MAKING TAX DIGITAL
Tax is changing! The Government has decided to make tax administration digital. The aim is for HMRC to be interacting digitally with all taxpayers by 2020 which will also see ‘the end of the tax return’.
How can we help you?
We wanted to be ahead of the game so from April 2017 we have signed up to the year-long trial period for Making Tax Digital and Dawn has been a part of the consultation with the AAT and HMRC advisory committee. There are still some details to be ironed out and these will be announced in the July 2017 finance bill.
All of the changes for Making Tax Digital apply to you. You’ll be required to use digital tools, such as software or apps, to keep records of your income and expenditure. HMRC have confirmed that records can be prepared on spreadsheets but the information will have to be processed through a third-party software tool before being submitted to HMRC as the information must meet their requirements. HMRC has also stated that it won’t provide its own software.
To help you meet your new tax reporting obligations we are recommending ‘Xero’ a cloud based accounting software to all our clients to help you become digitally ready. By using Xero, you will have a clear overview of your current financial position in real-time.
We will then be able to submit the information directly to HMRC. We have chosen this software to make the transition as smooth as possible and to help simplify reporting. Because Xero is cloud based we can remotely log in to your Xero account and access the relevant data needed for your quarterly tax reporting. The Standard Xero package is £22 + VAT per month.
During the coming months, we will keep you updated as new information is announced and will be happy to talk through your options with you, and explain how we plan to work with you as Making Tax Digital is rolled out.
What is Making Tax Digital?
From April 2018 unincorporated businesses, self-employed people and landlords will be required to update HMRC quarterly for income tax and National Insurance obligations through accounting software. The date for which incorporated business are required to file quarterly is still to be confirmed. The aim of Making Tax Digital is to make tax administration more effective, more efficient and easier for taxpayers, through the implementation of a fully digital tax system.
By 2020, all businesses and individual taxpayers will be able to register, file, pay and update their information at any time of the day or night, and at any point in the year, to suit them. For the vast majority, there will be no need to fill in an annual tax return.
By this time taxpayers should see the following major changes to the way you manage and report your business taxes:
• Through your digital account, you’ll be presented with a complete picture of your business’s tax affairs and you’ll be able to manage all of your liabilities at the same time, in the same place.
• HMRC will collect and process information affecting tax in as close to real time as possible. This should prevent any tax due or repayments owed from building up.
• You’ll no longer have to wait until the end of the tax year to know how much tax you have to pay.
Digital Tax Accounts
From April 2018 the self-assessment tax return will be replaced by an ‘online digital tax account.’ There are Personal Tax Accounts and Business Tax Accounts. It is proposed that if you have income taxed under PAYE and are also self-employed or have rental income, and the total of your self-employment and rental income is under £10,000, then you will no-longer need to complete a tax return.
Instead, you will update your digital tax account and any future tax due will be collected through your tax code. The new tax accounts will be generally available from 2017.
How will Making Tax Digital work?
Contrary to popular belief, Making Tax Digital (MTD) would not require businesses to file four tax returns every year. Instead, businesses will send total income and total expenditure to HMRC about their business each quarter, or more often if the business prefers.
Businesses will need to send this information from online accounting software. HMRC has confirmed that they will not be providing their own bookkeeping / accounting software and that the use of “digital record keeping software that links to and updates business’s digital accounts with HMRC” will be mandatory, except for taxpayers who are exempt from MTD.
Each business will have a proposed nine months after the year end to file an “End of Year declaration”, submitting final figures. This would be a month less than the current tax return filing deadline, which is just under 10 months after the end of the tax year.
Timeline of Making Tax Digital Implementation:
- April 2017 - Authorised agents are able to manage their clients’ digital tax accounts.
- January – June 2017 - New online billing system begins. Taxpayers are able to report additional sources of income through their digital tax account.
- July - December 2017 - Digital tax accounts show taxpayers an overview of their tax liabilities in one place.
- April 2018 - Unincorporated businesses, self-employed people and landlords will be required to update HMRC quarterly for income tax and National Insurance obligations through accounting software.
First year soft landing penalty regime from HMRC who will not enforce payments in the initial period.
- 2019 - Most businesses, self-employed people and landlords start updating HMRC quarterly for VAT obligations through their accounting software.
- 2020 - Most businesses, self-employed people and landlords start updating HMRC quarterly for Corporation Tax obligations through their accounting software.
If you require any further information, please do not hesitate to contact us.