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  • Paul Clifton

Making Tax Digital: An Update

Updated: Oct 23, 2022

Over the next few years businesses, sole traders, and landlords will be required to keep digital accounting records and provide summary trading profit/loss information from them to H M Revenue & Customs. This will be through quarterly electronic updates, thereby eventually eliminating the annual Tax Return for these persons. HMRC are keen to stress that the quarterly updates are not quarterly Tax Returns.

From April 2018 (*) , businesses (sole traders and partnerships, rather than limited companies) paying income tax and NICs will be required to comply with the new reporting requirements. This will be extended to the VAT system from April 2019 and then finally to limited companies and corporation tax by April 2020.

* = 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.

Summary of Proposals

It is envisaged that throughout each quarter, businesses will be required to record the details of their business income and expenses on apps or third party software, with an update sent to HMRC with 30 days of each quarter end. HMRC were saying that spreadsheets, like Excel, would not suffice as they will not have a button to press to submit the contents, in the required electronic format to HMRC. This will enable businesses to have an in-year estimate of their tax positions.

As around 90% of small businesses that we work with use Excel this is going to mean some extra work by somebody. Excel is generally more than adequate to keep your accounting records and for this firm to use to prepare annual accounts. However, HMRC want the data to be submitted in a special format through software and apps. We may be able to allow our clients to continue to use Excel and import their contents into commercial third party software like Sage that we widely use in house. Sage will be able in due course to make the required submissions.

HMRC later said that would permit spreadsheets in connection with MTD-compliant software, though the special MTD software may have to be paid for.

After the accounting year-end, the taxpayer will be required to make a 5th submission, containing tax and accounting adjustments and any corrections made to the in-year figures returned in one of the four quarterly updates.

A year-end declaration (i.e. a 6th submission) will be required to confirm the completeness of the whole online 'Tax Return' data held within the individual's / business's tax account to finalise the year's tax position. We as accountant would most probably be involved in dealing with these year-end tax and accounting adjustments and submissions.

Unincorporated businesses and landlords with annual turnover not exceeding £10,000 will not be required to maintain digital records nor provide regular updates to HMRC.

The data links to and from the HMRC central database, known as API (Application Program Interfaces) are still being developed and at this stage it is not possible to provide much guidance. Accordingly, the big software companies like Sage are still ascertaining the new rules and no software is expected to be released for a year or two that can make the quarterly updates.

New Penalty System

Under the current system, a tax return filed late will attract an automatic penalty of at least £100. Under the new rules, a late submission of an update or the End of Year activity will not immediately attract a penalty. Instead, HMRC will issue penalty points and will only apply financial penalties after several failures.

The Consultation Documents

The Government’s ambition is to create one of the most digitally advanced tax administrations in the world are not without criticism, with many professionals and business owners feeling that not enough information regarding the proposals has been released, and that quarterly reporting will create an administrative and financial burden for smaller business.

The reason for all the upheaval is to let the business owner and taxpayers know more accurately and sooner what tax they owe…. And in due course probably pay their tax quarterly based on the quarterly results. In our opinion, and that is shared by most accountants, whilst the current system is not perfect, it is well understood. We can only see extra time and work being spent and that would have to result in extra cost to business owners and taxpayers.

We will of course be keeping all our clients up to date with the rules as they develop and offer assistance with recordkeeping and quarterly and year-end submissions.

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