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MTD - call for action

23rd Aug 2016
Tax Writer Taxwriter Ltd
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Tax agents need to respond to the Making Tax Digital consultations in order to achieve the best outcomes for their clients and for the wider accountancy profession. 

The government is determined to drag the UK tax system into the digital age. Make no mistake about it; the proposed move from the self assessment tax return to a quarterly reporting system based around the digital tax account will happen. The big question is: when will the new digital reporting system become compulsory for each category of taxpayer?  

The commencement dates and turnover thresholds are not cast in stone; the purpose of the consultations is to tease out the potential problems and to find acceptable solutions. This can only be achieved if all of those affected submit their views to HMRC. This population includes: all businesses, employers, accountants, tax advisers, software providers, and organisations that provide information about their customer to HMRC - in short, all UK taxpayers plus their advisers, banks and agents.

Exemption for micro-businesses

We know there will be an exemption from quarterly reporting for unincorporated businesses and landlords with business income or gross rents of no more than £10,000 per year. However, this threshold is not fixed.  See question 34 on page 74 of Bringing business tax into the digital age: “Do you agree that £10,000 annual income is an appropriate threshold for exempting businesses from Making Tax Digital? Do you have any other comments on how the exemption should operate?”

So what is the best turnover level for this permanent exemption, and should it be reviewed year on year?

Perhaps this lower turnover limit should it be set at a level close to the average wage in the UK of £27,600, say rounded up to £30,000? When the OTS proposed a cash basis for small businesses their considered opinion was that the turnover limit for using the cash basis should be set at £30,000.   

AccountingWEB member Kernowlive suggests that the exemption for micro-businesses should be around £50,000, dropping to £40,000 then £30,000 in subsequent years.

Delay by a year

HMRC has already proposed that the next tier of unincorporated businesses and landlords won’t be required to make quarterly reports until April 2019. That’s a one-year delay from the general start date for all unincorporated businesses of April 2018. But how to define this next tier of businesses is up for discussion, see question 36 on page 74 of Bringing business tax into the digital age.

HMRC’s current view is that a measure of turnover is the most straight forward way of defining this tier of businesses, but they are open to other suggestions (see para 7.33 of Bringing business tax into the digital age).

My view is that only unincorporated businesses who are VAT registered, and which are trading over the compulsory VAT registration threshold, should be required to make quarterly reports from April 2018. All other businesses, including all unincorporated landlords, should be permitted to delay quarterly reporting until 6 April 2019 at the earliest. Those smaller businesses who are ready and able to quarterly report from April 2018 should be permitted to do so on a voluntary basis.

My thinking is that VAT registered businesses (unless they use annual accounting) are already preparing totals of their income and expenditure in order to complete a VAT return each quarter, so it should be a relatively easy step to also report totals of categories of expenditure to HMRC as part of their quarterly income and expense report. Those businesses which use the VAT flat rate scheme are only reporting their sales income on their VAT return, not their expenditure figures, but at least they are in the habit of collecting the sales figures and quarterly-reporting.

Shout and be heard

The argument for delaying the commencement date for a significant proportion of small businesses is strong. It would give the software companies the time to develop low cost or free apps to be used by this tier of businesses. The delay will also allow accountants more time to introduce their clients to digital methods of keeping business records (the exact format of which is another detail to be decided).    

Do you agree? What turnover threshold or other measurement should be used to determine when a business should start to quarterly report?

Please post your comments below. Alternatively, send your considered arguments on this issue to: [email protected]  title your email Questions 35 and 36 of Making tax digital for business.

Accountingweb will be submitting a community response to each of the MTD consultation documents.

If you'd like to find out more about Making Tax Digital, click here to register for our live digital MTD conference. Join in the discussion on 24 October as part of Practice Excellence Live!  

AccountingWEB is working with Thomson Reuters Digita to collate the profession's feedback to the MTD consultation documents. You can participate in our quick survey here to share your thoughts. The survey responses will feed directly in to the official AccountingWEB response to the consultation documents.

Replies (21)

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By Tim Vane
23rd Aug 2016 17:50

No, I don't agree there should be a delay. Delaying the inevitable will just lead to uncertainty and prevarication. Software houses won't get their fingers out quicker because there is nothing in it for them in the short term, and businesses are businesses, so they won't do anything until they absolutely have to - they won't use the delay as preparation time, they'll just stick it in the pending tray until it smacks them in the face later.

