Making Tax Digital Are You Ready?
In 2015 the government announced major plans to modernise the tax administration system by introducing digital services for tax. There are three main strands to these proposals, as follows:
- personalised digital tax accounts for individuals and for businesses
- quarterly digital reporting of income and expenditure by businesses, self-employed people and landlords
- options for paying tax
Consultations were published by HMRC which provided further details of these proposals and so we have set out below what we currently know about the changes. However, the consultation period closed on 7 November 2016 and we are currently awaiting for details of any changes to their proposals, so watch this space.
Digital tax accounts
Digital tax accounts for individuals have already been created by HMRC. These are called Personal Tax Accounts. These accounts have been linked to HMRC internal systems so that they will be pre-populated with income and tax details that HMRC already hold. This includes employment income, PAYE and NIC and any state retirement pension. From April 2018, it is intended that interest paid by banks and building societies will be included in digital tax accounts. In order for this to happen, banks and building societies will be required to provide information to HMRC earlier, and more frequently, than currently. Taxpayers will also be able to report any additional sources of income through their digital tax accounts in 2018.
HMRC expect that with pre-populated information and taxpayers able to add in other sources of income, the digital tax account will mean that a significant number of taxpayers, with relatively straightforward tax affairs, will not need to complete a tax return.
Digital tax accounts are also being established for businesses and these will show an overview of the income tax or corporation tax, VAT and NIC details of the business. In order to show details of the income subject to income tax or corporation tax, details of the business’s income and expenses will be provided by new quarterly tax updates.
By 2020, most businesses, self-employed people and landlords will be required to keep track of their tax affairs digitally and update HMRC at least quarterly through their digital tax account. These changes will be phased in from 2018. These measures will not apply to unincorporated businesses or landlords where their turnover or gross income from property is under £10,000. Some businesses and landlords with income above £10,000 will also benefit from a deferral of the new rules by one year. The upper threshold and eligibility for this deferral have not been detailed in the consultations. Charities and Community Amateur Sports Clubs are also likely to be exempted from these new rules.
To meet these quarterly reporting requirements, taxpayers will be expected to use software or apps which record day-to-day transactions, categorise them into different types of income or expenses and then feed the summary data directly into HMRC systems. HMRC has no plans to offer free software but expects developers to provide free software for businesses with the most straightforward affairs.
The periodic updates of data to HMRC will be made quarterly but could be done more frequently if a business or landlord chooses. When an update is due, businesses and landlords will have one month to compile the information and declare that the period’s data is complete to the best of their knowledge.
In order to help the self-employed and landlords meet these additional reporting requirements, HMRC are consulting on a range of options including:
- the extension of cash basis accounting to more businesses and allowing unincorporated property businesses to use the cash basis
- the reduction in the number of accounting adjustments required to arrive at a taxable profit or loss.
What about partnerships?
The consultations propose that a partnership, through a nominated partner, would fulfil the obligations of record keeping on behalf of the partners. The partnership’s updates would then feed directly into each partner’s digital tax account as pre-populated income based on the profit allocation of the partnership. Therefore, individual partners would not have to maintain their own digital records. A similar approach would be taken for jointly held property which is let out.
The ‘End of Year’ return
Throughout the year, businesses will have provided HMRC updates of their business income and expenditure. After the end of the year, having made any adjustments to arrive at their taxable profit or loss, businesses will make an ‘End of Year’ declaration that everything is correct and complete. This declaration will be made within nine months of the end of a period of account (normally a period consisting of four consecutive quarterly returns).
Tax payment changes
For employees, HMRC has already started using real-time PAYE data to reduce under and overpayments by changing tax codes in-year. They are proposing to extend this principle through individuals’ digital tax accounts to include common income types in the in-year tax calculations. In principle, tax arising on additional income which is small or regular will be collected through PAYE tax code changes. On larger amounts of income, individuals will be advised through their digital tax accounts how much tax will become due after the end of the tax year and will be given options on how and when to pay what is owed. Businesses, self-employed people and landlords, who are keeping their records digitally, will be able to adopt pay-as-you-go tax payments on a voluntary basis.