Making Tax Digital was first announced by the government in 2015, and while MTD for VAT has become part of the landscape, MTD for tax remains lurking on the horizon. In the past, when the world was business as usual, it was easy to dismiss MTD for tax as something not to worry about.

Thanks in no small part to Covid 19, businesses are more future-focussed than they may have been in the past, embracing the concepts of change and future proofing, and fast forwarding the advantages of the digital world.

Though it is not yet mandatory, MTD for tax is a fundamental change to the tax system covering both income and corporation tax and was made law in 2017. The consideration must be that it will happen sooner rather than later and has an important part to play in the future plans for all Businesses. 

The main impact of MTD for tax are:

  • Keeping digital records
  • Keeping records up to date
  • Using HMRC approved software
  • Submitting income tax updates directly to HMRC through a digital link rather than logging into the HMRC portal and entering the data manually.
  • Managing the transition

Becoming MTD tax ready is likely to involve investment in technology, both hardware and software, for small businesses in particular. But the main investment for all businesses is the time and effort to administer it, especially those for whom keeping records up to date has not been a major priority.

If its not been before, engaging a licenced bookkeeper to take on the extra workload may be worthwhile consideration, leaving Businesses to concentrate on business.

What is Making Tax Digital for Tax?

Making Tax Digital is a key part of the government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs” HMRC

Back in 2015 David Gauke MP, financial secretary to the Treasury  announced that, “Tax returns will become a thing of the past and be replaced by digital tax accounts making it possible to declare income and pay tax in year. Individuals and small businesses would have the option to pay as they go to help manage their cash flow so they won’t be faced with a one off bill many months down the line.”

For most businesses already operating MTD for VAT and using digital records the main concern will be to be sure their software offers the same MTD facility for Tax.

However, according to an HMRC survey in 2019 56% of small businesses who submit Self Assessment Tax returns still use spreadsheets and 74%, paper records. For these MTD for Tax will mean investing in online software approved by HMRC such as Quickbooks, Zoho, Zero, Sage or Kashflow. To help the smallest businesses, HMRC have made a commitment to include free software in their approved list of suppliers.

How Does it Work ?

MTD for tax is a major change to the way taxable income is reported. Instead of one Tax Return, reports will be a quarterly with a final declaration including all other income and claims for allowances.

The quarterly reports are anticipated to be a straightforward summary of income and expenses with no need to include any accounting adjustments until the final declaration.

Rather than reporting retrospective results, the quarterly digital reports will be in real time, the first report in a tax year being June/July and then every 3 months after that. There is no restriction to them being made more frequently than quarterly, but under HMRC guidance, the reports will need to cover all of a normal accounting period (a whole year of trading ending on the accounting year-end).

What are the implications ? 

The main implications for businesses are around technology, the move to digital records and being able to make direct online income / expense returns to HMRC. A secondary consideration is timing – how to minimise disruption ?

How might the transition might look.

For the sake of clarity we will assume that the accounting year end and tax year end are the same (5th April) and start date is 5th April 2021.  In that case the timeline of events for the transition to MTD would be:

January 2021 – Complete and submit the 2019/20 self-assessment return as usual for the accounting year end 5th April 2020 .

6th April 2021  – Sign up for compatible software start keeping real time digital records.

June/ July 2021 – finalise and submit the first current quarterly income / expense report to HMRC.

December 2021/ January 2022 – Complete and submit the 2020/21 self-assessment return as usual for the accounting year end 5th April 2021 and submit the third quarterly income/ expense return (October to December 2021)

January 2023 – Complete and submit final declaration confirming business profits for the accounting year end 5th April 2022 including other taxable income and claims for allowances for the tax year 2021/22

Beyond the need to have up to date records, the complications arise if a business does not have a 5th April year end.

Referring to guidance from HMRC that ‘the reports will need to cover all of a normal accounting period’, the implication is that where a Business accounting year end falls after the mandatory start date, businesses should start keeping digital records on compatible software at the beginning of their accounting year end and sign up for MTD for tax as soon as possible.

Can a Business sign up ahead of a mandatory start date ? 

The answer is yes, but… Currently there is an option to sign up early and effectively take part in the trial and Beta testing. However, for now there are some eligibility requirements.

A Business must :
• Be a UK resident.
• Already registered for Self Assessment and tax payments are up to date.
• Be a sole trader or landlord with one business
• Not have any income from other sources, or taxable payments they claim tax relief on.

Will there be any exemptions ? 

Exemptions from MTD are allowable on the grounds of religion, location, age or disability that exclude the use of technology or the internet. However, the HMRC will need to be convinced before they will allow it.

Some discussion are reported as having taken place around a total lower taxable income threshold. Currently indications are that it will be £10,000. 

Will the way a business pays its tax bill change ? 

Under the current system for self assessment any unpaid Tax and NI will fall due for payment by 31st January in the year following the tax year end (5th April) plus half of a payment on account for the next tax year, based on the previous year’s tax due (if it was over £1000), with the second half instalment due 31st July.

Under MTD, the due date of 31st January for payments will remain, however, the submission of MTD quarterly reports will prompt HMRC to raise an estimate of the tax due.

Giving Businesses the option to ‘pay as you go’ would imply making payments on account in line with the HMRC estimate each time an income / expense report is submitted. The current system of often burdensome twice yearly payments on account based on a good year in a year when cash flow is an issue will be replaced by more frequent payments based on real time results.

It’s anticipated that Corporation Tax will follow a similar ‘pay as you go’ process to Self Assessment Income Tax.

The overall aim of MTD is to bring each taxpayers details together in one place much like online banking to declare and pay tax in year.

Conclusions

Covid 19 has come at great cost to everyone, not least the economy. The government investment in businesses has meant unprecedented borrowing alongside a predicted substantial economic down turn. For a government looking more closely at its future revenue, the ‘pay as you go’ aspect of MTD is likely to be seen as an attractive option. It’s not beyond the bounds of possibility that pressing the ‘go’ button on MTD for tax will move up the list of priorities.

When fully implemented, MTD for tax is a mechanism that will level up a system that could be seen as giving the self employed and businesses an unfair advantage over the employed paying tax under PAYE aswell as scope for being problematic.

Perhaps the most convincing argument for businesses to consider is that MTD for tax is the investment in technology and time and could lead to the unwanted complication of having essential records in two places for an accounting period.  Even before Covid 19, digital technology was playing an increasing role in the business community, faced with the prospect of a new normal that investment has been accelerated. Making a business MTD tax ready a part of the investment in technology and change will future proof it and avoid incurring extra cost later.

As they say, a stitch in time save nine

 

References 

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/890922/HMRC_research_report_573_-_monitoring_business__awareness_of_MTD_-_updated.pdf

https://www.gov.uk/guidance/follow-the-rules-for-making-tax-digital-for-income-tax

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/413975/making-tax-easier.pdf

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/873574/Making_Tax_Digital_-_An_evaluation_of_the_VAT_service_and_update_on_the_Income_Tax_Service.pdf

https://www.gov.uk/government/publications/making-tax-digital-for-business-stakeholder-communications-pack/making-tax-digital-for-business-stakeholder-communications-pack

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/871581/HMRC_research_report_492_MTD_exploring_complex_businesses__tax_processes.pdf