So, no. If you are going to tear off a plaster, do it quickly and without pre-amble, then we can deal with the pain, rub the sore spot, mop up the inevitable blood and move on with our lives.

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Tornado
By Tornado
23rd Aug 2016 18:22

I broadly agree with Rebecca's observations and definitely agree that we need to respond to the consultation documents.

The main sticking point for me is the compulsory use of software to carry out the reporting. As one of the first Accountants in the UK to prepare accounts using a personal computer system (in 1981) I am happy to embrace new technology when it works properly and has a tangible benefit, but I know from experience that my clients are not able to do the same. Over the years I have provided clients with various ways to prepare accounting records on their computers and whilst some are able to do this, many more simply do not have the right mindset to deal with this.

If it was a case of simply reporting from records that we and clients already keep, (manual, software, spreadsheets, etc), then we are talking about something that is a more realistic approach and we, as Accountants, can work better with our clients to achieve this, but any insistence on our clients obtaining, learning and using specific software for MTD within 18 months (and never for some) is simply a non-starter.

The problem I have with Consultation Documents is that they usually contain proposals that should never have been suggested in the first place. However, this is the nature of Government, stick in some ridiculous proposals, back down on those and eventually be left with what you wanted in the first place. So yes, I will play the game and respond to the Consultation Documents as this is likely have some effect on the final proposals.

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By steve 12321
24th Aug 2016 10:39

Where is the benefit to the UK business person / self-employed? Let's put them first and let them try to make a living. We have such a complex tax system. It is simply wrong to do this. I will respond too. I think the best approach is to stop it dead and leave the system as is apart from, bring forward payments on account and simply the tax rules. I cannot believe people in the profession cannot say this too and stand up and be counted rather that accept this. with client support I am sure someone would have to listen

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Replying to steve 12321:
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By elaynam
25th Aug 2016 19:51

I heartily agree. These rules are usually dreamt up by HMRC top earners trying to justify their existence and tinker with a system that works. Your average self employed trade person drops his paperwork in once a year, has it put into a semblance of order and submitted to HMRC on his behalf. As they are in no rush this can be over several months timescale after the end of the financial year. Getting that same person to drop in 4 times a year with his/her paperwork to be dealt with is unrealistic. Firstly because it takes earning time out of their day to do so, so less money earned. Secondly it will cost a lot more to have information processed and submitted, so more money spent. Thirdly they will be forced into a strict timescale of getting the paperwork to their agent for submission. The agent also will be under pressure to process and submit many of their clients information at or before specified dates so may have to employ more staff to cope. I hope and trust the government will be able to cope with the massive unemployment figures that will ensue as these people will just give up and stop work rather than struggle on facing fines for not getting their paperwork submitted in the correct quarters. When will the government take on board not everyone is computer literate and some are even computer phobic. Plus the one man band agents are also caught in this, hoping to be able to keep all the balls in the air whilst trying to manage their own accounts.

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Stepurhan
By stepurhan
24th Aug 2016 11:44

If you rip off a plaster and there is "inevitable blood" then you've ripped it off too soon. The whole point of a plaster is to protect the injury until the blood stops flowing.

To follow the analogy, this is why I think a delay is sensible. From what I've read of the consultation documents to date, a lot of unnecessary blood will flow if this is rushed in. Delaying to sort out details so the system works properly is only sensible.

The key issue is the requirement to use apps/software. Two matters have not yet been properly addressed.

First is the availability of a free option. The government insisting commercial companies provide a free option is not an answer. I would be surprised if said companies don't challenge that requirement in court, they would seem to have a good case to do so. Even if they acquiesce, can we see them produce anything but a bare bones (and unsupported) program whose sole purpose is to encourage users on to their paid offerings.

But more importantly, there are still many jobs that requires no computer skills. That being the case, many people without computer skills can run highly successful businesses without that being a handicap. Is the government really going to close down those businesses over a reporting requirement?

Quarterly reporting may be inevitable. What is not inevitable is quarterly reporting in the form being currently suggested. A delay to get a workable system is worthwhile.

