As part of its program in Making Tax Digital (MTD), HMRC has published ‘Making Tax Digital: Bringing business tax into the digital age’, a consultation that considers reporting timings, software requirements and what businesses and their accountants will need to do.

Key highlights are:

  • Time limit for quarterly reporting likely to be one month after the end of the quarter.
  • Proposed time limit of nine months following the year end to complete the final annual submission.
  • Commencement of requirements to keep digital records and make updates to HMRC to be from April 2018, either based on first accounting period starting after April 2018, a fixed date regardless of accounting period, or based on quarterly VAT periods.
  • The transition to MTD will be eased, this will include:
    • Quarterly reporting to HMRC in summary format, but no requirement to make tax accounting adjustments quarterly.
    • Giving exemptions for the smallest businesses and for those meeting certain criteria.
    • One year deferral for small businesses.
    • Financial support to help some businesses with the transition.
    • Points based penalty system and soft landing on penalties.
    • Increase to the cash basis of accounting limits and simplification of accounting rules for smaller businesses.
  • Exemptions will include:
    • All unincorporated businesses and landlords with annual incomes below £10,000; HMRC are considering whether this should be higher.
    • Charities, possibly not trading subsidiaries of charities.
    • Community Amateur Sports Clubs.
    • Possibly insolvent businesses and insolvency practitioners.
    • Businesses or people who ‘cannot engage digitally’.
  • Software requirements and HMRCs software expectations:
    • Some free products to be available for most straightforward cases, HMRC will not be providing its own free software.
    • Software to link fully with HMRCs digital tax account providing a one-stop solution.
    • Software to recognise scanned documents and ideally automate accounting entries.
    • Software will be available that can handle special VAT schemes.
    • Software to have the minimum level of income and expense categorisation set by HMRC and to make some automatic tax adjustments to accounting profits.
    • Software to ‘nudge’, prompt and flag reliefs or allowances for taxpayers.
    • HMRC to set minimum security specifications and standards.
    • HMRC to provide more digital support such as webchats, virtual assistants and instant messaging.
  • Digital records to be kept.  The expectation is that evidence of transactions and trading, such as invoices, receipts etc. will largely be kept digitally through software, using smartphone cameras to upload pdfs for example.
  • Timing of tax calculations and adjustments:
    • VAT still to be calculated quarterly.
    • Tax adjustments to accounting profits only required annually, but can be made more often at discretion of the business.
    • Possible alternative to UK GAAP to be available for smaller businesses which will reduce the tax adjustments required.
    • Businesses to be able to make provisional claims for reliefs and allowances during the year to calculate an accurate estimate of tax payable.
  • Partnerships will nominate a partner to complete the quarterly reporting for the partnership which will feed into the individual partners’ tax accounts.  Similarly, jointly owned property owners will nominate an owner to be responsible for the reporting.
  • CIS returns will feed directly into the digital tax account for subcontractors.

The consultation will end on 7 November 2016.  The government will publish its decisions, along with draft legislation for the Finance Bill 2017 after the Autumn Statement. 

Summary of Consultation Questions

These refer back to chapters in the consultation.

From Chapter 2: Acquiring Digital Tools

  1. What are the challenges for businesses that currently keep their records on paper or simple spreadsheets in moving to an integrated software package for record keeping, and what further measures or support would help businesses to meet these challenges?
  2. What information and guidance would you find helpful in choosing the appropriate software for your business?
  3. What types of business should a free software product cater for? What functionality would be necessary in a free software product?
  4. What level of financial support might it be reasonable for the government to provide towards investing in new IT, software or training, to whom should such support be aimed, and what is the most appropriate form for delivering such support?
  5. What other forms of support would help to make the transition to Making Tax Digital easier?
  6. What facilities would make it easier and more secure for businesses to enrol for Making Tax Digital and use software regularly?

Chapter 3. Digital record keeping

  1. Do you have any comments about the practicalities of keeping evidence of transactions and trading when using digital tools?
  2. Do you agree with the minimum transaction data fields proposed for trading businesses, including retailers? What other data fields might the record keeping software usefully include as a minimum?
  3. Do you have any comments about reflecting the current VAT requirements in MTD-compatible software?
  4. Do you have any comments on the additional data capture requirements for property income and capital gains?
  5. What should the minimum categorisation in the software be? Would additional sub-categories be useful?
  6. Do you have any comments on how businesses should reflect transactions and expenditure with non-deductible elements in the software?
  7. What prompts and nudges would be most useful to businesses?

