How Making Tax Digital Can Affect You and Your Businesses

Cited to launch alongside the 2017-2018 tax year beginning in April, the Government has recently announced that Making Tax Digital will be pushed back until the following year, allowing individuals, businesses and accountants more time to fully comprehend the core components of the new initiative.

Making Tax Digital, when launched in April 2018, will mark one of the most fundamental changes to the UK taxation system for over a generation, dramatically changing the way in which businesses, landlords, individuals and tax agents interact with HMRC.

However, as Making Tax Digital is phasing into the public beta testing phase, information about the impact Making Tax Digital will have on you and your clients, or proprietary planning, is piecemeal and scattered. Even the emerging guidance and legislation appears to be prompting more questions than answers, and whilst the tax department has offered up small clarifications, a lot of the machinations of Making Tax Digital remain opaque.

Whether you’re an accountant or a business owner, we’ve compiled a single resource with clear information and valuable oversight on the most frequently asked questions, in order to guide you through the ongoing process.

Making Tax Digital

What is Making Tax Digital?

Announced originally in the spring 2015 Budget, the premise of HMRC’s Making Tax Digital initiative is to modernise the UK tax system by 2020, removing inaccuracies and making the current system more transparent.

Essentially it will restructure the UK tax system, implementing universal commercial accounting software, and a set standard of record maintenance and quarterly reporting to the HMRC. Bank transactions and financial information will now flow automatically into people’s digital tax account, tying in with the new Trading and Property Tax allowances, whether or not they declare that income or those expenses.

The primary aim of HMRC's Making Tax Digital is to align tax administration to a more effective, efficient and easier system for taxpayers, by actioning a fully digitalised tax system by 2020, with the intention to end the need for self-assessment for businesses and individuals by 2018 and reducing tax management overheads.

The new legislation will apply to a wide range of taxpayers, including most businesses, self-employed professionals and landlords, with the primary requirement of maintaining compatible digital tax records.

The Making Tax Digital Timeline

The primary catalyst dates for the implementation of Making Tax Digital are staggered in accordance with VAT thresholds. 

The timeline of Making Tax Digital basis are as follows: 

  • Self Assessment effectively ends on 5th April 2018 
  • April 2018 Making Tax Digital will go live for income tax businesses and landlords with turnover above the VAT threshold (£83,000 from April 2017) (excluding some larger partnerships)
  • April 2019 Making Tax Digital will go live for income tax businesses and landlords with turnover below the VAT threshold and for VAT
  • April 2020 Making Tax Digital for corporation tax and income tax for partnerships with turnover of more than £10m

However, whilst the threshold is set at a turnover level equal to VAT registration, this does not mean the taxpayer is required to be VAT registered. If you’re sales exempt from VAT due to the nature of your business, you will join MTD from the first accounting period that starts on and after 6 April 2018, providing your turnover for the previous period was in excess of the VAT threshold (£85,000 from 1/4/17).

The majority of businesses, including limited businesses, who are VAT registered, will start to make quarterly reporting from the accounting period that starts on or after 6 April 2019. Only companies who are not VAT registered will be able to wait until 2020 to start to make quarterly MTD reports.

Are There Exemptions to Making Tax Digital

As stated above, all businesses, included limited, are included in Making Tax Digital, however, there are some limited exemptions, primarily; 

  • Individuals and businesses with an annual turnover below a £10,000 threshold - although this is still to be confirmed by HMRC 
  • Individuals who are unable to engage digitally, due to circumstances like inadequate broadband accessibility

All businesses and individuals who believe they are exempt must make their case directly to the HMRC.

What are the Reporting Requirements of Making Tax Digital

If you are already using supported accounting software, such as one of these cloud accounting packages, the move to MTD-compatible software will be managed by your software vendor. 

The main issue with reporting will come courtesy of businesses who do not currently maintain digital accounting records but will now have to begin. Although the HMRC has indicated it will attempt to ease this process through the facilitation of free software products, with manageable updates and training. If you are one of these businesses, and you choose to set up and maintain your digital accounting records yourselves, any accountancy firm will be able to help you set up proper processes and procedures.

Spreadsheets

Whilst you will be able to continue to use spreadsheets for record keeping, you must ensure that any spreadsheets align with the necessary requirements of Making Tax Digital, primarily ensuring that the right information is provided each quarter.

That said, the software, and requirements, provided by the HMRC will differentiate between users, as detailed below:

Making Tax Digital for Businesses

Businesses and Landlords will be required to use commercial accounting software to update their records, and consequently, the HMRC quarterly. 

Making Tax Digital for Agents

The introduction of Making Tax Digital is likely to have a significant effect on the current agent-client relationship, the scope of which will need to be continually reviewed throughout the implementation of the initiative, however, there is a provision that agents are able to access their clients' tax accounts. However, there will be no free software available for agents.

Making Tax Digital for Individuals

Making Tax Digital for Individuals is centred around the Personal Tax Account. Although it already has the majority of the services required by PAYE taxpayers, it will be continually developed throughout the process.

What are the real-time benefits of Making Tax Digital?

The primary benefit of Making Tax Digital is its required frequency of use. Whilst engaging with your accountant more regularly, or making more frequent submissions, may seem like an additional burden, they actually circumvent the potential for nasty annual surprises. It minimises the big backlogs of work and mitigates the accumulation of large tax bills.

Similarly, providing the standardised accounting software has online capabilities, it allows for a greater accessibility for both yourself and your accountant, alongside the ability for real time updates and the establishing of direct bank feeds so transaction data flows straight into the ledger.

For small businesses, accountants and individuals, the exact technicalities of the workload required, and underlying infrastructure necessary, to undertake the change to the initiative are still unclear, although in an archive of responses by key revenue staff working on Making Tax Digital, compiled by AccountingWEB, a more in-depth breakdown of exactitudes required should be forthcoming on further confirmation from the government.

Nevertheless, until its implementation in April 2018, the government will be releasing regular updates on the potential legislation and processes, so the best way to stay ahead of Making Tax Digital is to remain aware. Similarly, accountants will be instrumental in translating the more heavier aspects of the initiative, so arranging for a consultation with an accountant specialising in business finances about the potentialities of the updated record and taxation systems, will be extremely useful in preparing for the switchover.