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To build on our previous post on Making Tax Digital, we’ve pulled out some key points to try and give you a feel for how Making Tax Digital will change how we manage all things tax in the coming years.
First thing to should point out – the current set of consultation documents do not cover changes to Limited Companies and Limited Liability Partnerships. Separate consultation documents for these will be released later in the year (maybe the pigs will have some enticing reading over the Christmas holidays!).
Everything we mention below relates to you as an individual taxpayer, self-employed, Sole Traders, Landlords and any unincorporated business (i.e. where there is a personal liability for all things undertaken by your business activity).
The first real headline is the end of Self-Assessment Tax Returns – you know, those things you dread once a year that have to be submitted by the end of January, and often mean you then have to hand over some money to the tax man – ugh. You will still be declaring your tax affairs but this won’t be via the existing Self-Assessment process. This will take effect from April 2018, at which point the Self-Assessment will be committed to the compost bin for good. Replacing it will be “Quarterly Reporting”.
HMRC’s intention with quarterly reporting is to move closer to the live reporting of expenses and income. This can sound quite burdensome, but actually in reality the quarterly reporting is just headline figures – i.e. “Income – Expenses = Profit/Loss”. Simples! On a quarterly basis, you will need to declare the information as being “Complete”. This means there can be later corrections applied when you submit your final return at the end of the year (perhaps when your accountant has reviewed your accounts and made some necessary adjustments). On your final submission you will be declaring the information as “Complete and CORRECT” – quite a difference.
There will be limited exemptions to the quarterly reporting regime – note the word limited as the exemptions will be exactly that – the message here is that Making Tax Digital is pretty much mandatory. So it is a good idea to start preparing now as we all know how quickly time flies!
Your business must report headline figures at a minimum every 3-months under the quarterly regime, but you can choose to report more frequently – i.e. monthly. When you submit your report, HMRC will provide you with an estimate of your tax liability for the year – be warned though, it looks like this will be based only on the figures just submitted, as opposed to cumulatively over the year. Therefore, it will not take into account any of those end of year adjustments so your liability could be higher, or lower!
At the moment, there is no indication that any changes will be made to the dates when payments are due to be made to HMRC – i.e. Sole Traders still need to pay NI contributions throughout the year, any personal tax due must be paid by 31st January and you will still need to make payments on account.
April 2018 will be a funny time for all of us, as both the Self-Assessment process and the new quarterly reporting will be running in parallel. So you will still need to think in Self-Assessment mode for the year ending 5th April 2018, whilst moving into quarterly reporting mode from 6th April 2018, when you will be keeping all your data under the new regime, with your first quarterly submission being due shortly after 5th July 2018 – which may be before you have filed your Self-Assessment!
How do I keep my records?
Now to the “how” of keeping records – software is the key here! HMRC has made it clear that they will NOT be providing any free software to enable you to submit your quarterly returns. ALL businesses will be required to use compatible software, which is unlikely to include spreadsheets.
We do expect some free software to be available from the various accounting software providers, but this will just be for those with very tiny businesses. HMRC is still reviewing how it may support the cost of acquisition of software (and any required training) – perhaps by providing financial incentives to businesses. You will have to watch this space on this one – but don’t expect a windfall!
With the new regime, HMRC will be encouraging businesses to use software that enables you to photograph your receipts and invoices as you receive them, with this then being automatically recorded in your accounting software. You may be thinking “yeah right!”, but this software already exists and it’s true – it does AUTOMAGICALLY convert a receipt to an accounting transaction. (Get in touch if you would like a demo!). There will also be a need for you to record other activity in the software – such as allowances for home working.
The choice is yours – NOT!
The message you MUST take away is THIS IS NOT OPTIONAL! You will need to change the way you currently do things. There will be a points based penalty system in place, almost a “3 strikes and you’re out” model. For example, you may incur 1 penalty point for a late submission, and these points will escalate if you don’t then bring your information up to date…and this escalation will continue until your reach 3 points, at which point you will then incur an escalating fine. We anticipate these will be much harsher than currently in place.
There is no doubt that Making Tax Digital will impact us all, but we believe it is a very positive move by HMRC. The timescales may be challenging based on their previous history, but we’ll keep you up to date as things develop!
Making Tax Digital will affect every person and company in the UK! You cannot ignore it.
The tax system will become fully digital, resulting in a system that should be more efficient and easier for taxpayers.