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.
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.