The Making Tax Digital (MTD) regime was heralded over the past few years by the Government as a key element in its plans to invest £1.3bn in transforming HMRC into “one of the most digitally advanced tax administrations in the world”. Back in December 2015, HMRC launched its roadmap towards an online digital tax system starting in April 2018 with the aim of being fully online by 2020. The ultimate MTD vision being to make the tax system for businesses operate much more closely to “real time”, as opposed to the current system of reporting information on tax returns and paying liabilities long after the end of the tax year. The rush towards the original 2018 start date had the accounting and tax profession up in arms and crying out in dismay. Most external commentators pointed to a lack of developed software capable of dealing with MTD on both sides, together with the limited time available to test the new systems as key barriers to successful implementation. Significant IT and data security concerns held up access to the early pilot projects for those agents and volunteer taxpayers who had signed up as initial guinea pigs to the project. Nevertheless, it appeared that HMRC were pushing on relentlessly, ignoring the warning signs and passing over the controversy. Then with total surprise, Theresa May called a snap election for June 2017. Everything suddenly ground to a halt. The draft MTD legislation amongst other major tax measures was cut from the Finance Act 2017, before that legislation was pushed through Parliament ahead of its dissolution for the election period. MTD it seemed had been put into cold storage until the Conservatives would surely win a landslide majority and then the game would be back on again within the same timetable. Of course, the anticipated result was different and subsequently, for various reasons in the new hung parliament, the Chancellor announced that whilst plans for the MTD regime will still proceed; some of the most difficult elements would be deferred until “at least” April 2020.
By way of a recap, under MTD most businesses, self-employed and landlords will be required to keep track of their financial affairs digitally. They will be required to use digital tools, such as software or apps to keep records of their income and expenditure. The original consultation suggested that MTD will help to reduce the tax gap and contribute £945m to the exchequer by 2020/21. Ministers reported a higher tax contribution resulting from MTD as a result of HMRC having greater ability to identify evasion by criminals and getting to grips better with a renewed focus on tax avoidance. There are numerous examples, especially in Australia, South America and Scandinavia of other countries overseas who, after an initially difficult period of trial and implementation, have made a real success of digitising their tax system and are now able to claim that their taxpayers now regard their versions of MTD as a way of life and as the norm.
If you listen to HMRC, MTD is all about having a simplified tax system where bureaucratic form filing is eradicated, time delays are eliminated, with taxpayers, having self-service access to digital accounts accessing a ‘real time’ update of their tax position in a jovial manner. Smart phone and tablet apps will get taxpayers more organised and into the habit of keeping proper books and records as they go along. The carrot for business is to know the latest performance picture, to save time by using technology tools, to save hassle by managing all tax affairs online and to get the opportunity to plan forward and budget better by operating near real time calculations of tax owed. On the other hand, the threat of points based penalties akin to the motoring offences system of strikes and incremental fines for non-compliance is set out as the stick.
The idea of quarterly reporting is intended to provide HMRC with an accurate snapshot of the business trading performance, with summary details submitted throughout the year of turnover and expenses. However, without the usual accounting adjustments (accruals, prepayments, stock and tax allowances being amongst others) being added in to the mix; there is a real concern that the actual position will be very different in reality.
So what has changed post-election? HMRC’s plans to allow self-service access to digital personal and business tax accounts for individuals and businesses respectively remains the same, as will the prospect of allowing Agent access to these online. HMRC still plan to make better use of third party data in the tax reporting process, albeit this appears lower down their priority list. However, the key effect is that the earliest mandatory quarterly reporting of income taxes is now from April 2020.
The main initial focus is now on VAT under MTD which will now be compulsory from April 2019 onwards for all businesses above the VAT threshold of £85K. It is also assumed that the previous announcements on MTD quarterly reporting for Corporation Tax will largely remain in place from April 2020. Further changes and announcements on both are expected following further public consultation. We can expect a further flurry of lengthy documents from HMRC and another huge response level as happened back in late 2016 last time round.
Given all the work which has been put in to date by Government and HMRC, in my opinion it is inevitable that a full blown MTD system with mandatory digital record keeping will be in place within the next three to five years. As a result, I would recommend that all businesses start to move over to a fully compliant digital record keeping system; whether it is based on Cloud Accounting or desktop software applications. It will take several years to plan, design, implement and test new systems so that they are fit for purpose. Time is now of the essence as the countdown clock to MTD re-starts.
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The information in this blog should not be regarded as financial advice. This is based on our understanding in August 2017. Laws and tax rules may change in the future.