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Replying to stepurhan:
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By Robert Hurn
26th Aug 2016 11:50

I agree with Rebecca that VAT registered business are in the best position to submit quarterly figures, but must be able to use their VAT quarters, not quarters run form their year-end date. The latter would require accountants and bookkeepers to work twice per quarter rather than once or
re-stagger clients VAT quarters to fall in line with quarterly filing. Changing the VAT quarters would lead to a very large number of businesses being required to file for the June Sept, Dec and March quarters.

I would make the VAT threshold the threshold for quarterly filing with smaller concerns being required to file quarterly later, when the system has settled down.

One concern with the proposes £10,000 threshold. If a business is marginally under the threshold at 5 April 2017, they may well exceed it early in 2017/18. Will they be exempt from quarterly filing in the year they breach the threshold? And the reverse once in quarterly filing can they leave if turnover falls below the proposed £10,000

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By essex accountant
24th Aug 2016 13:17

What very much concerns me is what i can do as an agent.

My clients will expect me to do much of the work for them. OK some will be able to do most of the entries themselves, but will want me to check and submit quarterly. Some clients will not have a clue and will expect me to do all the work. Most will fall somewhere in between. There will need to be increased fees agreed and then there are software costs as well. so a hairdresser sole trader who has a £500 fee currently will have to pay me at least £400 more a year plus £100 for software. So an increase in expenses by 100% + an hour or two extra admin time each week.

So what can the agent do? Will they get a log in to the client's digital account with HMRC? or is it right what I have read that agents will not have access?

I can do this if I have the additional fee income from clients, full access as agent to the digital accounts of clients and one or two more staff.

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By adam.arca
24th Aug 2016 13:32

Well, I agree with Steve and disagree with Rebecca and everybody else who are seemingly bowing to the inevitable as they see it.

Are we not putting the cart before the horse in just accepting that MTD will / should happen in its current suggested format? I've read the consultations but haven't so far read anything which persuades me there is a business case for going down that route. Yes, the Revenue get something out of this but what does UK business get out of it really? Overall, this package seems to generate a net loss if looked at from a UK plc point of view.

I'm a big believer in people and businesses being able to get on with their lives with the minimum level of government interference but MTD cuts right across people's right to do what they want, when they want and how they want with their accounting. Obviously that has happened before with, for example, the introduction of VAT meaning that books had to be written up every quarter so, clearly, this can happen again but why should it when there is no reasonable justification for it?

And just so we're clear, I'm not opposed to digitisation of the tax system per se but just can't see the benefit of MTD in that process. Rather, it just appears to me to be a massive land grab by HMRC plus, if past history is anything to go by, the cue for 10 years of bedding in we would probably all rather avoid. It would appear HMRC refuse to learn from the past and still can't think in terms of baby steps and that it's the tortoise which wins the race not the hare.

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By andyjdicker
24th Aug 2016 13:42

'AccountingWEB member Kernowlive suggests that the exemption for micro-businesses should be around £50,000, dropping to £40,000 then £30,000 in subsequent years.'

That would be hugely confusing, especially when you consider self-employed people have pretty changeable levels of income. I don't think many accountants would want to go through their clients and make an assessment of which needs quarterly reporting and which don't and to explain that to clients.

If we're going to have quarterly reporting, then make it simple. Either tie it in with VAT registration, which makes sense. Or make pretty much everyone do it (the £10,000 limit). Any middle path or changing limits yearly is just going to be a clusterf**k.

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By legerman
24th Aug 2016 13:55

Based on the comments from Essex Accountant, it is going to be very much down to the client being prepared (and ready) to supply their bookkeeper/accountant with the correct paperwork in order to have their quarterly "return" submitted. It's our job to educate the client, and if they don't want to be, then it's their fault if the "return" isn't submitted in time.

I agree with Rebecca that non incorporated VAT businesses should be the first to make the digital returns, because they already have sales and purchase information available, and it's probably not going to be too much of a stretch to include what else will be required, once we know what that is of course. That should start in 2019 as planned, and 2018 be scrapped altogether.

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By ireallyshouldknowthisbut
24th Aug 2016 14:23

I simply dont see how in practice HMRC can mandate method of record keeping.

