Making Tax Digital FAQs: August 2016 update
After shaky beginnings in March 2015 and a poor critical response, a new production team has taken the helm and Season Two of the Making Tax Digital soap opera is being lined up to hit the tax airwaves in the summer of 2016. The updated AccountingWEB guide gives you the lowdown on all the key plot lines and discussion points. Bookmark this page as a reference resource as the MTD process develops between now and 2020.
STOP PRESS: At around 9:30am on Monday 15 August, HMRC released an overview and six separate consultation documents setting out its plans for Making Tax Digital. The most notable element of the package was news that HMRC planned to exempt the very smallest businesses from the regime (unincorporated businesses <£10,000 turunover - see chapter 7 of Bringing business tax into the digital age consultation paper).
The material in this FAQ will be updated in response to the detailed documentation, which includes:
- Making Tax Digital overview
- Digital record keeping in the digital age - What exactly is meant by digital record-keeping (ie not spreadsheet records) and how the process will actually work. From HMRC articles published elsewhere, the current think appears to be that quarterly reporting will come into effect for accounting periods after April 2018 and will be based on businesses’ current year-end dates.
- Tax administration - What the final filing deadlines are likely to be and what penalties might be levied for missing them. This could be one of the more controversial issues if it appears that the regime will open the door to more ways for HMRC to collect penalties.
- Simplification options for unincorporated businesses- As ABAB and others have pointed out, computerising a cumbersome system is a sure way to make things worse. Quarterly data will not be any use for calculating profit unless the organisation has already adopted the cash basis approach. One option may be to extend the cash basis where it’s available to traders turning over less than the current VAT registration threshold to all unincorporated businesses. There may well be a separate paper discussing the possibility of using the cash basis for property income to give a quarterly estimate of tax liabilities.
- Payments regime: voluntary pay as you go - Setting out options for paying taxes as you report them. For small businesses, this might mean extend the quarterly VAT approach to all business taxes.
- Using third party information - HMRC has been plugging into different information sources such as credit card service providers for a while now, and the mechanisms it has in place are intended to be the way it populates personal tax accounts with data from banks, pension companies and the like.
- What is the government’s objective for Making Tax Digital?
- What will quarterly reporting actually involve?
- How will the quarterly submission process work?
- What is the MTD timetable?
- What are the legislative implications?
- Wouldn’t it be easier to simplify the small company tax system first?
- What opportunity will there be to influence HMRC’s thinking?
- What are the chances that MTD implementation will be delayed?
- Is there a silver lining?
- Will businesses have to pay tax more often?
- How will capital allowances be calculated?
- Will filing every three months mean we will have a busy season every quarter?
- Will agents be able to submit quarterly reports for clients?
- What if firms are still using paper records?
- When will the last year of Self Assessment tax returns be?
- HMRC said there will be free software solutions to small businesses. When will we see them?
- Will clients have to use cloud bookkeeping to upload their figures?
- Will accountants be able to access clients’ online accounts?
- If you currently use the HMRC free software what are the options?
“The government is committed to reducing burdens for taxpayers and building a transparent and accessible tax system fit for the digital age… HMRC will collect and process information affecting tax in as close to real time as possible, stopping tax due or repayments owed from building up. Individual and business taxpayers will no longer have to wait until the end of each tax year before knowing how much tax they should pay, avoiding any surprises and helping them to plan their financial affairs with more certainty. And taxpayers will be presented with a complete financial picture of their tax affairs in their digital account, able to see and manage all of their liabilities and entitlements together for the first time.” (HMRC Making Tax Digital discussion paper, Dec 2015)
The detailed proposals will be set out in consultation documents due to arrive in August 2016, but contrary to some rumours and scare stories, businesses will not have to present HMRC with a file dump of their full transaction history each quarter. Summary totals should be sufficient, and HMRC says it keen to explore ways to make this as simple as possible - for example by accepting P&L reports formatted in line with the company’s chart of accounts. (Rebecca Benneyworth)
HMRC will provide a lot of information within the personal tax account and sees the quarterly report as a “review and confirm” process rather than “prepare and send”. The agent is going to be asking the client to review and agree some kind of statement of income that will update their tax account. The agents software will download HMRC’s data and discuss it with client. Once you have their agreement, you will upload it back to HMRC (Mark Purdue, Thomson Reuters).
