Making Tax Digital - Questions and Answers by Sponsor Francis Clark

What is ‘Making Tax Digital’?

Making Tax Digital (MTD) is part of HMRC’s plan to transform its current system into one of the most digitally advanced tax administrations in the world. HMRC’s vision is that paper tax returns will be abolished and digital records will enable taxpayers to update HMRC frequently on their income position, thus having a ‘real-time’ idea of their tax liabilities presented to them in their digital tax account. The intention is that a taxpayer should not have to tell HMRC something that HMRC should already know.

 

What are the advantages for me to using MTD?

The future for record keeping is definitely digital. Many businesses, large and small, could see great advantages from moving to cloud based accounting systems, including the ability to track sales and costs in real time and automate manual tasks such as invoice input and bank reconciliations. Additionally, your accountant has access to the same financial information and can monitor your margins and profitability, and provide proactive advice on tax, accounting and business issues when you need it most.

 

What will MTD mean to me?

That depends; MTD will impact the business taxes of sole traders, partnerships and companies. More pressingly, MTD will apply to VAT from April 2019.

 

MTD for VAT

From April 2019, businesses with a turnover above the VAT threshold (£85,000 until at least March 2020) will have to:

  • keep their records digitally (for VAT purposes only), and
  • provide their VAT return information to HMRC through MTD compatible software.

This means the imminent end of the manual cashbook for a large swath of businesses, and others will need to review their accounting software (to ensure it is compatible with HMRC’s new Gateway.

 

MTD for business

HMRC wants to abolish annual tax returns. Unless you are exempt, you will need to update HMRC digitally every quarter (or more frequently if you choose) with details of your income and expenditure. These updates are to be filed no later than one month after the end of the quarter via MTD compatible software.

 

HMRC recognises that there will need to be an ‘end of year’ report to make accounting and tax adjustments and to confirm that the data supplied throughout the year is correct. Therefore, a final adjustment is also to be made on the earlier of ten months after the year end, or 31 January following the year of assessment.

 

MTD for Business will not come in to force until at least April 2020 and, as yet, we don’t know which businesses will be impacted first or what form it will take. There are however ongoing pilot schemes, which we and our clients are participating in. It appears that initial adoption may also be voluntary for some businesses.

 

Do I have a digital tax account?

Yes. These are already in place, although you may not have activated yours yet. This needs to be done via the Government Gateway at: www.gov.uk/personal-tax-account.

 

Do I still need to keep annual accounts?

Currently for companies the answer will be yes. However, for unincorporated entities, once they enter MTD, the answer is no, you won’t. You will need to keep accounts, but these need not be annual. They can be quarterly to tie in with reporting to HMRC or they can cover another period that suits the particular business. But… consider if you want to raise finance, move home, sell your business or just manage your finances, there are more reasons than just tax legislation to prepare annual accounts.

 

Do I need to change my accounting software?

Accounting records will need to be kept digitally and every business will need to be using a package which will communicate with HMRC’s system. This could be problematic for law firms who have bespoke accounting packages and early discussions with the software providers will need to take place to enquire on their plans to be MTD compliant.

 

Am I going to need to pay my tax earlier?

At present, no. There is an undertaking not to change the current tax payment dates, at least for the time being. However, HMRC has proposed an option to voluntarily pay tax earlier, known as pay as you go (PAYG). It is therefore possible that a move to real time reporting is a precursor to the alignment of tax payment dates to match the earning of the profits they are paid on.

 

Do I have to do this?

There are very few exemptions. However, if you are exempt from MTD, you are exempt from both digital record keeping requirements and making quarterly updates.

 

Exemptions include: ‘digitally excluded’ people and will include individuals whose income from both property and trade is less than a lower level, which is yet to be confirmed. There are also some further detailed exemptions by entity type.

 

This publication is produced by Francis Clark LLP for general information only and is not intended to constitute professional advice. Specific professional advice should be obtained before acting on any of the information Contained herein. Whilst Francis Clark LLP is confident of the accuracy of the information in this publication (as at the date of production), no duty of care is assumed to any direct or indirect recipient of this publication and no liability is accepted for any omission or inaccuracy.

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