In my draft response to the consultation my main themes are:

1. Mandation of record keeping is 'over stepping' the mark in terms of the role of the state vs individual freedoms to keep records as they see fit.

2. The 30% time saving that underpins all their cost/benefit analysis is completely bogus. It may be true that businesses going digital save time "doing the books", and that time saving may be 30%, but that is a business decision, on a case by case basis. Essentially HMRC are taking credit for time save by using software tools, they have nothing to do with them. My logic would suggest if HMRC do nothing at all, then for business who will save time, will use them, albeit the take up may be a bit slower. For those business that it wastes time (ie the really small ones), then HMRC compulsion is acting as a drag.

I would say it was ever accountant in practice's duty to respond to this consultation, and point out the stupidity of many of the questions, and also to question their assumptions very hard.

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By Eric T
24th Aug 2016 15:46

I do not think that the quarterly return of VAT will be of much help when completing quarterly business information for tax and NI purposes.

For a start, there is no guarantee that the quarter periods will coincide. For the quarterly system to work for Income Tax and NI, it MUST be lined up with calendar quarters i.e. Jan/Feb/Nar - APr/May/June etc.

As we all know, VAT returns don't have to be arranged like this. Any quarter period is OK.

If a business has VAT returns that aren't lined up with the tax year end, and they don't want to change their VAT quarters, they would then have the nightmare scenario of having TWO separate sets of quarters running in any given twelve month period - and submitting two sets of quarterly returns to HMRC covering those periods. That effectively means eight submissions a year.

More worrying is the notion that the fundamental difference between Capital and Revenue income and costs seems to have been completely forgotten by HMRC .

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By Eric T
24th Aug 2016 15:46

I do not think that the quarterly return of VAT will be of much help when completing quarterly business information for tax and NI purposes.

For a start, there is no guarantee that the quarter periods will coincide. For the quarterly system to work for Income Tax and NI, it MUST be lined up with calendar quarters i.e. Jan/Feb/Nar - APr/May/June etc.

As we all know, VAT returns don't have to be arranged like this. Any quarter period is OK.

If a business has VAT returns that aren't lined up with the tax year end, and they don't want to change their VAT quarters, they would then have the nightmare scenario of having TWO separate sets of quarters running in any given twelve month period - and submitting two sets of quarterly returns to HMRC covering those periods. That effectively means eight submissions a year.

More worrying is the notion that the fundamental difference between Capital and Revenue income and costs seems to have been completely forgotten by HMRC .

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Replying to Eric T:
By ireallyshouldknowthisbut
25th Aug 2016 08:59

Eric (1) you can change your VAT Q ends very easily. (2) you can chose your period ends for MTD. They can be anything you like, not just March/June/Sept/Dec.

Albeit for a sole trader with an April period end then we are back to partial exemption and all that pain hung over from the last time we changed tax system.

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By Eric T
25th Aug 2016 09:29

What if the trader doesn't want to change their VAT return periods? They may have chosen the VAT quarters they have for solid commercial reasons.

The problem with the "Oh Well, the trader can just change their systems and way of operating to suit HMRC" is that HMRC seems to think that the prime reason people go into business is to provide data to HMRC.

It's a fundamental misunderstanding of business and the reasons why people decide to run businesses.

I really think this whole project is totally misguided and indicates a real lack of understanding on HMRC's part on the needs and priorities of small businesses.

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By jonathan Freeman
26th Aug 2016 11:57

The current proposed turnover limit for quarterly reporting is far too low. I believe this should be set to the VAT registration threshold. If HMRC needs taxpayers money with sales below this level up front, just get them to pay 4 times a year based on last year's figures. What could be simpler!