Having released its consultation documents, HMRC will now turn its attention to the legislation and software development work needed to deliver the MTD package. In outline form we will know what the digital set up is being designed to do and how data will be reported.
April 2018 has been set as the first anticipated go-live date for quarterly reporting of income tax and national insurance contributions by businesses and traders who pay income tax on their profits. This definition will take in some of the smallest, least digitally aware taxpayers as well as large and quite complex partnerships - including many accountancy firms.
To meet that April 2018 deadline, public testing of HMRC’s systems with submissions from third party software should start in April 2017. The MTD launch sequence is being organised by type of tax, so if the programme proceeds as planned, quarterly VAT data will be added to the digital reporting mix in April 2019 and corporation tax data submissions will come on stream in 2020 (HMRC advice).
What are the legislative implications of MTD and what changes are we likely to see in tax and company law?
Some pundits have drawn parallels between the MTD quarterly reporting regime and the cash basis accounting method used by sole traders to calculate and report their tax liabilities. But this system is currently restricted to unincorporated businesses. Relaxed reporting requirements for MTD could also conflict with the company law requirement for accounts to a “true and fair view”, which is presumed to indicate compliance with UK GAAP - so expect some changes there too. Many of the minor reliefs currently included within corporation tax computations will need to be accommodated by new definitions that allow for exemptions for small amounts, or a new framework for quarterly deductions. (Rebecca Cave)
This is a question that should cause some disconcerting echoes around the halls at the Office of Tax Simplification. If that august body has not been able to make much significant headway framework during the past six years, how likely is it that HMRC will uncover a magic solution within the next two? Ripping out the old self assessment system and reporting environment, and sticking in a new one on top of the old regime will just add an extra layer of complexity. The reply from digital tax enthusiasts would be that this dramatic step forward is a necessary jolt, and presents an ideal opportunity to introduce some much needed simplification.
In its 2016 annual report, the Administrative Burdens Advisory Board that “challenges” HMRC on red tape said that the move to digital was “a great opportunity” to simplify and improve tax processes and urged the department to work with business representatives and the OTS to support simplification during the next two years. “The digital transformation must not just be digitising existing rules, systems and procedures but must include using digital to enable real change to what is required for tax compliance,” ABAB commented. The board’s call was answered in consultation documents setting out options for tax simplification for unincorporated businesses, new record-keeping requirements and applying the cash basis to property income.
The whole Making Tax Digital project hinges on the content of HMRC’s long awaited consultation documents, released in mid-August 2016. One of the reasons for the delay was due to pressure from professional tax bodies on HMRC to tighten up some of the more glaring weaknesses in the original documents just ahead of the 2016 Budget in March.
Probably 50:50. The consultation process has already been side-lined by a sequence of delays. The original consultation documents weren’t ready for public consumption as intended at Budget time in March, and subsequent events including the EU referendum campaign added to the delays.
The Association of Tax Technicians called for a 12-month postponement even before the consultation started and representatives from other tax bodies have privately expressed support for this stance. The late start of the consultation exercise will squeeze the time available for practical development and implementation work down to a handful of months - from November 2016 to April 2017. There are questions about whether the APIs will be ready in time for commercial software developers to create all the necessary tools and interfaces in time. HMRC is in the middle of a major IT transition from its old outsourcing contract to a new mix of in-house and external service providers, doubts continue to be raised about whether HMRC’s existing systems will cope with such a big new source of electronic data. The common sense approach would be to take a bit more time to get the system specification right and allow for extensive pre-launch testing rather than pressing ahead regardless to meet an unrealistic timetable. (John Stokdyk)
The silver lining for an agent is the new process will enhance the working relationship with clients. No longer will it be an annual letter requesting historic data, and the annual provision of a form of no worth to the client. Instead, agents will be able to access near live data for their clients, giving the ability to offer advice and planning opportunities in year; planning to mitigate a client’s higher rate liability before the year end, for example. (Mark Purdue, Thomson Reuters)
At this stage, there is no suggestion of mandatory quarterly payments. There was a consultation earlier this year, and the outcome was that HMRC would offer voluntary quarterly payments to those who would prefer to pay by this method.
