In the March 2015 budget HMRC announced its new ‘Making Tax Digital’ initiative, however, since then there has been few details on how it may work and what it would mean for small businesses. They have now produced consultation documents explaining in depth how they see Making Tax Digital working, here is a quick summary.
Who does MTD apply to?
At this time the proposals only apply to sole traders and partnerships, limited companies and their directors are expected to be covered by separate consultations released later in the year.
HMRC are proposing that MTD would only apply to businesses that have an annual income/turnover of £10,000 or more, so a sole trader that has one small business making under £10,000 in sales a year would be exempt from Making Tax Digital. However it is important to remember that if a sole trader has more than one business, it is the total turnover of all of the businesses combined that applies. For example a sole trader has 2 businesses each with a turnover of £5500, the individual would have to comply with MTD as their total income for the year is £11,000.
HMRC has clarified that those who ‘genuinely cannot use digital tools’ will not have to do so. This includes people for whom online filing is not reasonably practical for reasons such as, disability, age, location, religion etc.
How will MTD work?
Making Tax Digital will require businesses to send summary data to HMRC every quarter (or more often if the business prefers). The summary data will consist of total income and total expenditure with the expenditure being broken down into categories (this does not mean that businesses are required to file tax returns every quarter).
The summary data will need to be sent from an online accounting software package. HMRC have confirmed that the use of digital record keeping software, such as Xero, Freeagent, QBO etc., that links to and updates a business’s digital HMRC account is mandatory (except for those who are exempt from MTD). HMRC will not be providing their own bookkeeping/accounting software.
At the end of the year businesses will have a proposed 9 months to file an ‘End of Year’ declaration which will submit the final figures to HMRC (this is one month less that the current tax return filing deadline).
When will MTD start?
Making Tax Digital is expected to start in April 2018 with a year’s extension being suggested for the smallest businesses (this threshold has yet to be decided). In the consultation HMRC have asked for opinions on when it should be introduced for each business, the 3 options are:
- For its first accounting year starting on or after 5th April 2018
- Taking quarters during the accounting year, the first quarter starting on or after 5th April 2018
- If the business is VAT registered, for its first VAT return starting on or after 5th April 2018.
How will tax payments work?
HMRC are not planning to change the current payment dates, however, they have asked if they should review the current payment on account regime. Under MTD businesses may have the right to make voluntary ‘Pay As You Go’ payments, towards their tax liabilities. Under Pay As you Go individuals can decide how often and how much they want to pay. Payments will not have to be fixed or made at regular intervals, there will be no such thing as a missed voluntary payment.
How will penalties work?
HMRC is proposing to abolish the current penalty system for late submissions and instead introduce a points system somewhat similar to the driving license penalty points, with a penalty only imposed when the points reach a set level. It is suggested this level will be four points and that the slate will be cleaned 24 months after the last points were received. Penalties for inaccurate information would only apply to End of Year updates. It is expected that in the first year of MTD there will be leniency on the penalty regime.
So, what now?
I would encourage you to read the consultation papers and give any feedback you have to HMRC. Also, if you are not already using an accounting software package please get in touch to enquire about the packages we use so that you are set up and ready to go once MTD is introduced.
If you would like any further information please email me on firstname.lastname@example.org