Making Tax Digital (MTD)
As the next step in abolishing tax returns and replacing them with individual digital tax records, on 15 August 2016 HMRC published a series of consultation documents. These set out some of their ideas and timings, but were open for responses by professionals and businesses until 7 November 2016. The undermentioned points are subject to any amendments which might be made as a result of the consultations.
MTD will be introduced in three stages. Income tax and national insurance will start in April 2018; VAT in April 2019; and corporation tax in April 2020. Those individuals with business and/or property income totalling less than £10,000 per annum will be exempt from MTD and those who genuinely cannot use digital tools will not have to do so. Suggested reasons for this are disability, age or remoteness of location. Charities will also not be forced into MTD. Some smaller businesses/landlords may be given an extra year to get their records in order.
Those who are “caught” by MTD will need to introduce digital tools to enable them to report details of their business/property income electronically to HMRC on at least a quarterly basis. HMRC recognise that this will involve a real cost to some businesses and they are consulting with commercial software providers with a view to them providing free or low-cost software. HMRC are not proposing to provide their own free software!
Under the current system businesses have a very long time in which to provide their account details to HMRC. For instance, a business with an accounting year ending on 30 April 2016 would have until 31 January 2018 in which to file a tax return with those details. Under the new proposals they would have just 14 days in which to report the quarterly details and nine months in which to finalise their annual figures.
Coupled with these much tighter time limits, HMRC are proposing to change the penalties system more in line with driving offences. One possibility is that a penalty point will be “awarded” for each failure to meet a quarterly or annual filing deadline and a penalty will be imposed once four points have been accumulated. Further penalties would be incurred for each subsequent failure and the slate would not be wiped clean until a full two years of compliance had been achieved.
As well as penalties for late submission, HMRC are proposing to change the interest charges for late payment. There are currently no plans to change the tax payment dates of 31 January and 31 July, but the current system of charging interest (currently at 3% per annum) from the due date plus a 5% penalty on tax still unpaid after 31 days, would be replaced by a penalty interest system which would kick in after just 14 days at a suggested rate of 10%. Taxpayers would, however, have the opportunity to try to negotiate a “time to pay” arrangement within that 14 days without incurring penalty interest. Taxpayers would also have the option to “Pay as you Go” if they wished to do so.
In an attempt to make reporting simpler HMRC are suggesting that taxpayers should be able to adopt the cash basis of accounting where their turnover is higher than the currently permitted level of £83,000. They have suggested possible limits from £100,000 to £166,000. Under the cash basis any qualifying capital expenditure can be claimed as though it were an expense of the business, whilst any capital sales will be treated as income.
Partnerships would be dealt with in a similar way to individual businesses but the information provided to HMRC by the partnership would be automatically transmitted to each individual partner’s Digital Tax Account, thus avoiding the need for the present duplication of reporting.
There is a lot of reliance in the new arrangements for information provided by third parties. At the moment HMRC receives information from employers, banks, building societies and government departments. From April 2017 HMRC will be using some of this information on a real-time basis to try to ensure that the right amount of tax is being deducted under PAYE, with bank and building society interest being included from April 2018. In respect of this additional information taxpayers will, as at present, have the right to opt out of the automatic adjustment and pay the tax separately if they wish.
By 2020 the objective is to have taken almost everyone out of the need to file a tax return. Access will be looked for to other sources of income such as dividends, peer-to-peer lending and property income.
In order to ensure that third party information is accurate, HMRC will provide the taxpayer with a list of income sources with multiple bank accounts shown separately so that the individual figures can be checked. It is hoped that any queries will be able to be resolved through the Digital Tax Account or an alternative route, but it may be necessary for the taxpayer to approach the third party direct to resolve some issues.
HMRC have announced their intention to allow taxpayers to authorise an agent to access their Digital Tax Account, but no timeline for this has yet been suggested.
We will be considering our response to the consultation documents and will update our report once the various matters have been resolved.