be confirmed by HMRC) will be exempt from the requirement to report quarterly
The Digital Tax Account
The method of providing HMRC with taxable income information in the future, probably from 2019/20, is going to migrate from the existing tax return based system to a new digital tax account system. This will give taxpayers greater visibility of their tax positions and will be partly populated with information from both HMRC (such as P60 details) and third parties (such as bank interest). However, the underlying basis of the system will not be changing, so the tax year will still run from April 6th to April 5th and personal tax payments will still be due on 31 January and 31 July.
We will continue to take care of our clients’ tax affairs exactly as we do today, but in the future we will complete income and gains information via our clients’ digital tax accounts rather than using the current form based system. We will ensure the transition is simple and painless.
What if I can’t / don’t want to use the internet
Establishing a digital tax account will require the possession of an e-mail address, but this does not preclude the digitally excluded from accessing the new system. Dafferns will create and manage e-mail addresses for our digitally excluded clients to take the hassle and anxiety away from them.
The brave new world
So hopefully the vast majority of taxpayers will stand to gain from this brave new digital world of taxation. Not in monetary terms, but in ease of interaction with HMRC and in improved visibility of where they stand.
Of course, there will be teething problems and the new systems will take time to get used to, but this will ultimately be an improvement for many. For those that can see nothing but extra administration and cost, speak to us to learn how you can make these changes work for you, rather than against you.
Get in touch
If you would like to talk through any of the issues raised in this article please telephone 02476 221 046 and ask to speak to Brian Jukes or Brian King or, if you are an existing Dafferns client, your normal contact. Alternatively, e-mail us at [email protected] or [email protected].