At this stage, the simple answer is we do not know (the consultation documents referenced above will clarify this). Other similar questions include; What happens about loss relief? How will farmers averaging work? (Mark Purdue, Thomson Reuters)
The transition to quarterly reporting will have some challenges! One such challenge will be getting quarterly data from clients, reviewed and to HMRC efficiently as possible in accordance with its deadlines. The nature of quarterly submissions remains to be clarified in the relevant consultation documents, but one educated suggestion is that they will be aligned to the end of companies’ VAT reporting quarters.
Yes - assuming their chosen third party software supports this.
This, without doubt, is the biggest challenge agents are likely to experience with clients, some of whom may may be classified as “digitally excluded” (unable to access digital services). HMRC is exploring alternative methods for this group, such as phoning in quarterly data. Another possibility is that the agent (where the client is represented) takes on the role of quarterly reporter, on behalf of the client.
Clients who are not digitally excluded, but currently don’t have a digital solution will need to be educated on their role in the new process. Whilst some may argue that HMRC should be the primary educator, agents must take an active role in advising their own clients on what steps to take - ultimately, you will want your client to be as efficient as possible in line with your processes (Mark Purdue, Thomson Reuters).
Based on what HMRC have published to date, at the point that quarterly reporting” commences, the requirement for a formal SA tax return is likely to disappear. This suggests that for unincorporated businesses and other individuals, the last SA return will be for the year ended 5 April 2018.
The government has made the commitment that businesses with the most straightforward tax affairs will have access to free software for managing their tax account data. At the moment, ‘straightforward’ has not been defined, so the scope of what will be available is not yet known. Currently, HMRC are in discussions with software developers on what solutions will be available.
This type of detail will be clarified as part of the various consultation. The only clarification HMRC has made so far is that the recording of data must be digital, and for this purpose, that excludes spreadsheets.
The Administrative Burdens Advisory Group responded to HMRC: “We are disappointed with the announcement to mandate digital record keeping and quarterly online reporting for even the smallest businesses as part of ‘Making Tax Digital for Business’… compulsory digital record keeping and quarterly online updates is not an approach we can endorse. We are concerned that the proposals for quarterly updates will be more burdensome than they currently are with increased record keeping and compliance costs. This will have a big impact on the smallest of businesses. The requirement that as part of the reforms all businesses will have to keep records digitally is a significant concern, given the timescales to educate businesses and provide the necessary tools for them. We also have reservations around the current capability of software being able to deliver HMRC’s vision and the appetite amongst small businesses to utilise them.” (ABAB 2016 annual report)
In its Agent Services webinar on 19 May, HMRC made it clear that agents will only be able to access digital tax account data for their clients via third party software; HMRC will not permit access by agents using client IDs and passwords.
Third party software will allow agents to access the underlying data held in the client’s tax account. At the moment HMRC is working on exposing this data via application programming interfaces (APIs) to allow third party providers to write the necessary agent software. HMRC has let it be known that this work will be completed “in the autumn”, leaving a very short time-frame for commercial software developers to complete their work in time for live testing by April 2017.
HMRC will not be writing any software solutions to mirror their current offerings. If you are an agent, currently using the free HMRC products, then you need to start considering your requirements, and looking at what third party products will be available to meet your needs.
With thanks to officials at HMRC, Rebecca Benneyworth, Rebecca Cave, Philip McNeil, Mark Purdue (Thomson Reuters), Steve Checkley (TaxCalc) and many other AccountingWEB members. This FAQ is the beginning of a collaborative process between AccountingWEB members and all those involved in the MTD transition. If you have any questions or comments on MTD, add them below and we will seek the answers or an official response.
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