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The implications for taxpayers of the ‘Making Tax Digital’ regime

In one of the most far reaching reforms to the UK tax system for many years, HM Revenue & Customs (HMRC) will be imposing a regime requiring the majority of businesses in the UK to report tax critical information online on a quarterly basis beginning in April 2018, 12 months from now. Apart from some enabling changes there is little draft legislation available but HMRC’s intentions are clear from last year’s ‘making tax digital’ (MTD) consultation documents as well as the recently published responses to the proposals.

Distilled to its simplest form, under MTD unincorporated businesses, smaller companies and landlords will be required to supply current financial information online to HMRC at least every three months. The regime rollout is intended to start in 2018 with Income Tax for larger businesses, self-employed people and landlords with annual turnover above the VAT threshold (From 1 April 2017 £85,000). In 2019/20 it will extend the Income Tax coverage of MTD to all businesses, self-employed people and landlords with annual turnover above £10,000. VAT reporting will start in 2019 with companies needing to comply from 2020.  Although it hasn’t yet been suggested by HMRC, there is concern amongst tax professionals and taxpayers that such information will be used ultimately to accelerate tax payments by these businesses.

The HMRC publications seem to assume that small business owners possess both a detailed knowledge of tax law (including the statutory differences between accounting and taxable profits) and are comfortable with reporting their income directly to HMRC. The concern under MTD is that an innocent mistake, possibly made without professional advice, could prove extremely costly.

While Knill James and other tax practitioners readily embrace technology and see that there are benefits associated with maintaining business records in a digital form and with online reporting, there is a concern that HMRC has not considered the impact on small businesses and has set an unrealistic timeframe for compliance with the regime. This remains true even with the one year grace period to 2019 granted in the Spring Budget to unincorporated businesses with turnover under the VAT threshold. The House of Lords report from the Economic Affairs Committee published on 17 March 2017 echoes these concerns, both on costs to business and the implementation timetable.

There has however already been some welcome softening of the Government’s approach to MTD in its response to the 2016 consultations. These include dropping the requirement for businesses to make and store invoices and receipts digitally, allowing businesses to continue to use spreadsheets for record keeping and in permitting businesses eligible for three-line accounts to submit a quarterly update with only three lines of data.

There remains, however, significant uncertainty regarding the form that the quarterly reporting for most businesses will take. HMRC has stated that “quarterly updates will largely be a matter of checking data generated from record-keeping software or app and clicking send” but such statements reflect an alarming gulf between HMRC’s perception of how businesses operate and what happens in the real world. Not surprisingly, taxpayer representatives have reacted with alarm at the prospect of MTD, concerned at the mandatory nature of the changes, the ambitious timetable and the likely increase to compliance costs to taxpayers that the reforms will bring.

Making Tax Digital represents the single most significant change to the UK’s system of taxation in recent times, and many smaller business clients will need to act soon to implement major procedural changes to the way they record and report their results to the tax authorities.

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