Following the 2017 Spring Budget it has been confirmed that Making Tax Digital, the most radical change in the tax system for over 20 years, will proceed as planned, but with a delay of a year for the smallest businesses.
What that means is that unincorporated businesses and landlords will have to start to keep digital tax records and file quarterly updates with the tax office from:
Employees who additionally receive business or rental income in excess of £10,000 a year will also have to comply with the digital requirements, from April 2018 or 2019 depending on turnover.
Companies will have to join the regime from April 2020.
Those businesses and landlords with turnovers below £10,000 will be exempt from tax digitalisation, though this threshold may yet increase. There will also be exemptions for those who cannot access the internet due to their disability, geographical location, or other prescribed reason.
Charities will not have to keep their records digitally, or make quarterly updates, but their trading subsidiaries may have to.
Finance Bill 2017 contains the framework for the new regime, with details to be filled in by secondary regulations.
Businesses and landlords that come under the regime will need to keep a record of their costs and revenues in a digital format, which can include spreadsheets, and send a summary of this every three months to the tax office via software. Spreadsheets will have to link to software to generate and send the updates.
For most businesses, there will be 4 updates for each accounting period, with a fifth reconciliation update submitted within 10 months of the end of the accounting period.
Those businesses that are VAT registered and already filing quarterly VAT returns may find they will be making as many as nine VAT and tax returns per year, in addition to meeting six payment deadlines – four for VAT and two for tax.
VAT reporting may be synchronised with the new quarterly reporting requirements for income tax and corporation tax to reduce the compliance burden, though there will be transitional issues in moving to the new regime for each tax at different times.
Free software will be made available from third party software houses for digital tax reporting, but only for the simplest of cases. Other businesses will either be using their accountant to file the updates or will be investing in commercial software to do so.
The quarterly updates will differ depending on whether the business opts to use a cash-basis of accounting, instead of the normal accruals basis. Where a cash basis is used, the updates to HMRC will be in a three-line format. Businesses can opt for the cash basis where their turnover does not exceed £150,000.
Where information is submitted in an update which later turns out to have changed or is found to be incorrect, this can be corrected in the next update.
A nominated partner in a partnership will file updates on behalf of all partners. These updates would feed directly into each partner’s digital tax account. As a result, each partner will not need software, nor need maintain their own digital records, unless they have other business interests.
It is proposed that limited liability partnerships (LLPs) and mixed partnerships will not be exempt from quarterly reporting, whatever their level of income.
By 2020, most companies will also have to start filing quarterly updates to HMRC for corporation tax purposes. Further details will be published later for consultation.
Unincorporated landlords will be able to use the cash basis, so will only need to declare rental income they have actually received. Conversely, only payments actually made in the tax year would be allowable. Relief for the costs of buying furniture etc. would be give on a replacement basis.
No turnover limit is likely for landlords who wish to use cash accounting, as their businesses do not necessarily become more complex as they grow. The cash basis would, as is already the case for individual landlords, operate by reference to the tax year (6 April to 5 April).
Businesses will be able to make voluntary payments on a pay-as-you-go basis via their digital accounts. Any voluntary payments made will appear in the digital account of the taxpayer or business as a credit and will be allocated against liabilities as they become due, across their range of taxes. Any unused credits will be carried forward for future use. Taxpayers will be able to choose how and when to pay.
HMRC hopes that quarterly reporting will result in less errors being made. However, the contrary may well be true in that with more reporting deadlines, there is the potential for more mistakes to be made, or for figures to be missed.
A new points-based penalty system is likely to be introduced, subject to consultation. A point would be incurred for each late submission, and a penalty would be triggered when a specified total is reached, but a period of good compliance would reset the total to zero.
Also in development are rules to apply interest on the late payment of a penalty, in addition to late payment interest on the tax itself.
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