MTD: The legislative road ahead

A long road ahead for MTD regulations
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The government’s response to the Making Tax Digital consultation leaves much detail to be thought through, and questions unanswered. Rebecca Cave sets out to explore some of them.

Worth waiting for?

The government promised to provide its response to the MTD consultations in January 2017, so at lunch time on 31 January it issued summaries of the responses to all six MTD consultation documents, together with draft legislation and explanatory notes in the following areas:

Comments on the draft legislation can be submitted until 28 February 2017, and should be sent by email to [email protected]  or [email protected]. The House of Lords economic committee is also collecting views on the MTD draft legislation, but they need responses by 15 February 2017.

Regulations

Much of the detail of how MTD will work in practice will be contained in regulations (ie statutory instruments or “secondary legislation”) to be written by HMRC. You can see this from the points in the draft legislation where it says “the Commissioners may by regulations require…” or “regulations under this paragraph may…”.

Traditionally statutory instruments are not debated at great length in Parliament, and are generally passed with little more than a rubber stamp. Regulations can be changed far more easily than an Act of Parliament, and thus give the government more flexibility to amend details such as tax rates and thresholds. Much of the PAYE and VAT law is contained in regulations, but the core of direct taxes: income tax, corporation tax and capital gain tax are contained in Acts.

The danger of putting detail in regulations is that the vital points of how taxpayers must comply with MTD won’t be scrutinised. None of the regulations required for MTD have been published alongside the draft law, so we will have to wait to see the full picture. It is possible that the draft regulations won’t be issued until shortly before they are due to take effect, and thus deny us all the opportunity to comment and change them.

Guidance

HMRC issues a vast amount of guidance on the tax law, which is contained in; HMRC manuals, statements on gov.uk, helpsheets, notices and leaflets. Very little of this guidance has any legal effect. Some sections of VAT notices do have legal backing, but those parts must be clearly marked.

All other HMRC guidance is just opinion, not law. The courts do not form judgements based on what the HMRC guidance says, but they will consider how the guidance has influenced the taxpayer’s behaviour. In some cases HMRC issues guidance to give taxpayers comfort that the law does not apply to their situation, so the taxpayer is taxed by law and untaxed by guidance. This is regrettable.

In the case of MTD it appears that HMRC will be given considerable scope to alter or amend regulations by way of “directions”, which to my mind means guidance.

Software standards

Accounting software is the linchpin of MTD. Spreadsheets will be permitted as a recording tool, but some interaction between the spreadsheet and accounting software will be required to make the quarterly updates to HMRC.

The accounting software (in combination with spreadsheets or not) must produce complete and accurate accounting records. This is set out in the draft legislation, which says: “records kept must meet standards of accuracy and completeness set by specific or general directions given by the Commissioners.” So HMRC is going to have the power to set standards of accuracy within accounting software. I find this very alarming. 

Cash basis

The use of the cash basis will make MTD compliance easier for many businesses, as they won’t have to calculate: prepayments, accruals, debtors and creditors. We already have a form of cash basis which businesses can start to use if their turnover is under the VAT threshold of £83,000, and they can carry on using until their turnover reaches double that figure.

Those turnover thresholds are to be increased to £150,000 (entry) and £300,000 (exit) with effect from April 2017, so a year before MTD becomes compulsory. Landlords with turnover of up to £150,000 will also be able to use a form of the cash basis from April 2017. However, the rules concerning capital assets purchased under the cash basis will change from the same date. I will write in detail about both these changes in a later article.   

Outstanding matters

The MTD story is not complete. We still don’t know how it will apply to companies and complex businesses. HMRC has promised that another consultation document to deal with these issues will be released in “the Spring”.

We do know that partnerships with turnover of £10m or more won’t be dragged into MTD until at least 2020, which is the date when companies are due to join the system. However, smaller partnerships, where at least one partner pays income tax, will be required to comply with MTD from April 2018. I predict significant problems with partnerships and MTD, and I suspect we may see further movement in this area.   

There will also be another consultation paper dealing with penalties under MTD, to be released “later in 2017”.

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About Rebecca Cave

Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.

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to 0098087
06th Feb 2017 17:00

Universal credit tie in (another of those wonderful wheezes working so well that nationwide roll-out keeps running over the horizon)

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By LAC47
06th Feb 2017 17:30

for the small practitioner the only hope is for a realistic exemption limit. The fact that they have delayed announcing this only proves that they really don't understand the 'problems' we face at all. Really sorry for you younger practitioners who have to continue....I will just call it a day.

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06th Feb 2017 17:50

You know what. The more that say they are throwing in the towel must be heaven to HMRC's ears. They really do want rid of agents. Those of us who will be left will have even more of a difficult job. Instead of saying enough is enough, join those of us who are staying to be a thorn in the side of the idiots from HMRC at this time.
There will come a time when sufficiently intuative software will be available for taxpayers but not until enough money has been invested in its development. This unthoughtout rush is causing all the problems, based on the misguided idea that the Administration will save money in a short period of time. This is a nonsense. How much did it cost to develop the software for the National Lottery and how many pieces of information does it deal with each day without too much of a problem?
Wake up Government. As we all know, cheap garbage in rubbish information out.

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By 7555775
to david wilks
06th Feb 2017 18:23

I read the whole of the consultation reply yesterday, basically they acknowledge that agents need to be involved but on the last pages in their "Journey" (their words not mine) agents won't be doing anything except year end.
I really liked the bits about scanning invoices and using software recognition programmes to input data, ha ha, that made me laugh.

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07th Feb 2017 08:45

Most of the detail in how MTD will work is to be in regulations issued by HMRC.

Sounds like making it up as you go along to me.

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