Making Tax Digital
Sophie Warner - March 8th, 2017
First published – 18th August 2016
Last updated – 8th March 2017
In the March 2015 budget, HMRC published the proposal that the tax return as we know it would be phased out. This would mean that instead of the taxpayer (or their advisor) submitting all data to HMRC, it will instead be possible to log in and see prepopulated data showing information already held by HMRC. Information such as employment (P60 & P11D), interest and dividend income, should already have been supplied by third parties such as employers, banks or pension providers.
In December 2015, HMRC released a more detailed booklet setting out the proposals that would fill in the other income information, such as self-employment income and property income, not already supplied to HMRC from third parties: –
Further updates were released with responses to previous consultations on 31 January 2017 –
and the timeline was confirmed on budget day 8 March 2017 –
Finance Bill 2017 will include legislation to provide more detail of exactly what records will need to be kept and what will need to be submitted quarterly to HMRC.
The timeline will be: –
Businesses, self-employed people and landlords will be required to start using the new digital service from:
- April 2018 if they have profits chargeable to Income Tax and pay Class 4 National Insurance contributions (NICs) and their turnovers are in excess of the VAT threshold
- April 2019 if they have profits chargeable to Income Tax and pay Class 4 NICs and their turnovers are below the VAT threshold
- April 2019 if they are registered for and pay VAT
- from April 2020 if they pay Corporation Tax (CT)
Businesses, self-employed people and landlords with turnovers under £10,000 are exempt from these requirements.
Those in employment who have secondary income of more than £10,000 per year through self-employment or property will also be required to use the digital service.
Partners will not be required to submit details of their partnership income individually as it will be submitted by the partnership.
WHY THESE CHANGES ARE BEING MADE
In order for Universal Credit to operate more efficiently, HMRC need to have real time information on all claimants so that all tax credits can be claimed and paid in accordance with actual income and not on past or estimated income.
There is also a proposal that taxpayers could pay tax based on actual income rather than the current self-assessment payments on account system. There is a strong possibility that quarterly tax payments will be brought in alongside the quarterly reporting requirement. At this stage, it is proposed that quarterly tax payments will be optional.
Many small businesses and landlords do not currently use accounting software that will satisfy the requirements for submitting the data in a standardised format to HMRC. The original proposals suggested that spreadsheets would not be acceptable for uploading data as almost every user has a different format to record their information. However, the latest proposal is that businesses can continue to use spreadsheets to record their data but these will have to be converted into a format suitable to upload to HMRC. Therefore, many businesses and individuals will have to consider how best to record their financial data in the future. For some, as with payroll, it will be satisfactory to use HMRC free software (when it becomes available) and simply use their own manual or spreadsheet records as a basis to upload data quarterly to HMRC.
Although the new requirements may seem onerous, for many people we consider that this could be a good opportunity to modernise and simplify record keeping so that you are always able to have an accurate feel for how your business is running. In many cases, improved book-keeping systems could have other advantages such as reducing the time spent in administration and improved cash-flow with quicker payments by customers. For example, invoices can be processed and sent to customers electronically, who could then pay quickly.
A recent development is in digital accounts systems which store data in a ”cloud” which enable the user to access and enter data anywhere through different devices, including tablets and smart phones via the use of apps. For example, you can use apps to record mileage records or expense claims while away from home.
We understand that some people are concerned by the security aspects of keeping your sensitive data in a cloud. Most of the cloud based accounting software systems use the same encryption techniques that are used by online banking and therefore your data should be secure at every step from data input to processing to storage.
One big advantage of a cloud based package is that as your advisor, we would be able, with your permission and log in details, to access your data at any time, enabling us to provide support to whatever level you need as well as helping with the quarterly upload of data to HMRC. We would expect that with an improved accounts system, we would be able to offer real time assistance in business advice, such as decisions over large purchases and their finance, and investments as well as tax advice during the year. Overall we would hope that our compliance time on routine accounts preparation would be reduced so that we can instead spend time assisting you with growing and improving your business.
We have researched and reviewed various cloud based accounting solutions and have identified several that we believe we can assist you in operating. There are various levels of packages depending on your needs and the costs range from as little as £5 per month for the simplest packages up to £25 + VAT per month to support a larger business with more complicated needs. Some packages can be used to import data that you already have from existing software such as Sage or Excel.
If you would like to do some research into our suggested software solutions, please follow the links below: –
Bearing in mind the need to become familiar with a new software package and that the transition should ideally take place at an accounting year end, we would suggest that you should consider your options at an early stage.
We would be pleased to discuss the available options with you and help you identify the most appropriate solution to update your accounting records and prepare for the forthcoming reporting requirements.