Chapter 4: Establishing taxable profit

  1. Do you agree that businesses should have the choice as to when to record accounting adjustments?
  2. Do you agree that business should have the flexibility to reflect reliefs and allowances when they choose?
  3. What do you consider is the most appropriate approach to reflecting the effect of the personal allowance on an individual’s taxable business profit?
  4. Is this the right treatment of partnerships? Are there any additional partnership issues that need to be considered?
  5. Is this the right treatment of individuals who receive income from property, let jointly?
  6. Is this the right treatment of subcontractors within the Construction Industry Scheme? Are there any other CIS issues that need to be considered?

Chapter 5. Providing HMRC with updates

  1. Do you have views on how detailed the summary data in the updates should be, and whether the level of summary data should be different depending on the size of the business?
  2. Do you have any comments on the categorisation of summary data in the updates?
  3. Do you have any views on what VAT data the updates should contain? Do you have any views on the advantages or disadvantages of including VAT scheme data in the updates? If so, which schemes and which data should be included in the updates?
  4. What flexibility around update cycles would be useful?
  5. Do you agree businesses should be allowed one month to submit their update? Would any problems be caused for VAT registered businesses by standardising the time limit for updates for all taxes?
  6. What method of deriving a business’s start date for providing updates under Making Tax Digital would be most straightforward for businesses?
  7. Do you wish to make any comments about the operation of ‘in-year’ amendments to updates for the purposes of profits taxes or VAT?

Chapter 6. ‘End of Year’ Activity

  1. Do you agree that the process of finalising the regular updates should be separate to the regular updates?
  2. Do you agree that businesses should have nine months to complete any End of Year activity?

Chapter 7. Exemptions

  1. What criteria should be applied in determining whether to exempt a particular business or business type from the requirements of MTD?
  2. Should charities be exempt from the requirements to maintain digital records and to update HMRC at least quarterly?
  3. Should trading subsidiaries of charities be exempt from the requirement to maintain digital records and to update HMRC at least quarterly?
  4. Should CASCs be exempt from the requirement to maintain digital records and to update HMRC at least quarterly?
  5. Should businesses within the insolvency process be included within the scope of the requirement to maintain digital records and to update HMRC at least quarterly; and are any special arrangements required for this group?
  6. Which businesses should be included within a consistent definition of persons ‘unable to engage digitally’?
  7. Do you agree that £10,000 annual income is an appropriate threshold for exempting businesses from Making Tax Digital? Do you have any other comments on how the exemption should operate?
  8. Should the smallest unincorporated businesses that are not exempt have an extra year to prepare for Making Tax Digital? How should eligibility for this group be defined?
  9. Do you agree that the principles set out in Fig. 7.3 are the right ones to use in determining eligibility for an exemption? Are there any additional principles which should apply?
  10. Which additional groups (if any) should be exempt from the requirements to maintain digital records and to update HMRC at least quarterly?

Chapter 8. Initial Assessment of Impacts

  1. Do you believe that there is the opportunity for MTD to create savings for your business? What percentage time reductions would you see from the following?
    1. Targeted software tax guidance (prompts and nudges to get information right first time).
    2. Gathering, collating and inputting data.
    3. Reporting obligations through providing regular updates.
    4. Any other potential savings not covered above.
  2. Do you think there are different business sectors or sizes likely to benefit more from MTD? If so, what would these be?
  3. What costs might you expect your business to incur in moving to the new regime? Please provide details of the costs for:
    1. Time spent in your business familiarising with the new processes and conversion to these new processes.
    2. Software expenditure costs (new or upgrading software).
    3. Hardware expenditure costs (purchase of a computer, tablet device, etc).
    4. Any other costs which are not covered above.
  4. Do you expect that your business will incur additional on-going costs as a result of these changes? Please provide the details of the additional costs or time for:
    1. Additional support from your accountant or tax agent.
    2. Additional time spent gathering, collating and inputting data.
    3. Additional time reporting obligations through providing regular updates and any end of year activity.
    4. Any other costs or time spent not covered above.
  5. Will particular businesses (e.g. partnerships) experience more difficulty in adapting to the changes? If so, please provide details, including any additional one off costs or ongoing costs.
  6. If you are an agent, please provide details of how these changes will impact on your own business, including details of any one-off and ongoing costs or savings. How do you perceive that these changes might affect your clients?

Links

Consultation document: Making Tax Digital: brining business tax in to the digital age.

Our summaries of all consultations and latest news on MTD: Making Tax Digital: index

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