Making Tax Digital: HMRC has a dream
Jennifer Adams reviews the MTD consultation documents to discover how HMRC perceives life post-MTD.
The MTD consultation documents are not an easy read. MTD: Tax administration ( which includes proposals for a revised penalty regime) is particularly difficult to follow. The reader is bombarded with 'we are doing it for the good of our customers' and 'we have been asked by our customers to do this' and it's all going to be wonderful-type statements. Much of the text is not aimed at 'customers', their agents or many other interested parties but appears to be instructions to the software houses who need to bring HMRC's 'dream' of MTD to fruition.
The basics are well known - under MTD every business owner large or small, VAT registered or not, including landlords, will submit quarterly returns (sorry...'updates) and if any are late by more than one month then penalty points will be levied. HMRC's dream is that every business will use software to record income and expenses by loading the data manually or by scanning receipts and then every quarter submit a summary of that information to HMRC.
No more than nine months after the accounting year end the business will be required to make a final submission, termed an 'end of year activity' report. This will confirm the previous submissions and include claims such as capital allowances, if they have not already been included in the previous submissions. So in effect there will be five 'updates' in all.
In HMRC's dream agents will only get involved in the preparation of the final accounts. HMRC thinks taxpayers will do the quarterly submissions themselves with agents (maybe) coming in at the end of the line or do the whole lot - bookkeeping and all.
DIY tax assessment
The taxpayer will log onto his own digital tax account where some information will already be loaded. So far this will be bank interest, P60 figs and CIS income. Later on dividends from PLCs and rental income from properties let via letting agents will be included. The taxpayer will submit the business's total figures.
HMRC's tax computer will instantly calculate the taxpayer's potential tax bill and at the same time remind the taxpayer to put some money aside for payments (which, invariably, they won't).
HMRC believes that in this way the liability won't come as such a shock when the final demand is issued. The intention is to remind ('prompt') the dates of payment at the time of submission of accounts information. In HMRC’s ideal world taxpayer's knowing their tax bill will immediately lead to accurate tax payments and the instances of late or non-payment will be reduced.
There are many issues to be decided upon from answers to the 150 questions in the consultation documents.
Here are some of them:-
The main MTD consultation document does not say that spreadsheets cannot be used, they may get a reprieve as discussed here.
Taxpayers' can record business transactions as they wish but they must use software that will either be free (for basic entries -whatever that means – we don’t know yet) or purchased to submit. Submission needs to be in the format that HMRC's computers will understand. HMRC don’t want to spend their money developing software, the expertise for which is already available at the software houses, which is fair enough.
The purchased software will prompt the taxpayer into making the correct decisions about how to classify expenses, not HMRC itself. However, HMRC will be expanding their (un)helpful webchats, online guides, and YouTube videos to assist taxpayers and 'Ruth' will always be in the background.
HMRC believes that these facilities will help rather than hinder or confuse the taxpayer. As a result HMRC believes that there should be a reduction in phone calls for what they perceive are the more simple questions. Already their automated phone recording system directs callers to the (not always accurate) gov.uk website.
What will be submitted
Submissions will be of total figures only and HMRC’s intention is to use set expense headings. HMRC believes that there should be no need to retain the use of three line accounts. The tax software's ability to deliver more detail means that submission of accounting information will apparently be as easy as submitting three line accounts.
There will be no requirement to submit invoices or receipts. HMRC’s dream is of customers purchasing software sophisticated enough to scan and load invoices and receipts automatically, thereby reducing the time required for manual loading. This functionality will obviously be dependent upon the cost of the software. Many small businesses won't be able to afford the higher cost and thus the higher level functions of sophisticated software. Also, HMRC envisage the use of bank-feed software to load data directly from bank accounts into the submission.
When information will be submitted
HMRC is adamant that one month after the quarter end and nine months for the final submission is long enough to comply with the submission of accounts information. They think that taxpayers should be attending to their accounts every week anyway, so the deadline of one month will not be difficult to achieve.
In HMRC's dream each quarters' accounting information will be so accurate that minimal amendments or additions will be needed. Thus the year end submission will be a quick confirmation of the figures previously submitted.
Paying the tax
Payment dates will remain the same, meaning more deadlines for taxpayers to remember. HMRC doesn’t think that this will be a problem as they will be reminding taxpayers of deadlines when the taxpayer logs onto their account. HMRC assumes that all taxpayers will be checking their account on a regular basis.
HMRC expects to send reminders to taxpayers via text and email. In this week's Talking Points HMRC announced that when a prepopulated entry is added to the taxpayer’s digital tax account, they will receive a text at the same time.
One stated aim of MTD is better targeted enquiries. Enquiries will only be made into the year end submission. HMRC will have 12 months from the year end submission date to make an enquiry which will be on the final submission and not on any of the quarterly updates.
Over time the information submitted will create a picture of a taxpayer's business, which will enable more accurate comparisons with other similar businesses than are available currently. This is one of the reasons for HMRC’s dislike of three line accounts.
Some dreams come true and although the basic premise of MTD will become a reality, that does not mean that the detail is set in stone.
AccountingWEB will be submitting responses to the consultation documents based on members' comments but in the consultation process it is the number of submissions that will attract HMRC's attention. Even if you respond to only one or two of the questions posed in the documents then that submission will count.
It is time to show HMRC that some facets of its dream will, in fact, be unworkable and as such be fantasy. As Rebecca Cave has said, what is needed now is a call to action by all accountants.