We are just over a year away from Making Tax Digital (MTD) becoming a reality for millions of businesses and individuals across the country, and finally a few things are becoming clear.
One is that HMRC is quite a tough task master (their eagerly awaited response to the MTD consultations was published yesterday), another is that they are determined on scoring £925m from MTD by 2020/21 – and the third is that, well, a lot of what’s going on is pretty mysterious and/or confusing.
Here are a few answers that were given after yesterday’s report, for your peace of mind.
1. IS MTD really coming?
This was a little confusing at first. Many an-honest taxpayer didn’t see it coming. In fact, just a month ago a mammoth 85% of small business owners and freelancers, surveyed by FreeAgent, said they weren’t aware of the existence of such a policy!
But a digital tax system is real. It’s the future. And yesterday HMRC made it clear like the light of day. As soon as April 2018, businesses, self-employed people, individual taxpayers and landlords will be required to start using the new digital service.
2. Shouldn’t the smallest of businesses get some more time to prepare?
This was something the Treasury Committee requested, and something of key concern for micro-businesses. We think it’s unfair that the smallest of businesses are facing the same deadline as larger companies.
Various stakeholders have urged HMRC to give unincorporated businesses, with a turnover of less than the VAT threshold of £83,000, an additional year to prepare before they have to abide to the new digital tax system.
As mentioned above, MTD will be rolled out as planned in April 2018. There is no stopping that. However, HMRC has confirmed that the number of businesses affected and the impact it will have on them will be reviewed throughout 2017.
3. Can I use spreadsheets to keep costs down?
Following feedback from the Treasury Committee and thousands of other businesses, HMRC said that businesses will now be able to continue to use spreadsheets/MS Excel to record receipts and expenditure. However, the spreadsheets must:
- include digital record-keeping functionality
- provide quarterly information updates
- support end-of-year activity
As per HMRC it is very likely that spreadsheets will need to link to software to automatically generate and send their updates to HMRC. The burning question: ‘how will this work?’ will be explored in more detail during the pilot scheme that begins in April 2017 with landlords.
4. What’s the real cost oF MTD?
Earlier in the consultations, respondents had raised concerns that the cost to businesses, who are entering the first tranche of quarterly reporting, could run into thousands of pounds.
In their report, HMRC has offered its own estimate of £280 per businesses over 2017-18 and 2020-21. This will include software and training costs.
Before the consultations, ICAEW estimated the true cost for all businesses to be at least 3bn going up to 7bn. Now that HMRC has accepted MS excel as an acceptable way of record-keeping and reporting, the cost is likely to be a little lower for businesses.
5. What about free MTD-capable software and reporting?
This is still one of the most challenging parts of the original HMRC plan. But the news is positive.
According to HMRC, free software will be available to the majority of the smallest businesses. In addition to that, software vendors will be required to invest money in marketing and encouraging micro businesses to discover and adopt their new MTD products.
We agree that just being listed on an HMRC directory of MTD ready products won’t be enough to get people on the system. However, it will be interesting to see how software providers monetise the additional costs they bear.
6. Will landlords get to use the cash-to-cash basis?
If a landlord’s annual income is under £150,000, they will be able to use the cash basis for the first time they are reporting.
The option to account for income and expenditure on a simple ‘cash in, cash out’ basis will be extended, helping an extra 2.5 million self-employed businesses and unincorporated landlords.
7. Did anyone even pilot test this thing?
Good question. HMRC will pilot the digital system with hundreds of thousands of businesses before rolling it out. This will not only ensure the software is user-friendly, but will also give businesses and landlords time to prepare and adapt.
A year-long testing period will start in April 2017. Software developers are expected to work closely with HMRC to ensure quarterly reporting software is available to a wide range of taxpayers for trial.
The real challenge will be to raise awareness amongst landlords and small businesses. HMRC has promised that it won’t run the communications without careful planning.
8. What about penalties?
Customers will have at least 12 months to become familiar with the changes before any late submission penalties will be applied.
Following the latest round of feedback, HMRC has confirmed that it will consult again in the spring on a new penalty model.
9. Who’s exempted from switching to MTD?
HMRC has clarified that all self-employed businesses and landlords with a turnover of less than £10,000 a year will not have to keep their records digitally or make quarterly updates.
HMRC even acknowledged the need to reconsider issues such as the initial exemption threshold and deferral for some small businesses, but businesses that cannot go digital will not be required to do so.
Plus, charities will not have to keep their records digitally or make quarterly updates. Final decisions will be made later this year. Stay tuned!
10. What about the threshold exemption?
In yesterday’s report, HMRC said it was considering exempting more of the smallest unincorporated businesses.
It is also considering deferring the mandatory start date by 1 year for the next tier of small unincorporated businesses and landlords with annual incomes of above £10,000. However, the lower threshold is yet to be determined.
11. Did I miss anything?
Other concessions include a move to allow businesses eligible for “three line accounts” to submit a quarterly update with only three lines of data (income, expenses and profit), while partnerships with a turnover of £10m or more will see Making Tax Digital for Business deferred until 2020 – rather than 2018.
Get ready for Making Tax Digital
We understand the implementation has been shoddy but we passionately advocate for a digital future. We recognize that as accountants we have a huge role to play and we are committed to help you in any way we can. However, time goes quickly. The new system will be here before we know it. Start thinking about what it means for your business or individual tax affairs.
Dig into MTD now. The following documents make for interesting reading: