Making Tax Digital – The New Legislation Which is Arriving Soon with Force
Government’s proposal for Making Tax Digital (MTD) has received a widespread criticism, yet the political and business groups have agreed that online is the only way for taxation to go forward. Currently it seems that the new legislation is going to arrive either the next year or in 2020 and all the businesses will have to adapt to the changes it brings.
What is Making Tax Digital or MTD?
Making Tax Digital (MTD) is an HMRC initiative that will revolutionise the UK tax system and ultimately bring an end to self-assessment. It is matter of time that the changes in the legislation come into effect, it is speculated that by April 2019 it is going to be applied. When the changes come, most of the businesses will have to submit the quarterly online tax returns through software which will be approved by HMRC. All these updates are going to be followed by end-of-year reconciliation to make sure activities for the whole year have been recorded properly for taxation. As we came to know from the taxman, following changes will be achieved:
reducing the burden on the taxpayers
giving benefit to the exchequer
making tax system more transparent and also accessible
The government has consulted on these proposals the last year and has also said that they are going to respond very soon to the consultation. Last year HMRC has published the draft Finance Bill which includes the clauses for necessary changes to be legislated.
Commons Treasury Committee has stated that the small firms could be spelled with disaster with the radical plans and they also feared that many small business firms may face the out of business situation.
Though the Committee well supports the idea of reporting of the tax being digitized, it also stresses that there is no proof that the quarterly reporting and record keeping through mandatory digitization can be beneficial and that there should be a detailed set of pilot systems before it becomes obligatory for every business.
Committee is also concerned about the economic (cost) impact of introducing and maintaining MTD on small businesses as the information about the free software which will help to submit taxes is not sufficient still now. Committee feels that all these extra costs are going to surpass the benefits to exchequer in tax gap reduction terms as the result of few taxpayer errors leading to MTD’s overall impact being negative.
In response to the conclusion of a report regarding MTD, Committee Chairman, Andrew Tyrie has said that if the digitization of tax records and the reporting i.e. MTD can be introduced carefully then it can make a great opportunity to improve tax system administration for long term. But without careful approach, MTD could be disastrous. He also said that if it is implemented with proper care where it is necessary along with the arrangements that are long transitional and that it gets full information from inclusive pilots, then Making Tax Digital can be beneficial both for the tax yield and the economy. According to Andrew if it is introduced in a rush then it is not going to benefit the system.
Recommendations by the Treasury Committee:
To report through MTD the £10,000 threshold should be raised matching the £83,000 VAT threshold.
The starting date must be pushed to minimum 2019/2020 or later
It is must to have comprehensive pilots for the proposed system with complete protection for the firms which are required to participate.
Pilots must be designed in such a manner that they can gather all information over entire reporting process, in inclusion with the end-of-year reconciliation. Then this information must be evaluated with the pilot evidence and presented to the Parliament before the MTD’s full implementation
A right functioning market must be there which is going to produce the appropriate software for MTD and the software should be absolutely free for the smaller and the less complex businesses.
HMRC must publicize obligations of the taxpayers when the precise timing and shape of the MTD is confirmed.
It is quite apparent that with the implementation of MTD, the scope of the cyber-attacks and hacking is going to increase. HMRC must provide the right assurance about the data security of each taxpayer which the software providers are going to hold.
It is to be seen whether the Government is likely to take note of Committee’s recommendations and all the related concerns and the suggestions which are voiced by bodies like the Institute of Chartered Accountants in England and Wales or ICAEW and the Chartered Institution of Taxation.
Though, one thing is certain that Making Tax Digital (MTD) is going to be placed in the legislation system in a very short space of time.
Mostly those business with exceeding taxable turnover then the threshold of VAT registration will have to keep their records digitally using the compatible software for MTD functioning and then create VAT return from the software or combination of software; mostly for return periods.
Some of the challenges business and their advisers going to face due to MTD are:
Businesses won’t be able to keep manual records and they have to keep all digital records in the some functional compatible software which will connect via API or Application Programming Interface to HMRC. More information is required.
VAT returns should be submitted from the software only to HMRC and not through the HMRC entering just the VAT return figures.
It is expected that the VAT MTD will take place at the time when UK leaves the European Union. It will make the businesses understand the rule changes of the tax-technicalities and must also ensure that all the accounting systems deal with these transactions correctly.
Right now it is hard to predict the exact timing of the implementation and the total impact of MTD on businesses but one thing is for certain, it will lead to more work for the accountants. Accountants will have to deal with not only more inquiries but make sure that all their existing customers are fully complied with MTD. Accountants may have to find innovative ways to deal with such deluge of work.