Making Tax Digital Update – the impact on Professional Practices

The vision for Making Tax Digital for Business (MTDfB) is to have a digitalised tax system that is more effective, efficient and easier for taxpayers.  It will mean many Professional Practices will be required to make quarterly submissions to HMRC and will also result in significant changes to the way Professional Practices will interact with HMRC as digital reporting and digital tax accounts become a reality.

What has changed?

HMRC announced on 13 July 2017 that the roll out of MTDfB is to be pushed back to April 2019 for all businesses and instead of launching with Income Tax first, then VAT, then Corporation Tax - it will now begin with VAT reporting in April 2019, followed by Income Tax and Corporation Tax in April 2020. 

In an extract from their website, HMRC state:

‘There is widespread agreement that Making Tax Digital for Business is the right approach for the future. However a number of concerns about the pace and scale of change have been raised. As a result the government has announced that the roll out for Making Tax Digital for Business has been amended to ensure businesses have plenty of time to adapt to the changes.’

Since the concept of MTDfB was introduced two years ago, there have been a significant number of changes and many details have yet to be decided. Consultation on these issues is on-going, with HMRC considering feedback from users on an ongoing basis during the development phase.

What is HMRC proposing?

  • Digital records - Businesses will be required to maintain their records on software (or apps) that are compatible with HMRC’s interfaces. Any firms still keeping records manually, or using a spreadsheet such as Excel, will need additional software to meet the requirements.
  • Quarterly reporting and the year end declaration - While it was widely publicised that the government was looking to scrap the annual tax return, it now appears that it will simply be replaced – with four quarterly ‘updates’ and one final year end declaration.
  • Voluntary pay as you go - Businesses will be able to opt into a pay as you go system for the collective payment of taxes. It has been stated that quarterly tax payments will not be made mandatory during this Parliament, however the cashflow effect of this being introduced could be very damaging when it happens.

Why is it changing?

  • HMRC’s aim is to reduce the burden for taxpayers and provide greater certainty over tax bills through direct prompts from HMRC
  • Businesses will not have to wait until the end of the year to know how much tax they will pay
  • Tax payers will be able to send and receive information from HMRC at the click of a button with alerts to help businesses with advice and queries
  • It will make it easier for businesses to comply with their reporting obligations and deliver accurate information to HMRC

Who will Making Tax Digital apply to?

At this stage, the MTD proposals apply to sole traders and partnerships, including LLPs and so professional practices will certainly be caught by this.

How will Making Tax Digital work?

MTD will not require affected professional practices to file four tax returns every year. Instead, businesses will send summary data to HMRC about their business each quarter, or more often if the business prefers. The summary data will consist of total income and total expenditure, with the expenditure broken down into categories such as staff costs, property expenditure, etc.

Businesses will need to send this information from online accounting software - HMRC has confirmed that they will not be providing their own bookkeeping/accounting software and that the use of “digital record keeping software that links to and updates business’s digital accounts with HMRC” will be mandatory, except for taxpayers who are exempt from MTD; typically those with incomes below £10,000. 

However, the update provided by the Government on 13th July 2017 appears to suggest that the exemption has been raised from £10,000 to £85,000 for all businesses, but this is not entirely clear and we will need to await legislation after the summer recess for clarity.

Here are a few details of note as specified by HMRC during this consultative phase:

  • The business won’t have to keep any additional paper records.
  • Businesses will be able to continue to use spreadsheets to record receipts and expenditure, which they can then link to software to automatically generate and send their updates to HMRC – most assumed this was going to be the case anyway.
  • If the business is registered for VAT, one report may cover both income tax and VAT reporting requirements.
  • HMRC believe that the cash basis of accounting should be extended to larger businesses, as this will be simpler for them to use. It has suggested doubling the current entry threshold, which matches the VAT registration threshold – so a business would be able to begin using the cash basis of accounting if it has income below £166,000, using today’s VAT registration threshold. This will not be of benefit to professional practices with incomes above this level who will have to continue to account for their figures on the accruals basis.

The move to Cloud Accounting

All businesses need to move with the times. Taking bookkeeping onto a digital platform has never been about MTD, but about firms maintaining their ability to compete in an increasingly competitive market. Achieving this is in part about having up to date financial information to ensure opportunities that arise can be exploited in a timely manner, and executed in a way suitable to businesses’ financial position.

Professional Practices going down the route of using Cloud based accounting systems, will need to ensure they are compatible with MTD.  Firms should either talk to their software provider, or accountant, to ensure that the method they are currently using for keeping records will not cause a headache when it is time to submit information digitally.

If you are considering a Cloud accounting package for your practice, you should make sure that:

  • The package is user friendly and straightforward to operate
  • Your chosen Cloud accounting package is compatible with HMRC
  • The package provides the ability to accurately report on the period required

 

What do you need to do?

Start talking to us about how your practice will be affected and what you can do to understand and embrace the changes as soon as possible. Change is coming and by taking proactive steps now you will be fully prepared for what lies ahead.

If you would like a no obligation complimentary meeting to discuss your circumstances, or just want to talk through some questions or ideas over the phone, please do not hesitate to get in touch