16 May 2017

Making Tax Digital: the facts, myths and unknowns

With so much confusion and uncertainty surrounding Making Tax Digital, we set out the current facts, myths and unknowns, and what to expect moving forward.

Making Tax Digital (MTD) is the single biggest change to the UK tax system since the introduction of the Self Assessment tax return over 20 years ago. The idea is simple; to bring the management of taxes into the digital age by allowing information to be uploaded and updated in real-time, instead of waiting for tax returns to be filed nearly 10 months after the end of the tax year.

However, despite the introduction of MTD being for accounting periods commencing in April 2018 (just shy of 12 months away at the time of writing), information on the precise operation of it is still fairly scarce.

What we do know is that MTD will only apply from 2018 for unincorporated businesses with a turnover in excess of the VAT registration threshold (currently set at £85,000). We also know that information will need to be uploaded quarterly to HMRC’s system, followed by an end of year return, which will replace the existing need for a tax return.

Recent developments, however, have cast further doubt on the precise nature and timetable of the introduction of MTD, with the relevant clauses being removed from the 2017 Finance Bill prior to it becoming enacted. The Government’s current position is that the clauses will be reinstated in a future Finance Bill, which is to be presented to Parliament following the upcoming general election.

With so much uncertainty and confusion, we thought it would be useful to summarise the current facts, myths and unknowns.

Facts

There are a number of things we believe to be fact when it comes to MTD, as follows:

  • The Government has set a target of 2020 for a fully digital system.
  • Sole traders, partnerships and landlords will be affected from April 2018 if their turnover is above the VAT threshold.
  • There will be new tax filing dates but tax payment dates are to remain the same for the foreseeable future.
  • Online quarterly reporting to HMRC will be obligatory, due within one month of the end of the quarter.
  • An end of year declaration including tax adjustments, such as claims for reliefs, is to be submitted within 10 months of the end of the accounting period (or 31 January, whichever is earlier).
  • Records on spreadsheets will be acceptable, provided they include a quarterly summary.
  • There will be no requirement to submit invoices or expense receipts.
  • HMRC will not enquire into quarterly returns.
  • A simplified cash basis for unincorporated businesses, including property businesses, will be available where turnover is £150,000 per annum or less.
  • The current interest rules for Income Tax and National Insurance Contributions will be maintained.
  • Partnerships will be required to nominate a partner to fulfil the rules regarding MTD. They will be responsible for maintaining digital records and for providing regular updates on behalf of all the partners. 
  • MTD will be deferred for larger partnerships until 2020 (this includes those with a turnover in excess of £10 million).

Myths

There have been a number of myths and rumours surrounding MTD, which we debunk below:

  • Taxpayers will have to submit four tax returns a year.
  • Personal taxpayers, excluding unincorporated businesses and landlords, will no longer have to submit tax returns or require the assistance of accountants and tax advisers to check their tax affairs.
  • Taxpayers who are unable to submit returns digitally will suffer penalties.
  • Businesses will need to keep additional records over and above their existing records.
  • Quarterly returns will have to be prepared to the same degree of accuracy as annual tax returns.
  • Tax payments will also have to be made on a quarterly basis.
  • As the clauses have been dropped from the 2017 Finance Bill, MTD has been cancelled.

Unknowns

Certain points are still to be clarified by HMRC and are very much unknown at this stage, as follows:

  • The exemption turnover threshold for unincorporated businesses – this will be £10,000 from 2019 onwards, but is this likely to change?
  • Which businesses will be eligible for three line quarterly accounts.
  • The HMRC approved list of MTD software.
  • Whether software houses and HMRC will have suitable tried and tested software in place by April 2018.
  • How HMRC will deal with clients that do not have the facility to file digitally or do not know how to file online.
  • What the penalties will be for late submission (after the 12 month initial grace period). As it stands, HMRC has issued a consultation on how the penalty regime should work.
  • How taxpayers will be able to query information provided to HMRC by third parties.
  • If agents will be allowed full access to clients’ tax accounts.
  • What the new process will be for authorising agents.
  • If agents will be able to submit quarterly returns for clients.

What to expect

Despite the facts, myths and unknowns above, there are a number of things you should expect in the run-up to the implementation of MTD:

  • Correspondence and advertising from HMRC regarding the introduction of MTD.
  • In the era of ‘fake news’, some scaremongering in the press and on social media.
  • To be inundated with offers of assistance by other tax and accountancy firms.
  • Taxpayers will be expected to create and log into their own digital tax account, where third party information from banks, employers and pension companies will already be preloaded.
  • Taxpayers and advisers will be expected to check pre-populated returns.
  • Scott-Moncrieff to keep you in the loop on what you need to do and what you need to know.

If you have any questions or concerns in the meantime, please do not hesitate to get in contact. 

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