MTD for business (MTDfB) is being developed in an agile manner, which allows technical issues to be addressed as and when they arise. However, this means the entire MTD project has not been thought through from end-to-end.
HMRC now says its main reason to drive through MTDfB, is to collect more tax from small businesses, particularly those who are trading below the VAT registration threshold. The additional tax revenue will apparently be generated by businesses recording their transactions on a more timely basis, and as a result their accounts will be more accurate, leading to more tax becoming payable. We don’t have to agree with this logic to understand it.
The other justification HMRC offers for MTDfB is that it will help small businesses understand how much tax they need to pay. Using this information, they will be able to make regular voluntarily tax payments throughout the year, which will ease the nasty surprise of the big tax bill which becomes due months after the year end.
Remember, MTDfB is just part of the full MTD project, which will ultimately remove the need for individuals to complete an annual tax return. All the information received by HMRC from third parties will be reflected in the individual’s personal digital tax account, which the individual can access at any time and approve as a correct statement at the appropriate time.
In summary, these are the seven steps of the MTDfB process:
- The business keeps its records in a digital format, on a timely basis
- Quarterly update: The business reports to HMRC summaries of income and expenses (in prescribed categories), primarily to prove it has done step one
- Reflection: HMRC computer takes the reported results and updates the taxpayer’s digital tax account with the expected tax position. There is no human intervention by HMRC at this stage
- Understanding: The business owner accesses their digital tax account which indicates how much tax they will have to pay on profits
- End of period statement: The business owner reports to HMRC the final figures for the accounting period including any accounting adjustments. This statement must be made by the earlier of 10 months after the year end, and 31 January after the year end
- Figures from step five are reflected in digital tax account and business has final figure of tax due for the trade, but not necessarily for the whole tax year
- Final declaration: This is the new name for the SA tax return, which must be filed (as now) by the later of 31 January following end of the tax year, or three months after HMRC sends a notice to the taxpayer to make a return
1. Partnerships are responsible for keeping the accounting records and making the update report at step two, but that update doesn’t include a partnership share statement. Thus steps three and four do not occur for a partner in a partnership. The partner will only have his digital tax account updated with the tax he has to pay after the partnership has completed step five.
How does MTDfB help a partner understand the tax he has to pay?
2. Unincorporated businesses will be required to start complying with MTDfB from the beginning of the first accounting period that starts on or after 6 April 2018 (if turnover for the last complete accounting period is £83,000 or more), or 6 April 2019, if turnover is less than £83,000 but more than £10,000.
Will there be legislation to prevent businesses from changing their year-end to 31 March, in order to delay falling into to MTD?
3. The quarterly updates must be transmitted using accounting software, including an add-on to a spreadsheet. HMRC will make regulations to define the standards this updated data will be required to meet. HMRC does not expect accountants to intervene at this stage and review each update for accuracy and disallowable items.
If an accountant submits the update on behalf of his client knowing that it contains inaccuracies, is the accountant breaking the professional standards code: Professional Conduct in Relation to Taxation?
4. A business with a 30 April year-end will have to make its end of period statement (step five above) by the earlier of 10 months after the year end or 31 January following the year of assessment. However, the profits for an accounting period: 1 May 2018 to 30 April 2019, will form part of the self assessment for 2019/20, but will have to be reported within that tax year: by 3 January 2020. This is before the end of the tax year (2019/20) for which the profits will be assessed.
How can the tax be calculated for this 30 April accounting period at the time of the end of period statement?
5. All VAT registered businesses will be required to join MTD from a period start after 1 April 2019 (date not confirmed), in order to make MTD update reports of data which is currently reported on the VAT return.
Will the business have to submit an MTD update alongside the VAT return, or will the VAT return and the MTD update be one and the same process?
6. There have been a number problems which have exposed errors in the standards set for tax return software by HMRC. It is clear that standards which all software producers are obliged to comply with to submit tax returns on line are not in line with tax law in every respect.
Which independent body will audit the MTD software standards set for tax computations, and certify that those standards are compliant with tax law?
7. If the MTD software produces an incorrect calculation of tax liability, so it is impossible to submit the final declaration without creating an error in the tax due, how will the taxpayer submit his final declaration?
Will there be a paper alternative in such cases where the software fails?
8. How will companies report to HMRC each individual dividend they pay to shareholders?
How will HMRC ensure that dividend information ends up on the correct taxpayer’s personal digital tax account?
9. Trusts will also have to comply with MTDfB if the trust has trading income or rental income in excess of £10,000 for the year. Does a trust have a personal digital tax account?
If the trust doesn’t have such an account how will a trust get a reflection back from HMRC of the tax it should pay?
10. How will banks and companies correctly identify the recipients of interest when reporting to HMRC those interest payments?
How will HMRC allocate the savings income to taxpayer’s personal digital tax accounts?
11. How will a bank know that interest paid to a trustee is paid for the benefit of the trust and not for the trustee personally?
Will the interest end up on the trustee’s personal digital tax account?
12. Individuals who receive rental, partnership, or investment income from abroad often don’t have access to the underlying expenses and receipts.
Will such individuals be required to report such income under MTDfB?
There are a growing number of technical questions about MTD. These are my top dozen. Please add your own questions below and we will endeavour to obtain answers from HMRC or from the tax professional bodies as appropriate.