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The move to digital and mandating quarterly returns

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  • Publish date: 17 February 2016
  • Archived on: 17 February 2017

Briefing update for Making Tax Digital.

Making Tax Digital (MTD) has two main strands:

  1. MTD for business; and
  2. MTD for individuals.

We have had some informal discussion with HMRC on the former and none at all on the latter. The proposed changes will have a significant impact, on small businesses in particular, but also self-assessment taxpayers, beginning with those whose tax affairs are more straightforward.

ICAEW supports HMRC’s digital transformation and considers that for the tax system to be fit for the 21st century, a “digital first” approach has to be the right way. In practice, we are reassured that the Making Tax Digital policy will not amount to quarterly tax returns as we know them now, but will involve submitting income/expenditure information in summary “at least” quarterly. As yet, we have no details of what these submissions might look like or contain, but they will be summaries rather than transactional.

We are, however, extremely concerned with the proposal to make quarterly digital reporting compulsory. We are yet to be convinced that this will reduce the administrative burdens on business, particularly the smallest businesses. We also believe digital transformation needs to be done in parallel with the overall simplification of tax policy.

MTD for business – areas of concern

We have already expressed our concerns at Ministerial level. This has been through face-to-face meetings and also through correspondence. We sent a letter signed by five professional bodies on 11 December 2015, shortly after the proposal was announced in the Autumn Statement. We have also briefed all MPs on our concerns.

It is important to note that HMRC’s consultation on how the policy will be implemented is more around how to raise awareness of its existence than on exactly what is to be required. Events planned by HMRC include roadshows, workshops, webinars and roundtable sessions, but to date, little information has been shared beyond that published in December 2015.

We do not know, for example, but have asked the following questions.

  • How soon agents will have full access to the same information which will be available to their client? This is a priority yet is being dealt with as secondary.
  • How will partnerships report? Small partnerships will be included in the initial roll-out, although ‘flexibility' is promised.
  • How will quarterly reports for tax be reconciled with the annual taxable profit for income tax and NIC, nor to the monthly reports for universal credit? Given that most businesses are likely to have a number of adjustments that need to be made to arrive at the taxable income (for example, capital allowances, expenditure on cars, expenses disallowed, use of home, private use adjustments etc), the usefulness of providing quarterly data as a quick means of checking the tax return is at best likely to be of very limited benefit.
  • How will seasonal businesses report?

We understand that quarterly updates will be capable of being aligned for a VAT registered business.

There will be consultation later in 2016 on the sanctions and penalties to accompany MTD. There will be consultation on a possible de minimis rule although how this would operate is uncertain.

Software

Government has promised that software will be provided free at the point of use to businesses. For some businesses, it is likely that the free packages on offer may not be sufficient to replicate the paper-based accounting that they use currently, so forcing them to buy a bespoke package. Some businesses will have to buy their first computer.

Record keeping and the "tax gap"

The Government is concerned that part of the “tax gap” is down to poor record-keeping, particularly in the SME sector and that quarterly digital reporting will help to address that. We do not believe that the solution to poor record keeping is to impose a new requirement on the self-employed and businesses of all sizes to keep their records digitally (if this is the intent) and submit them to HMRC quarterly. Nor have we seen any evidence from HMRC to suggest that the consequence of poor record keeping is under-declared income; on the contrary, it is often under-declared expenses because the receipts have been lost.

Many small businesses keep handwritten records that align with the needs of the business and are more than sufficient to enable them to submit correct and complete tax returns. From 2018, they will have to abandon a record-keeping approach that works for them, and is tax compliant, and go digital. If the Government believes that record-keeping needs to be improved, then it would be helpful to understand the particular areas of concern and that HMRC should work with the professional bodies to see how improvements could be made.

Implementation timetable

Smaller businesses are being required to move to MTD before larger businesses. We understand that the first quarterly updates will be required by non-VAT registered self-employed businesses and landlords with an accounting period starting after April 2018. All VAT-registered businesses will be brought in from April 2019 and companies from April 2020.

In ICAEW’s view it would be less challenging to start with the largest businesses (which will already have digital records) and work down rather than with the very smallest and work up.

Businesses will welcome having access to more information about their tax affairs through their Digital Tax Accounts, but the transition to digital should be voluntary, based on a clear business case, rather than compulsory.

Compelling research is needed on access to and appetite for digital amongst the self-employed and small business community where we are concerned that most of the administrative burden of change will fall. We have already commissioned research to be carried out by an independent third party.

Personal MTD accounts

Sharing with the taxpayer income details already held by HMRC and other government departments, makes sense. For many people with simple tax affairs all they will have to do is check the information on their digital tax account and confirm it is right. This is a welcome simplification, but will be a task which many individuals who are not currently in self assessment, do not do at the moment.

For the future there is scope to collate even more information, for example from stockbroker’s end of year reports, banks and credit rating agencies and we expect consultation in spring 2016 on how this will work.

We do not forget too that:

  • provision will need to be made for those who do not/cannot engage digitally;
  • data integrity will be something that HMRC will focus on as a critical factor; and
  • data security will be a key issue for HMRC and taxpayers.
  • What we know already – timeline for implementation

(see Making Tax Digital, published December 2015)

January – June 2016

  • Initial consultation on options to simplify the payment of taxes.
  • Taxpayers can see how their National Insurance contributions affect their State Pension through their digital account.
  • All of the UK’s 5m small businesses and every individual taxpayer will have access to their own digital tax account, seeing information HMRC holds about them.
  • Webchat introduced to support PAYE taxpayers in their digital tax account.
  • Public consultation on the scope and operation of more frequent reporting of information by businesses to HMRC using digital tools.
  • Public consultation on third-party information.
  • Testing starts for secure messaging between taxpayers and HMRC in their digital tax account.
  • Public consultation on simplifying HMRC’s tax administration.

July – December 2016

  • Testing starts for digital reporting of accounts by small businesses.
  • Bank and building society interest above the personal savings allowance included in tax codes for employees and pensioners.
  • Authorised agents able to manage their clients’ digital tax accounts.
  • Testing starts on using real-time information to show taxpayers how their personal allowances are shared between jobs and pensions.

January – June 2017

  • Testing starts for digital reporting of income from letting property.
  • New online billing system begins.
  • Taxpayers able to report additional sources of income through their digital tax account.

July – December 2017

  • Digital tax accounts show taxpayers an overview of their tax liabilities in one place.
  • Automatic tax code adjustments prevent PAYE under and overpayments.

January – June 2018

  • Interest paid by banks and building societies starts to be shown in digital tax accounts.

July – December 2018

  • Most businesses, self-employed and landlords start updating HMRC quarterly for income tax and National Insurance obligations through their accounting software.
  • Taxpayers who currently report their Child Benefit to HMRC no longer need to do so.  

2019

  • Most businesses, self-employed and landlords start updating HMRC quarterly for VAT obligations through their accounting software.
  • Capital Gains Tax on the disposal of residential properties needs to be paid within 30 days.

2020

  • Most companies start updating HMRC quarterly for Corporation Tax obligations through their accounting software.
  • The full range of HMRC services are available through digital tax accounts.

February 2016