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First announced in the March 2015 Budget, and billed as a way for taxpayers to view an up to date picture of their tax affairs, providing greater certainty about tax due and entitlements, were the government’s plans to make tax digital. They surprised us all with theirs plans to kill off the annual tax return by the introduction of a digital system whereby taxpayers would use software to provide HM Revenue & Customs with quarterly figures. Since that time we have had few details of how the new system would work in practice. 

However on 15th August 2016 HMRC issued no fewer than six consultation documents around the theme of Making Tax Digital (MTD). We have read the documents and below are our summaries of the important points. Firstly it’s important to point out that this is a consultation process which is open until 7 November 2016. HMRC will then review the replies and publish a response to the consultation in the Autumn 2016 Statement, usually released in early December. Therefore any of the facts published in the documents could change before implementation, although we expect that most of the information will be enacted as stated. 

In summary the key facts are as follows: 

  • Each taxpayer will have a digital tax account with HMRC. This will be pre-populated with information from third parties, such as employers, banks, pension providers etc.. To this taxpayers with business interests (including landlords) will add their own figures of income and expenses related to their business activities on a quarterly basis, with a fifth end of year submission of the final figures to be assessed. Reports must be made digitally using third party software. HMRC have signalled to developers that free software products with free updates must be available but will not be providing any such software themselves. Clients can give authority to their accountants to access their account and manage their tax affairs within the software.
  • Quarterly digital reporting will be required from April 2018 for sole traders, partnerships and landlords.
  • Quarterly digital reporting will be required from April 2019 for VAT.
  • Quarterly digital reporting will be required from April 2020 for companies.
  • The quarterly reports will just be summary figures of income and a summary of expenses split between categories much as for current tax returns. Use of the right software should make the categorisation fairly straightforward. We are recommending Xero who are currently working with HMRC to provide a solution.
  • As stated there will be a final submission at the end of the accounting year. This will include any necessary accounting adjustments required to the quarterly submissions and any claims for reliefs or allowances not made in the previous submissions.
  • Taxpayers will be able to view the summary of their profit position and resultant tax liability as they go along. This will only be estimated until the final submission is made.
  • There will be exemptions for businesses and landlords with turnover or rents of less than £10,000 as well as exemptions for people on religious grounds or those with ill-health.
  • There will be encouragement for more businesses to use cash accounting or a more simplified method of regular accounting.
  • Penalties for non-compliance with the submissions will be on a graduated scale, with the proposal that they will only apply once you have four late submissions.
  • The time limits for quarterly submissions will be one month after the end of the period.
  • The time limit for the final submission is proposed at nine months.
  • Tax payments can be made voluntarily as you go, although there is currently no mention of changing the mandatory tax due dates. 

There is no doubt that the vast majority of our clients will be affected by the new rules by April 2020. It is therefore vitally important that we are all prepared for the most radical change to hit accountancy in several decades. 

With this in mind we will be offering a series of free seminars to provide our clients with all the information they need to make the right choice of software and give them the opportunity to prepare for the changes well ahead of the scheduled start date. See our article entitled “Bringing your accounting system into the 21st century” and find out about our seminars. If you are interested in attending one of our seminars please contact us here

In the meantime if you have any questions or concerns about the digital tax era please contact Jan Friend to discuss them.