Making Tax Digital – How the biggest change in tax for twenty years will impact your business

October 24, 2016

Few can deny that the UK tax system is facing significant change.  In the digital age that we live in, digitisation of the tax system is probably well overdue but in recent months, real concerns have been raised over HMRC’s ambitious timeframe for the rollout of Making Tax Digital (MTD).

The fact that there have been recent senior staff departues from the team driving the MTD initiative at HMRC gives further cause for concern.

So to summarise the current plans

1. MTD brings in mandatory digital records for business and landlords, with quarterly tax submissions to HMRC.  New businesses will have to make a first return within four months of start-up.
2. One month will be allowed to make each quarterly update; for smallest business this may be just a three-line account: but it will have to made directly from the accounting software via a digital tax account.
3. Nine months permitted for year-end finalisation – the ‘quarter five’.  In the consultations, HMRC envisages taxpayers submitting their own quarterly updates and their accountants making the final year-end update – the fifth return.
4. Digital records most likely mean ‘intelligent’ digital accounting software; with the potential for scanned invoices; smart phone apps; may be stand-alone or cloud.
5. There is a push towards simplified cash accounting for SME businesses, with the cash accounting turnover threshold potentially doubled (to circa £165,000 per annum ).
6. New cash accounting for landlords – who do not run a company: with no turnover limit.
7. Third party income data from banks, employers, and potentially the Department for Work and Pensions, all sucked into digital tax accounts: discrepancies would need to be challenged with the third party.
8. Voluntary pay as you go option – based on the forecast tax liability in your digital tax account.
9. New points based penalty system for all late returns across Income Tax, VAT and Corporation Tax.

And the timeline is

• Start of April 2018 for unincorporated landlords and the self-employed with £10,000 or more gross income
• April 2019:  VAT moves onto the new system
• April 2020: companies begin reporting quarterly to HMRC .  There will be a possible 12 month deferral for some SME businesses but the threshold still needs to be agreed.

FreeAgent and Xero

Lothian Accounting is partnered with FreeAgent and Xero  -both of these accounting software systems are working with HMRC to ensure that clients s will be able to update seamlessly to HMRC once quarterly reporting becomes mandatory.

If you would like to talk more in more depth about Making Tax Digital,  please call or drop me an email.