Quarterly Reporting and Making Tax Digital
Hardly a week goes by without I read about Quarterly Reporting and Making Tax Digital.
I reported on 3 February 2016, in my blog on ‘Digital tax accounts’, that H M Revenue & Customs (HMRC) had highlighted that most businesses, including the self-employed and landlords will be required to keep track of their tax affairs digitally and update HMRC at least quarterly via their digital tax account.
There are over 4 million non-employing businesses (sole traders or limited companies with no employees, just the owner-manager) in this country. I know that the majority of these businesses don’t maintain their records in a digital format which is going to be acceptable under the new regime.
What’s happening now?
Currently, Financial Statements (accounts) and Tax Returns are prepared and submitted once a year to H M Revenue & Customs. They are filed electronically, by us, either through paid-for commercial software or through the free Government Gateway. If you file your own Self-Assessment Tax Return, then you probably file it through the Gateway with a username and password.
We therefore currently report to HMRC annual.
Firstly, HMRC want landlords and non-VAT registered businesses to start reporting quarterly to them from April 2018 (*), followed by, from April 2019, VAT registered clients and then from April 2020, limited companies.
* = Later relaxed for unincorporated businesses and landlords, with turnover more than £10,000, but less than the VAT threshold, to start filing online from April 2019 rather than April 2018.
There is still some ambiguity as to when exactly each group of taxpayers will need to start reporting. However, the message is clear; in the next few years HMRC will be expecting all taxpayers, with the possible exception of very small businesses or landlords with only small amounts of income, to report to HMRC quarterly. The only exclusions are those with no internet access and religious grounds exemptions!
Secondly, HMRC want to remove the ability to file through the familiar Government Gateway. Many of our clients with use the Gateway to file VAT and Self-Assessment Tax Returns and some PAYE returns. They will also probably review the ability to view your tax liabilities and payments made through the Gateway.
Instead, HMRC wants taxpayers to file in a ‘digital format’.
Those who run payroll will be familiar with the Real Time Information (RTI) system. This requires that on or before the payroll payment date that businesses electronically update HMRC of payroll liabilities and PAYE information. Those who run payroll must use paid-for commercial software, and therefore cannot file payroll information through the Gateway.
Payroll systems mainly require a button or a menu item to be clicked in the software to submit the data to HMRC. They use the existing payroll data, i.e. no extra work or system changes are required.
Under the new rules, nearly all small businesses will have to change the way that they work and record their basic accounting transactions.
HMRC will be requiring all filings in the coming years to be made in digital format through commercial software, or Apps, and not through the Gateway.
The schedule of Quarterly Reporting
The current timetable is follows:
From April 2018: All Landlords, Self-employed businesses and Partnerships will have to start digitally reporting their information on quarterly basis. The only exclusions are those with no internet access and religious grounds exemptions and etc (*)
From April 2019: ALL Vat returns are to be lodged digitally and not via the gateway
From April 2020: All Limited Companies will have to start digitally reporting their information on quarterly basis
All Corporation tax returns are to be lodged digitally and not via the gateway
* = The Chancellor later announced a 12-month delay in the original MTD timeline for unincorporated businesses and landlords, with turnover more than £10,000, but less than the VAT threshold, to start filing online from April 2019 rather than April 2018.
Not using spreadsheets
Many of our clients use spreadsheets, e.g. Excel, to record their income and expenditure. Once a year, we will take these records and prepare annual Financial Statements and Tax Returns. We still have a handful of clients that use ‘old-fashioned’ handwritten cashbooks.
Businesses and small-landlords will have to maintain their records in a digital format which is going to be acceptable under the new regime.
I say acceptable, because we have had a lack of information about what actually is ‘digital’ and to date the only official utterances have been that a spreadsheet is NOT acceptable. You and I may classify a spreadsheet as a digital format but not HMRC.
Following much criticism, HMRC will now permit spreadsheets to still be used for recordkeeping, but busineses will need to link their spreadsheets with HMRC’s systems using an MTD-compliant software. This software may be made available for free to small businesses, though it may have to be paid for. HMRC has said that it will not design free software itself, so will be dependant on businesses to produce this!
Apps and commercial software
There is much talk of accounting and recordkeeping systems interfacing with those of H M Revenue & Customs through API (Application Programming Interfaces). APIs is just a fancy word for providing a link between your accounting software. It is starting to look like all our business clients must now buy, rent or pay for electronic recordkeeping or accounting software to link and upload quarterly data to HMRC.
It appears that users of the major software like Sage, Quickbooks, Kashflow, Freeagent, Xero et al will be okay as these companies will make sure that they are capable of making the upload to H M Revenue & Customs. I’m sure lots of Apps will be appearing on the market too.
Many clients may well be quite happily using software that works perfectly well but which is some years old and which they may not have updated over the years as the improvements would have had little or no impact on their business.
I’m not aware of any of the leading software companies that are currently creating software that will report digitally to HMRC. The reason is quiet simple; HMRC have not even developed the APIs that the new software will use to interface with the HMRC’s own IT systems.
I’ve read articles by HMRC about mobile phone/iPhone/Android apps being used to maintain accounting records and then upload the data quarterly to H M Revenue & Customs. Do those at HMRC live in the real world? I cannot see any business or taxpayer really pumping in lots of details through a phone, iPad or Android tab. It’s just too fiddly.
It looks like one of two things are going to happen if you follow HMRC’s ideas. Either you pay for software that can interface with HMRC or you pay an accountant / bookkeeper to do the same.
The Institute of Chartered Accountants in England and Wales (ICAEW) recently reported that around 80% of its accountants’ clients were not accounting in an ‘acceptable’ digital format.
I’m sure if I look at my small business clients then that percentage is going to be much higher. Most clients use Excel in some way or other.
I’m wondering, or may be dreaming, if our clients will be able to continue to use their Excel spreadsheets and once a quarter let me import the data into my Sage software to then digitally update HMRC.
More work and more cost
The logic behind all the above is to update HMRC more often, to help get your tax correct and avoid large under and over payments of tax through the current annual system.
It appears that our clients and we will be much busier and taking the existing annual (non-digital Excel spreadsheets) accounting records and doing a lot of the same work quarterly.
HMRC are keen to stress that they will not require four Tax Returns a year, only quarterly filings of certain outline information.
We will all just have to watch and wait to see how the requirements progress.
Search for more articles by us on 'Making Tax Digital' in the tag list.