Frequently asked questions about Making Tax Digital
Making Tax Digital is the Government’s attempt to bring the UK tax system into the 21st century. In a nutshell, it’s a digital revolution which will mean that you communicate with HM Revenue & Customs (HMRC) online rather than sending off paper tax returns in the post.
To be clear, the reforms aren’t an attempt to necessarily simplify the tax system, it’s just a change in the way HMRC administers tax returns.
The changes will affect everyone both individuals and businesses.
Individual taxpayers, whose tax affairs are not complex, will not have to file an annual tax return. Instead, they will be able to confirm their income online via a ‘Personal Tax Account’ based on the information which has already been provided to HMRC by third parties (e.g. banks, employers etc.) Personal digital accounts have already been set up but will need to be activated via the Government Gateway.
Businesses as well as a personal digital tax account, a self-employed person or a landlord with a rental income of more than £10,000 will have a business tax account.
Partnerships and limited companies will have a business tax account too. These businesses will need to file their tax returns online. An important change is that this will be required quarterly rather than annually.
MTD represents a significant challenge for businesses, which is why they need to start preparing for MTD now.
Under the rules, the option to account for income and expenditure on a simplified ‘cash in, cash out’ basis will also be extended to businesses with turnovers below £150,000.
This means that many will no longer need to account on an accruals basis and can instead account based on the difference between the money they have taken in and what they have paid out, meaning that they will only be required to pay tax on the income they have already received.
We are looking at online tools for the capture and recording of basic transactions such as rental income and associated property expenses which are likely to be more cost effective solutions for simple businesses. For those businesses where there are relatively few transactions a full accounting package is unlikely to be required.
That’s the million dollar question!
Prior to the snap General Election, Chancellor, Philip Hammond, had announced a timetable for MTD to be rolled out.
Although this initial timetable will, in all likelihood, need to be amended, it is useful to take a look at what was planned because it illustrates HMRC’s intention for a phased introduction:
April 2018 – Businesses with profits chargeable to income tax and that pay class 4 national Insurance contributions (NICs), with turnovers and rents in excess of the VAT threshold (£85,000)
April 2019 – Businesses with profits chargeable to income tax and that pay class 4 NICs, with turnovers and rents below the VAT threshold (£85,000)
April 2019 – The VAT element of tax compliance for VAT registered businesses (including companies)
From April 2020 – Businesses that pay corporation tax, excluding VAT
HMRC has indicated they will be lenient for the first 12 months to allow taxpayers to get used to the new way of filing returns. However, after this, anyone who misses their deadline will be penalised, using a points-based system. Once you have received a fixed number of points this will then result in a fixed penalty.
The details of the penalty regime have yet to be announced.
All businesses will need to prepare annual accounts since you will have to make an end of year submission, the “fifth return”, which will have to be submitted within 10 months of the end of the fourth quarter. This is likely to be simpler than current returns as HMRC will already hold data from the quarterly reports.
Companies will still need to prepare and file annual accounts at Companies House in addition to quarterly tax reporting.
MTD will require businesses to review their accounting systems to ensure that they are able to produce quarterly information in sufficient detail to accurately prepare a quarterly tax report.
In order to help the smallest businesses and some landlords the Government will provide free software, but the majority of businesses are unlikely to be eligible for this assistance and will need to seek outside accounting software advice and packages.
Now is definitely a good time to look at updating your accounting software so that it not only meets HMRC’s requirements but also has additional functionality which will help you to manage your business finances better.
At Milsted Langdon, we have a dedicated team who can assist with transferring your business over to cloud-based software.
Whilst many accountancy firms encourage their clients to use one particular software package, this may not necessarily be the right one for your business’ needs.
At Milsted Langdon, we believe in giving you the choice. We work with all the major software providers as well as some more specialist packages. This means that we can help you to select the software package which is most appropriate for your business.