Making Tax Digital
An aid to responding
Overview of consultations
• Six consultations in all
• Closing date 7 November
• A – Bringing business tax into the digital age
• B - Simplifying tax for unincorporated businesses
• C – Simplified cash basis for unincorporated property businesses
• D – Voluntary pay as you go
• E - Tax administration
• F – Transforming the tax system through better use of
information
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What does a digital tax system mean?
• For the taxpayer
• The end of the tax return
• The ability to pay tax based on your business activity during the
year
• The ability to upload or update your tax account in real time
• All of your tax information in one place
• For the tax authority
• The end of the tax return
• Smoother processing of data by removing peaks
• Better interaction with taxpayers
• Ability to support taxpayers to “get it right first time”
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The digital tax account
• For businesses this means
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All of your tax information and interactions are in one place
No separate notifications of change of address or other details
Easy payment, time to pay and other options
Less direct contact with HMRC
The ability to appoint an agent for the services you choose
• For HMRC this means
• Merging many back end systems to make a seamless front end
• The “Customer Golden Record” – all of the information about a
business in one place
• Therefore the ability to target information and support much more
directly
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A – Making business tax digital
• The key elements
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Businesses REQUIRED to keep digital records
Businesses to update HMRC quarterly with summary data
The annual taxable profit calculation
Commencement for income tax from April 2018 (based on accounting
period)
• Various measures to soften the blow for small businesses
• Under £10,000 turnover or gross rents will be exempt from the
requirement to keep digital records and update quarterly
• The next rank of businesses will have an extra year to prepare
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Digital record keeping
• Use any internet enabled device – most apps will be cloud based
• Record income and expenditure as near to real time as possible
• The option of free software for the smallest businesses
• Other support from HMRC with transitional and ongoing costs
• What form might this take?
• BUT – how many businesses will cope with this?
• Think about sectors – building trade; taxi drivers; childminders; pubs
• Can or should your firm adapt to service this in-house?
• What role does bank feed software play in this?
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Exemptions
• Under £10,000 turnover / gross rents (NB added together) – whether
a secondary source of income or not
• Charities, CASC’s
• Exemption for those who “cannot engage digitally”
• Currently defined for VAT – 2 categories
• A person who is a practising member of a religious society or order whose
beliefs are incompatible with the use of electronic communications
• Persons for whom online filing is not reasonably practicable for reasons of
disability, age, remoteness of location or any other reason.
• More? Self claimed with evidence. Use past turnover and
circumstances to claim for coming year.
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Formulating a response to Digital record
keeping
• Talk to your business clients with turnover > £10,000
• Identify problem business sectors
• Is internet access an issue for any of them? Numbers and %
• How many of your clients are computer literate? What can they do
(shop, Facebook, Skype, email, bank, accounts?) Numbers and %
• Does more time help? What should the turnover limit be?
• Could you (your firm) support the record keeping requirements in
part or full?
• Would this increase fees / remain the same / reduce fees?
• Remember re-working records will be a thing of the past
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Cost impact – can you quantify?
• Transitional costs
• Acquiring digital equipment
• Training
• On going costs
• Software
• Time
• What help is appropriate?
• Extra tax relief / free software / training online / other?
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Quarterly Updating
• Rests entirely on digital record keeping
• This should be almost automatic once the transactions have been captured
• Looking forward – will also capture VAT data
• One month to submit, no more than 3 months after the last
• More frequent updates possible
• Summary level data only – but more detail in transactions
• Option to capture accruals, stock, tax adjustments if desired
• Review or check before submitting?
• Or pick this up when finalising profits for the year?
• Will produce a tax calculation and business can pay early if they want
to
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Finalising the year
• Proposed that this is a stand alone process but for some
could be done with Q4 update
• 9 months after the end of the accounting period
• No more 31 January as this will be driven by accounting dates
• BUT makes Christmas difficult if we are not on top of clients who
are tardy or workflow control is poor
• Accounting simplification (see later) might make this much
easier
• Consider the cash basis – but with caveats (see later)
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Prompts and nudges
• Support for the taxpayer as and when he completes his
accounting records
• And when the quarterly update is being put together by the
software
• Identifying common errors and highlighting where the data
“looks wrong”
• Embedded within accounting software apps
• Intended to increase accuracy as early as possible
• Comments? Useful?
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B - Simplification
• Elements of the proposals
• Increase turnover threshold for the cash basis – what level is
appropriate?
