Making Tax Digital – the impact on Professional Practices

23 February 2017

In the March 2015 Budget the then Chancellor of the Exchequer, George Osborne, announced the end of the personal tax return. The new Chancellor, Philip Hammond is set on taking this forward.

Come forth “Making Tax Digital for business” (MTDfb) which will mean that all Professional Practices will be required to make quarterly submissions to HM Revenue & Customs (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 is HMRC proposing?

The vision for MTDfb is to have a digitalised tax system that is more effective, efficient and easier for taxpayers.

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.

When will Making Tax Digital start?

There is a detailed timeline in the MTD roadmap. Key events are:

  • On the current schedule, professional practices will be expected to update HMRC with business information at least quarterly from April 2018.
  • Reporting information is to be brought closer to real-time which is likely to mean submission of figures within one month of the quarter ends.

These are very significant changes and there are many details yet to be decided. Consultation on these issues is on-going. HMRC will be using an agile approach to development. This means that changes can be introduced, as the result of feedback from users, on an ongoing basis during the development phase.

A recent report issued by the Treasury Committee has called for the implementation of MTD to be pushed back “until at least 2019/20, possibly later”, however HMRC appear to have ignored this call for delay and intend to push through the original timetable.

How will Making Tax Digital work?

MTD will not require 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).

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

The extent of the changes being introduced will inevitably push professional practices down the route of using Cloud based accounting systems if they aren’t already using them. I’m sure we will shortly see a flurry of software providers making sure that their software will be MTD compatible.

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 decide to look at a Cloud accounting package for your practice to be sure you are ready for Making Tax Digital you need to ensure that three criteria are met:

  • The package should be user friendly and straightforward to operate
  • Your chosen Cloud accounting package needs to be compatible with HMRC
  • It is important that 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.