Back in March 2015, the government outlined plans to “make it easier for individuals and businesses to get their tax right and keep on top of their affairs – meaning the end of the annual tax return for millions” – by Making Tax Digital.
Making Tax Digital means that for the first time, all businesses will be required to submit quarterly updates to HMRC.
The scheme is based on four foundations; better use of information, that’s being able to check what information HMRC is holding about your business at all times, obtained not just from you but from your building society or bank, or other government departments; Tax in real time – HMRC collects information as soon as it becomes available and lets you know what tax you have to pay at any given time; a single financial account – merging details of liabilities and entitlements into one platform, much like modern online banking; and Interacting digitally with customers; prompts, advice and support whenever you need it, and a holistic picture of a businesses’ tax affairs.
So far so convenient, entrepreneurs might think – it beats the annual January scramble to get all your affairs in order and arrive at a tax figure that both sides agree is reasonable, whilst helping to avoid any nasty surprises; but it seems neither government nor small business are ready to take a step into the unknown just yet.
The changes were due to come into effect in April 2018, but last week, the Chancellor, Philip Hammond, announced that 3.1 small businesses, that’s “unincorporated businesses and landlords with turnovers below the VAT threshold”, to be precise, will be given an extra year before being required to keep digital records and send HMRC quarterly updates.
The change has led Tina Riches, a national tax partner at accountancy, investment management and tax group Smith & Williamson, to describe Making Tax Digital as “down but not out”.
“Making Tax Digital (MTD) appears to be full steam ahead despite no workable technology or even exact criteria about who it applies to when,” she has commented, whilst also suggesting that the delay should apply to all businesses.
Riches feels that “It must not be understated how concerned other businesses and landlords are about the transition to MTD, without a full cycle of piloting”, and suggests that “Philip Hammond should consider delaying the mandatory application of MTD for everyone for a further year at least to allow everyone to fully embrace how it will work.”
“We think the Chancellor has missed an opportunity to better clarify the business landscape for the coming years,” she continues, adding ““There seems to be no clear plan as to the development of MTD. Every announcement we hear more changes, which raise more questions. “
“Although a pilot has started, most larger agents that deal with a large proportion of affected taxpayers won’t be able to join the system for some months and it is still unclear exactly how it will work. In addition, we are still waiting to hear if the exemption for those with turnover under £10,000 is to be raised.”
The government says that it “wants to help businesses get their tax right first time and to prevent them from feeling punished for making honest mistakes”, which is a nice way of saying that it wants to leverage advances in digital technology to keep tabs on exactly much tax businesses owe.
According to HMRC, “The amount of tax not collected due to avoidable taxpayer errors and carelessness has risen to over £8bn a year. This not only costs the public purse – it also creates cost, uncertainty and worry when HMRC is forced to look into their affairs.”
“The appetite for digital services is strong”, HMRC points out, “and relying on a predominantly paper-based tax system makes no sense in the 21st century.”
HMRC published 6 consultations back in August 2016 to set out their thinking about Making Tax Digital, and say that they have received more than 1,100 written responses, as well as 1,200 responses to an online survey released within the short guide to the consultations.
What seems to be clear about Making Tax Digital – is that not much is clear. With the first requirement to submit a quarterly report over a year away, some larger businesses feel that that is still not long enough to get ready for the change in reporting behaviour, whilst businesses that make profits below the VAT threshold will not have to do so until 2019, although they may begin to do so voluntarily before then.
The government has also said that “for some, digital is genuinely not an option and where this is the case, an alternative will be provided.”
Given the popularity of digital accounting software such as Sage, or integrated services such as Bob or Geniac, filing accounts quarterly certainly should not feel as onerous as it once might have for small businesses, although it may pose a considerable headache, the larger and more complex a firm’s tax liabilities and credits are.
If you are a fan of watching paint dry, keep an eye on this space – nothing happens fast in government – sometimes its best to leave the digital disruption to tech startups.