AccountingWEB spoke to Making Tax Digital’s director of business Theresa Middleton about the raft of consultation responses and draft legislation published today around the government’s digital taxation plans.
- The Making Tax Digital proposals will proceed along the proposed legislative timeline.
- The government will re-examine the initial threshold level for mandation exemption
- Cash basis accounting option extended to firms turning over up to £150,000pa
- Businesses can continue using spreadsheets for record keeping – but alongside software.
- MTD-capable software will be available by April this year.
- There will be a 12-month soft landing before any penalties are applied.
Making Tax Digital had been generating discussion and controversy even before any details emerged about the plans, and according to HMRC the consultation documents published last year generated an unprecedented 3,000 responses to the six consultations.
“We had a really good response”, Middleton told AccountingWEB shortly after the consultation responses were published, “and we found broad and general support for the direction of travel in terms of a digital vision to build a transparent and accessible tax system.”
Middleton confirmed that the proposals are proceeding along the proposed legislative timeline, with mandatory quarterly udates due to begin for unincorporated businesses in April 2018. The rationale for this decision is to tackle the tax gap caused by errors from the small business population, which HMRC estimates at just over £8bn a year.
“Not only does it cost the public purse, but it also brings uncertainty and expense to the business community when we have to get involved to put things right, so we think there’s a genuine benefit to small businesses as well as for the taxpayer,” the HMRC director said.
Middleton acknowledged concerns flagged by the consultations over the pace of change, the cost to business of adopting the new system and whether the very smallest businesses were equipped to make that change.
“We’ve listened to those responses and they’ve been instrumental in shaping the detail of what we’re announcing today,” she said.
One thing not announced in the responses was the level of the initial exemption for mandation, stated at £10,000 in the consultation.
“Given the range of views on this matter,” said Middleton, “the government has decided to take a little more time to examine these issues, alongside their fiscal impact. A decision on this will be made before the legislation is laid later this year.”
The government is also considering measures to support the group just above the threshold, wherever it sits, to give them more time to prepare.
Both of these issues will be clarified before the Making Tax Digital (MTD) legislation appears on the Finance Bill in July [we presume the Finance Bill 2017, but will clarify this with HMRC], but no further details were available.
Middleton announced two decisions around the cash basis. First, the thresholds to enter the cash basis for small businesses will be extended to £150,000 from April 2017.
Second, incorporated property businesses previously unable to use the cash basis will be able to do so if they have receipts of less that £150,000 a year.
Businesses eligible for three-line accounts will be able to submit a quarterly update with only three lines of data – income, expenses and profit.
Another development is that businesses will be able to continue using spreadsheets for record keeping, but will have to ensure that the spreadsheet meets the requirements for Making Tax Digital. That is likely to be combining the spreadsheet with software in some way.
According to Middleton this was requested by a wide range of stakeholders, particularly small businesses, and the Treasury Select Committee in their assessment of the MTD scheme.
Having listened to the Treasury Select Committee, who championed a thorough end-to-end pilot of the scheme, the Revenue is determined to involve “hundreds of thousands of customers” in its beta testing programme ahead of the initial MTD rollout in April 2018.
“We’re going to start in a small, gentle way in April this year and then ramp up during the year once we’re confident that the products are user-friendly, work well with our systems and that individuals, businesses and those who represent them are ready,” said Middleton.
According to Middleton HMRC has been working with 18 software companies in the initial private testing beta phases of the project. Five of these developers hope to have a product available before April – at least one expects to have a product available during February. Middleton expected to see a mixture of free and paid-for tools.
“All of the companies are going to want to build both varieties. They will want to have a free product and products that have a range of price points,” she said. “Free software will be available to small businesses with the most straightforward affairs – in broad terms we are talking about people below the VAT threshold, not employing anybody and using the cash basis.” At time of writing it is not clear whether partnerships will be able to use the free software.
Although the government has not waited for products to be enabled for MTD before announcing the timetable, a full end-to-end MTD-enabled product will be able to keep your records digitally, categorise expenses for you, produce a summary and prompt you to send the summary to HMRC. HMRC will receive it and then play back what that says about how the tax bill is evolving.
“We’ve got between now and April 2018 to test the full end-to-end products,” said Middleton, “and we’re pretty confident that we’ll have one in February and we should have a few more before April. Those announcements should help because the software industry has been waiting for confirmation of the timetable, because they’ve got to invest in designing, building and delivering these new services. I’m hoping that more will start to emerge now that we’ve got some clarity.”
Consultation document for complex businesses
The consultation for complex business will come out at some point in the Spring – but no further details were provided.
Middleton confirmed there will be a 12-month soft landing to become familiar with the changes before any penalties for late submission will be applied. HMRC will consult again in the Spring on the penalty model.
“The responses we had on that [the penalty model] made us think that we needed to do a bit more work on it,” she said.
With some large numbers banded about by some stakeholders on what they thought Making Tax Digital would cost, HMRC has taken on board the consultation responses based on the transitional and ongoing costs and benefits and come up with a transitional cost figure of £280 on average per person on transition. After that the Revenue estimates an average of a small ongoing annual saving.
Unanswered questions and discussion points
Almost immediately after considering the collection of consultation responses and legislative proposals released at 12:30pm this afternoon, questions started emerging from accountants and tax experts. AccountingWEB’s tax policy editor Rebecca Cave was not the only commentator to remark on the amount of detail that was being delegated to secondary legislation.
In a stinging response ICAS director of taxation policy Charlotte Barbour commented: “The granting of powers, duties and functions are an important exercise of Parliament’s duties. Such powers should be exercised through primary legislation so that there is full consideration by Parliament before doing so... Exceptionally few of our concerns have been addressed. SMEs are still going to be expected to dance to HMRC’s tune.”
Some of the other unresolved aspects of the MTD blueprint include:
- Increased scope for HMRC to alter or amend regulations by way of “directions”, significantly increasing its ability to pre-emt guidance from courts and Parliament.
- This power extends to the software systems used and their quality. Who will actually police whether what is set out in statute is accurately reflected in the software specifications used by developers?
- When will questions surrounding partnerships, LLPs, complex organisations and many other issues be resolved?
- What impact will all these changes have on agent-client relationships. As Andrew Jackson has argued, in its rush to press ahead with MTD, HMRC is neglecting this vital aspect of the whole digitisation project.
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