It's February 14th, the most romantic night of the year and I have a Valentine date. Not as one may hope with a knight in shining armour who is going to sweep me off my feet and declare undying love but rather with HM Revenue and Customs and Making Tax Digital for Business.
If you have heard of ‘Making Tax Digital’, and not many businesses have, you will know that it is HMRCs way of helping you to understand your business finances by reporting your income and expenditure to HMRC quarterly using your digital software and then following that up with an annual summary. The much heralded End of the Tax Return’. This will also help you to calculate your tax due so you can budget for the payment across the year. Oh and there was mention of an £8bn tax gap which apparently arises mostly in the small business sector and HMRC are tasked with closing.
This all kicks off in April 2018, just over a year away and starts with small businesses and landlords. The turnover limit was originally proposed at £10000 but following the consultation process in the latter part of last year and the somewhat scathing comments of the Treasury Select Committee this is now ‘under active consideration’ and the figure will be announced in the budget along with the primary legislation to be included in the Finance Bill. There will also be a decision on deferment for some businesses. There are exemptions – CASCs, Lloyds Underwriters, Charities (but not their trading subsidiaries) and partnerships in excess of £10m.
So how do you submit your data? It will not be possible to just type figures into boxes via the government gateway as you may do now with VAT returns or SA returns. It will all have to be done with your digital software. HMRC are not providing any sort of software to allow you to do this, they are building the API for software providers to feed in to. And they are expecting those software companies to provide software and some sort of support free of charge. There were two software companies represented tonight but they couldn’t tell us what that software will be because they simply don’t know. They are, of course, working with HMRC who themselves seem very unclear as to what it entails. Apparently it will ‘evolve’ as the public beta, due to start in April, progresses and there will be a ‘viable product’ by April 2018. Initially spreadsheets had been ruled out but they have had a reprieve although the data from them will still need to be fed into some sort of digital software for submission. HMRC will be, we were told, training up a team to deal with customer support and education and there will be an advertising campaign to promote it once they have decided exactly what it is they have to promote. Please, no purple furry monsters!
What exactly needs to be reported quarterly? Good news is that on quarterly returns HMRC are not expecting accounts on an accruals basis. The cash reporting limit has been raised to an annual turnover of £150k (exit level £300k) and the three line reporting available to small businesses still applies. The annual summary will be the definitive figure used to calculate your final tax liability. The software will submit the data as a summary only but there still remains a requirement under tax legislation to complete and retain proper records to support those figures.
If the technophobes out there are starting to panic then don’t worry there are filing exemptions similar to those currently in place for VAT filing. So – membership of a religious society, disability, age, remoteness of location or ‘any other reason’. Don’t get excited about that one, ‘can’t turn on a computer’ doesn’t cut it. If you can’t do it yourself you are expected to find a competent person to help.
How will HMRC use this data to close the tax gap. They will not, we were told, be running checks on quarterly data and any risk assessment would be based on final annual figures. However, given that this will data will be fed into their Connect’ computer system which gathers information from various HMRC departments, government organisations and other sources such as eBay it is possible that triggers from the information provided may influence an enquiry. It is estimated that the cost of compliance by a small business will be £2770 a year and that arguably any tax gained by stricter reporting will be offset by the tax relief given against those costs.
And of course no HMRC initiative would be complete without that dreaded word – Penalties. Yes, there are deadlines and of course if those deadlines are missed there will be penalties. Original proposals were that quarterly returns would be filed within one month of the end of the quarter and the annual summary by 10 months or the end of January following the end of the accounting period. That bit didn’t make sense and HMRC couldn’t explain how it would work. Presumably something else that will ‘evolve’. The level of penalties has not been set but a soft landing has been promised so you’re not going to be hit immediately. There will be further discussions on penalties in Spring.
So have I fallen in love with Making Tax Digital? I can wholeheartedly support the idea that business owners are more aware of what is happening financially within their business. It’s the whole ethos behind how we work to support our clients. But is a mandatory filing regime the way to do it? And are HMRC competent enough to deliver it in the timescale they have set? Ask me again next February 14th when hopefully that knight in shining armour might just turn up…