• Reforming basis periods
• Simpler reporting outside the cash basis
• Reforming the capital / revenue divide within the cash basis
• This is an area for the professional firm to consider
• Think about the impact for you and your clients
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The cash basis – issues to consider
• Much simpler and a more natural fit with MTD
• BUT
• Ability to tailor capital allowance claims to retain benefit of
personal allowance is lost
• Interest and related costs capped at £500
• No loss relief other than carry forward
• Delay in paying tax for many businesses – but this is
temporary
• Will it reverse when the business is paying higher rates of tax?
• Incorporation / cessation / exceed upper threshold?
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Basis periods reform
• Policy aim – to eliminate overlap periods and allow much
more flexibility
• Suggestion provided but open to any other ideas
• Choose any accounting periods you desire, with a maximum length
of 12 months (and consecutive – no gaps!)
• Tax for a year is based on the accounting periods ending in that
year
• But business can end accounting periods on any date they choose
– there is no fixed “year end”
• Is this welcome? Does it simplify? Problems?
• (Current overlap profits released only on cessation)
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Simpler reporting outside cash basis
• Reducing the GAAP adjustments required – to make reporting
easier but outwith the cash basis
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No closing stock adjustment – care needed as this may distort profits
Contracts with length up to one year – no need to recognise until billed
No bad debt provisions (just write off the debt when irrecoverable)
No adjustment for accruals / prepayments if they relate to a maximum
of one year
• What stays?
• Capital v revenue
• Long term contracts and longer period accruals and prepayments
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Simpler reporting
• The benefits
• Reduced year end adjustments
• Optional – but adopt all or do full GAAP
• The benefits of the cash basis without the disadvantages
• Retain capital allowance claims
• Retain loss relief rules
• Full relief for interest
• Any issues? Any other suggestions?
• Turnover limit?
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The capital / revenue divide in the cash basis
• General disallowance of capital expenditure to be replaced by a
more specific disallowance of expenditure on the provision,
improvement or disposal of:
• Real property (including fixtures within) (new fixtures would be
allowed)
• Intangibles unless there is a definite fixed life of 20 years or less
• Another business including goodwill
• Financial instruments
• Any other asset which does not have an effective limited life or cannot
reasonably be expected to reduce in value over the time it is used
• Comments?
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C – cash basis for property businesses
• No turnover limit - optional
• But must be an individual or a partnership of individuals
• No restriction on interest costs other than announced
previously – compare to the cash basis for traders
• No sideways relief for losses – but this is in effect no change
• Comments? Useful?
• What about tenant deposits? Recognise as income / expense
or separate from other transactions?
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D – Voluntary pay as you go
• Offered as an option
• No current plans to change payment dates
• Some businesses have requested this
• Voluntary payments at a time chosen by the taxpayer
• In line with quarterly updates?
• Regularly by direct debit?
• Variable as and when?
• Design principle – simple, flexible, voluntary
• HMRC providing good clear information on likely liabilities
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PAYG - consider
• Quite complex to explain – see examples in consultation
document
• What might encourage take up? (page 19)
• Interest on credits
• Draw for prizes
• Transition for current businesses will be complex due to
payments on account
• Facility for earlier repayments based on quarterly updates
• Later on – single payment to cover all taxes
• Comments?
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E – Tax administration
• No new compliance powers to look at quarterly updating
• Tailor existing compliance powers to mesh with the new regime
but not regular updates
• Retain all existing taxpayer safeguards
• Late submission penalty – move to a points based system
• No immediate penalty
• Penalty imposed once a certain level of points accrued
• Some recognition of compliance history
• Two suggested models – Basic and Escalator models
• Comments?
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More on penalties
• Inaccuracy penalty as now
• Triggered after “End of year declaration”, not on quarterly updates
• Determinations etc. unchanged except for wording to meet
the new system
• Late payment penalty converted to penalty interest
• Applies when the debt is unpaid after 14 days and customer has
not negotiated time to pay or stuck to an agreement – suggested
rate 10%
• Might escalate at each penalty point
• In addition to late payment interest under current rules
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F – Better use of information
• Better and more effective use of third party information to keep
the tax collected closer to the correct liability
• Taxpayers update their digital tax account regularly – nearer to
real time
• From April 2017 digital tax accounts will include information
from employers and pension providers – easier to allocate
allowances across multiple PAYE sources
• From April 2018 include savings income (only relevant where >
Personal Savings Allowance) and adjust code
• But can choose to opt out of coding adjustment
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Third party information
• Dispute the existence of the income – notify HMRC
• Ideally through digital account
• Source will not be included in tax calculation until resolved
• Dispute the amount of the income shown on the account
• Contact third party and ask them to correct it
• Joint accounts – should deposit taker inform HMRC?
• After 2018 more sources of third party information may be
sought
• Dividends a likely contender – cost to business?
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