Spring Budget 2017 - Making Tax Digital
The Government’s plans for Making Tax Digital (MTD) are a total transformation of the existing tax system. Whilst MTD is tax driven, it will mean increased record-keeping and accounting.
We now have HMRC responses following the consultation on MTD, some draft legislation and updates in the Spring Budget.
From 2020 all taxpayers; individuals, partnerships and companies, will have their own digital tax account. The aim is that taxpayers will be able to see all of their taxes in one place; that is Income Tax, National Insurance, Capital Gains Tax, VAT, Corporation Tax and Pay As You Earn and additionally matters such as child benefit and potentially universal credit.
Change will be introduced across the next 3 years leading up to 2020. The timeline is summarised as follows:
6 April 2017
1. HMRC will be updating employee tax codes more frequently to ensure accurate tax collection during the year
6 April 2018
Landlords and unincorporated businesses with rental income/turnovers over the VAT threshold will be required to report data on a quarterly basis to HMRC
6 April 2019
Quarterly reporting for landlords and unincorporated businesses with rental income/turnovers over £10,000 and VAT will come into MTD
6 April 2020
Companies and very large partnerships will come into MTD
The key issues can be broken down into the following:
1. Better use of information by HMRC
2. Simplified cash basis for unincorporated property businesses
3. Bringing business tax into the digital age
4. Simplifying tax for unincorporated businesses
5. Tax administration
6. Voluntary Pay As You Go.
A brief summary of each of these is given below.
Better use of information
The aim is that all possible information available electronically will be uploaded onto a taxpayer’s digital account automatically. This should ultimately relieve the need for tax returns for many employees.
From this year, HMRC will use the information that already exists or it receives on salaries, benefits and pensions to calculate and recalculate an individual’s tax position in real time. We can therefore expect changes will be made to employee tax codings on a much more rapid basis with adjustments to ensure that the correct amount of tax is paid in a year. Where the tax due is too high to be collected through code adjustments HMRC will advise on this through the digital account and give the tax due date and options on payment.
HMRC acknowledges there is a risk that frequent changes to tax codes could lead to employers receiving a lot of queries from employees but believe the digital tax account will prevent this.
Then from April 2018 HMRC will include third party information from banks and building societies in the digital account, which will show a detailed list of income sources so taxpayers can check the information (problems in this area have already been identified where, for instance, an individual is first named on an account as a trustee but has no right to the funds). The aim then is to extend this to cover other income sources, eg, dividends, broker packs.
Unfortunately, HMRC’s current stance is that errors on the pre-populated income will need to be directed to the third party provider wherever possible.
This does mean that the default position will be for HMRC to collect tax on investment income through code numbers with taxpayers needing to opt out if that is that is not what they want.
While HMRC will use the information on the digital account it will remain the individual taxpayer’s responsibility to make sure that the pre-populated income is correct and to report any other information to HMRC.
Simplified cash basis for unincorporated property businesses – effective April 2017
Calculating profits on a cash received/paid basis is a natural fit for MTD as it should be easier to report and calculate the tax, well theoretically anyway. The Government proposes to extend the option to use the cash basis to simple property businesses – not companies, trusts, LLPs, partnerships with corporate members or other complex businesses. There will be a restriction, apparently separate to the restriction on interest on residential property, on interest and other borrowing costs where the loan amount exceeds property value and some restrictions on capital cost deduction.
It is expected that non-UK resident landlords will also be eligible to use the cash basis on their property income.
Bringing business tax into the digital age – effective April 2018
This is for unincorporated trading and rental businesses only. The details for companies are still outstanding.
The requirement is that all businesses will keep business records digitally and make quarterly returns from these records to their digital account. There is an option to make more frequent returns if desired.
HMRC’s will accept spreadsheets provided they can be linked to software for the digital reporting. For many landlords and small businesses this may mean an investment in software that would not generally be perceived as a necessity for their level of business activity. HMRC believes some free software will be made available by the major providers (but not by HMRC).
The theory is that quarterly returns will be lighter touch and easier than annual returns. However, behind the quarterly reporting requirements the existing requirements on record keeping (invoices, receipts and cash records) will not change. Currently HMRC do not envisage MTD requiring additional records.
The quarterly returns will need to include:-
- For businesses – a trading summary;
- For landlords – the property address and income and expenses split by property;
- For gains – dates of acquisition and disposal and cost proceeds values at that point.
The proposals give flexibility on when tax adjustments are made; either quarterly or at the year end. Clearly a better idea of liabilities will be available if adjustments are made earlier.
For partnerships a nominated partner will need to fulfil the MTD obligations. These should feed automatically into each partner’s digital account.
The current proposed reporting deadlines are short:-
- For quarterly returns - one month;
- For year end - ten months from the accounting period end or 31 January as now – whichever is earlier.
There will be an exemption for those with annual income below £10,000 per annum. Those people can either report through the digital account or stay in self-assessment, their choice.
Simplifying tax for unincorporated businesses – still undecided
HMRC is looking at reforms to basis periods in terms of allocating taxable income and providing increased access to the cash basis for smaller and simple unincorporated businesses.
It is also considering simplifying business reporting by eliminating adjustments for closing stock, profits where contracts span a year end, bad debt provisions, prepayments and accruals.
Tax administration – still undecided
HMRC is looking to change the penalty and interest structure but we have not seen any proposals since the responses to the consultations other than to say taxpayers will have twelve months to “bed-in” to the new regime before penalties are charged.
The Government’s view is that HMRC should not be an “easy” creditor so interest will be set at a rate higher than the bank rates and will not be tax deductible.
The new requirement that from 6 April 2019, Capital Gains Tax on sales of residential property should be payable within 30 days does not link easily into the quarterly MTD reporting.
Voluntary Pay As You Go
Once in MTD everyone will have an option to make voluntary tax payments against future liabilities on a regular or ad hoc basis. HMRC will allocate payments against liabilities as they fall due; people cannot choose to hold a payment toward a future liability if a current liability exists. Repayments can be requested but HMRC may hold back amounts to cover liabilities due in the near future.
The position on payments on account is also being considered to see if these could be simplified/improved.
However, HMRC is clear that quarterly reporting will not give early repayments, eg, on losses carried back to an earlier period until the final period return is made, in case anything changes.
I hope you have found this article useful, if you require any further information please contact Tax Partner, Cathy Corns.
Date: 9th March, 2017
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