Making tax digital: What, why, who, when?

For those who haven’t heard of it before, ‘making tax digital’ is an initiative outlined by HM Revenue and Customs in a number of consultation papers released over the summer. Its overarching aim is to simplify tax and develop a central hub for all tax matters.

With the rise of the digital age, HMRC has been forced to move with the times, and the result is a proposed complete overhaul of their systems and procedures.

Before you surmise that this will not have an effect on you, most self-employed individuals, businesses, and certain landlords will be expected to use digital tools and report to HMRC on a quarterly basis. Therefore, if you are a partner or director of a firm of solicitors, your practice’s, and even your own, tax compliance responsibilities could well be on the road to change.

What are the key proposals?

The aim of making tax digital is to simplify the tax system with the idea that individuals and businesses will have one account at the revenue which incorporates all taxes they are subjected to. In theory, this is an appealing concept and will provide a more joined-up service.

To provide that joined-up service, however, the revenue is proposing that for some businesses and individuals, accounting records should be maintained on a digital software package and information such as turnover, expenses, and profit or loss will need to be submitted to them on a quarterly basis. The deadline for these submissions will be one month after the quarter end. This regime, therefore, is not unlike the current VAT return requirements for most VAT-registered businesses.

Furthermore, these businesses and individuals will also have to submit a year end finalisation account which marries up or adjusts the four quarters that have previously been submitted. The deadline for this is proposed to be nine months after the accounting period end.

All this sounds like extra work, but for businesses that are already up to date with their accounting records, the difference is merely that the information will need to be submitted to HMRC throughout the year.

Why the change?

It would appear that the revenue has recognised that it needs to bring its tax system into the 21st century and, through its proposals, believes that there are three key benefits to making tax digital:

• Businesses will be able to have more confidence that their overall tax position is correct;

• By knowing that their overall tax is correct, businesses will be better able to manage their cash flow; and

• Businesses will realise a reduction in the administrative burden of dealing with HMRC.

Once the initial transition to digital software is achieved, and the routine established for quarterly submissions, there may be scope for a lighter administrative burden. And, presumably, if information is being submitted on a timelier basis, then HMRC’s assumption that greater confidence can be sought in tax positions could also be correct. Only time will tell as to whether making tax digital will deliver these benefits.

Who will be affected and when?

From April 2016, all individuals should be able to access a personal tax account through the government website. This should provide every individual with an easily accessible record of their tax position, together with a number of other useful tools.

From April 2018, the requirements for quarterly submissions in respect of income tax and national insurance will come into play for unincorporated businesses, the self-employed, and landlords, if these individuals and entities have a turnover of over £10,000 per year. There

may be a deferral to April 2019 for small businesses, but the upper turnover limit for this is still being consulted on by HMRC.

From April 2019, the same individuals and entities will be expected to update the revenue quarterly in respect of VAT obligations.

Finally, the proposal is that from April 2020, companies will be required to submit quarterly information to the revenue with regard to corporation tax obligations.

So, if your practice is a partnership and has a turnover in excess of £10,000, then compliance with making tax digital is likely to affect you from April 2018. Although this may appear to be a while away, we all know that time flies when you’re having fun and so the revenue’s concept of the digital age may be a part of our lives sooner than we think.

Jennifer Martin is accounts and outsourcing manager at Kreston Reeves

@KrestonReeves www.krestonreeves.com