Back in the early 1970s Toyota pioneered the concept of Just in Time manufacturing, or JIT. JIT aimed to synchronise the manufacturing process with customer orders, thus reducing manufacturing costs and waste whilst also markedly improving customer service. JIT is now an established philosophy and methodology that has transformed the whole supply chain from supplier to customer.
‘Making Tax Digital’ (MTD), the flagship tax policy being developed by HMRC would appear to be modelled on JIT principles. If we consider that HMRC is simply a tax recovery business, then it makes enormous sense for HMRC to maximise early receipt of cash from customers. Making Tax Digital is possibly a strategic move towards a JIT tax recovery framework that will ultimately see HMRC seeking close to real time recovery of tax.
Currently, incorporated businesses have up to 9 months following the year end to pay any corporation tax due. This is a significant cash flow advantage for a business, but means HMRC is denied any tax owing for up to 21 months. The vision for MTD is to see the end of reporting information on tax returns and paying liabilities long after the end of the tax year. Taxpayers will soon be required to update HMRC quarterly via a digital tax account.
The new system will require businesses to use digital tools, such as software or apps to keep records of their income and expenditure, however an annual digital submission will still be needed in addition to the quarterly reporting. It will be important to introduce real time tax planning to ensure businesses maximise tax reliefs in a timely manner.
The new system applies to most unincorporated businesses and landlords from 2018, with businesses below the VAT registration threshold joining in April 2019. In 2019-20 it will extend to all businesses, self-employed people and landlords with annual turnover above £10,000 and by 2020 will expand to include Corporation Tax.
Real time tax reporting is heading our way – and it could be swiftly followed by real time payment of tax. Making Tax Digital is a seismic change to the tax system. Make sure you plan ahead to minimise the impact and cost of the new tax order.