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By DMBAcc
26th Aug 2016 11:59

Rebecca. I agree the initial group should be all VAT registered businesses who either have the requisite software and knowledge or where the cost of new software and working practices should be less significant in percentage terms to their overall profit. I don't understand the £10,000 threshold. The fact it has been proposed shows that HMRC do not understand their own system. We all have a personal tax threshold of £11,000 - that's profit not turnover. Please can you explain why this has been proposed. Are you seriously suggesting that non-tax payers have now to pay to tell HMRC they have no tax to pay? I agree that if the VAT threshold is not used then the initial threshold should start at £50,000 BUT should NOT be reduced until there is sufficient evidence that the system works and that small businesses (with turnover less than £30,000) will not be seriously affected by software costs and workload issues. Also Rebecca please make a serious plea for seasonal businesses who work unreal hours during the summer months here in Cornwall (and I suspect many other parts of the country). They don't have time to think, leave alone prepare accounts during this period. There are a lot of worried people here (and the rest are still oblivious to what HMRC intend to introduce). Also if we are going to be helping our clients through the first year teething troubles how are we supposed to complete the 2017-18 tax returns? Will HMRC provide many more telephone operators to deal with queries during the startup period/ I am a lone accountant with 50 clients. I can manage these over 10 months but not over 4 weeks every three months. Who will help these people? They are not accountants and will not intuitively use accounting software. Some have only ever used hand written records which are sufficient for their small businesses. I could go on. Please can we have a champion for really small businesses. We feel we have no voice. We don't trust the consulatation. Our local MPs are reluctant to challenge their superiors even when we tell them there will be a political backlash to this at the next election. At present Cornwall is blue - at least three will go back to the LibDems on the same basis as the Brexit vote - because we little people have no voice. I will complete the consultation even though the documents are biblical in volume (one wonders if this too is deliberate). Please Rebecca do not ignore the voices of the millions of small businesses who at best don't understand what HMRC are proposing and at worst are still oblivious because HMRC have not written to them. The timetable of 2018 is not practical especially when we don't actually know what we will be expected to do. Please also assure your HMRC colleagues that this system will not work "simply at the press of an App". Life is not that simple and certainly financial life is not - if it were we wouldn't need accountants. Mmmmh perhaps this is what it is all about.

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Tornado
By Tornado
26th Aug 2016 12:13

I posted this on "Impact of MTD on Micro Businesses" but I think it is just as relevant here -

HUMAN RIGHTS

I am wondering if there is a Human Rights issue here. Forcing people to try and carry out procedures that they are unable to do, (for no valid reason) is clearly going to cause great distress to tens of thousands of people.

I suspect the issue of Human Rights related to Making Tax Digital will arise sooner or later.

After all, it would be unfair to introduce legislation that required pigs to fly around for 20 minutes each day, it just will not happen and tens of thousands of pigs would be heavily fined. Agreed that some would buy hang gliders or small planes, (those that arrogantly wonder why everyone else cannot do the same), but the vast majority of pigs would not be able to comply. That would be a very unfair situation causing a lot of distress to many pigs.

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By PatriciaRr
26th Aug 2016 14:07

Totally impossible for many in the building trade who are successfully running their non VAT registered business and leaving paperwork to their accountant at the end of the year having kept basic but sufficient information.The cost of carrying out the task would increase significantly and would make self-employment a very unattractive option for many. A significant proportion of these small businesses are serviced by sole trade accountants and the pressure of quarterly reporting within a short timescale for submission would not be workable. There could be a lot of early retirement ahead for clients and accountants.

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Tornado
By Tornado
26th Aug 2016 16:08

IS THIS AN INDICATION OF WHAT IS TO COME?

A client has just sent me a copy of a statement from HMRC indicating how his allowances have been allocated to 2016/2017.

This statement shows that my client is employed by a company that he left 5 years ago. Nevertheless HMRC have allocated a code number to him for that Company.

The Company that he does work for is not listed.

There is an employer listed that is just shown as my client's own name and a code number allocated against that although last time I looked, he has not registered as an employer to employ himself.

Despite the obvious errors, there are still two pages of notes explaining what the figures all mean (or in this case, are supposed to mean).

If this is the current standard of HMRC information then MTD has no chance of success.

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Worm
By TheLambtonWorm
30th Aug 2016 09:48

It seems to me like the only real benefit to HMRC for this this will be that it will assist them in investigations.

Once they have photos of invoices, it'll be pretty easy for them to check taxpayer records rather than the current system where they have to spend eons corresponding with accountants on even the most basic of enquiries.

I don't think for a second that it will mean much more tax collected for HMRC under this system, or that it will make life easier for businesses.

The only thing it will save is HMRC staff costs (in the long-term), at the expense of the taxpayer.

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