Nine Twenty Technology Blog - HMRC's Making Tax Digital Initiative

HMRC's Making Tax Digital proposition - where are we now?

 28th Aug 2017

Mark Pryce, Partner at Campbell Dallas Chartered Accountants, talks us through HMRC's Making Tax Digital initiative.

The Making Tax Digital (MTD) regime has been heralded by the Government as a key element in its plans to invest £1.3bn in transforming HMRC into “one of the most digitally advanced tax administrations in the world”. In December 2015, HMRC launched its roadmap towards an online digital tax system, starting in April 2018 with the aim of being fully online by 2020.

The ultimate MTD vision is to make the tax system for businesses operate much more closely to “real time”, rather than the current system of reporting information on tax returns and paying liabilities long after the end of the tax year. The rush towards the original 2018 start date had the accounting and tax profession up in arms, and external commentators pointed out key barriers to successful implementation, including a lack of developed software capable of dealing with MTD and the limited time available to test the new systems.

Nine Twenty Technology - Making Tax Digital

 Significant IT and data security concerns held up access to the early pilot projects for those agents and volunteer taxpayers who had signed up as guinea pigs. Nevertheless, it appeared that HMRC were pushing on relentlessly, ignoring the warning signs and passing over the controversy. Then Theresa May called a snap election for June 2017, and everything ground to a halt. The draft MTD legislation was cut from the Finance Act 2017. After the election, the Chancellor announced that whilst plans for the MTD regime would still proceed; some of the most difficult elements would be deferred until “at least” April 2020.

To recap, under MTD most businesses, self-employed and landlords will be required to keep track of their financial affairs digitally, using software or apps to keep records of their income and expenditure. It’s been suggested that MTD will help to reduce the tax gap and contribute £945m to the exchequer by 2020/21, as HMRC will have greater ability to identify evasion by criminals and focus more on tax avoidance. Countries including Australia, South America and Scandinavia have made a real success of digitising their tax system and claim that their taxpayers now regard their versions of MTD as the norm.

According to HMRC, MTD is all centred on a simplified tax system where form filing is eradicated and time delays are eliminated.  Apps will get taxpayers more organised and into the habit of keeping proper books and records as they go. Businesses can benefit from seeing up-to-date performance figures at a glance, saving time with technology tools, and using the opportunity to forward plan on budgets due to real-time operations.  On the other hand, the threat of points-based penalties and incremental fines for non-compliance will be a worry for many.

Nine Twenty Technology - HMRC

Quarterly reporting is intended to provide HMRC with an accurate snapshot of the business trading performance, with summary details submitted throughout the year of turnover and expenses. However, without the usual accounting adjustments (including accruals, prepayments, stock and tax allowances) being added in to the mix, there is a concern that the actual position will be very different.

So what has changed post-election? HMRC’s plans to allow self-service access to digital accounts for both individuals and businesses remains the same, as will the prospect of allowing agent access to these online. HMRC still plans to make better use of third party data in the tax reporting process, although this is now lower down their priority list. However, the key effect is that the earliest mandatory quarterly reporting of income taxes is now from April 2020.

The main initial focus is now on VAT under MTD, which will now be compulsory from April 2019 onwards for all businesses above the VAT threshold of £85K. It is also assumed that the previous announcements on MTD quarterly reporting for Corporation Tax will largely remain in place from April 2020. Further changes and announcements on both are expected following further public consultation.

Given all the work which has been put in to date by Government and HMRC, in my opinion it is inevitable that a full blown MTD system with mandatory digital record keeping will be in place within the next three to five years. As a result, I would recommend that all businesses start to move over to a fully compliant digital record keeping system; whether it is based on Cloud Accounting or desktop software applications. It will take several years to plan, design, implement and test new systems so that they are fit for purpose. Time is now of the essence as the countdown clock to MTD re-starts.

Want to know more about Campbell Dallas?  Visit their website.

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