HMRC’s flagship Making Tax Digital (MTD) online quarterly reporting is to be resurrected and extended. It will bring all VAT-registered businesses into the system from April 2022 and will from April 2023 include income tax Self-Assessment for sole traders and partnerships.
MTD income tax was to be introduced several years ago. Due to the complexity for businesses, and software companies not being ready, the system was put back. Recent issues with Brexit and Coronavirus had put HMRC’s agenda on hold.
A number of press releases were published this week confirming that the MTD system is now back on the agenda and will be implemented in the next two to three years.
The government were to consult in autumn 2020 on extending MTD to limited company businesses with Corporation Tax obligations.
A written parliamentary statement on 12 November 2020 announced that a MTD for Corporation Tax pilot would start in 2024 and that MTD for Corporation Tax would be compulsory from 2026, and possibly later even.
The background to MTD
Millions of businesses are already banking, paying bills and interacting with their customers or suppliers online, and many are already using accounting software.
HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world. MTD is making fundamental changes to the way the tax system works, transforming tax administration so that it is (in the opinion of HMRC):
more effective
more efficient
easier for taxpayers to get their tax right
The move to digital integration will eliminate many of the existing paper-based processes.
Digital records
Businesses need to use software to keep their business records digitally. This may include dedicated record-keeping software or a combination of software packages or spreadsheets with further ‘bridging software’ to link spreadsheets with HMRC’s systems.
Bridging software is how HMRC describes the additional digital software that can take information from other software, for example, a spreadsheet or an in-house record keeping system and then lets the user send the required information digitally to HMRC in the correct format.
Spreadsheets may be used to record and store business transactions digitally. However, those spreadsheets must be able to submit the required data to HMRC digitally; for example, using bridging software or an API enabled spreadsheet that can integrate directly with HMRC systems.
Bridging software must be capable of extracting or receiving the information from the spreadsheet digitally and then sending it to HMRC systems.
The summary information must not be physically re-typed into another software package.
HMRC spin states that it will also reduce errors and allow businesses and their agents to devote more time to running their business. Many businesses use an accountant (agent in HMRC speak) and MTD allows agents to continue to provide a full service in supporting their clients.
The deadlines and underlying tax rules for sending VAT returns and making tax payments have not changed. In respect of MTD for income tax, the underlying tax rules are not changing. What is changing is how and when the accounting and tax data is submitted to HMRC.
For larger businesses, the changes may not create too many issues as they will already maintain up to date accounting records and will be used to submitting information regularly to HMRC.
Small business and landlords will face the greatest change. They often do not keep digital records and only provide their paper-based accounting records to their accountant annually.
Making Tax Digital for Business
Since 2019, the vast majority of VAT-registered businesses with a taxable turnover above the VAT threshold (£85,000) have been required to keep digital VAT records and submit their VAT returns using Making Tax Digital (MTD)-compatible software.
From April 2022, these requirements will be extended to all VAT-registered businesses.
MTD for Income Tax Self Assessment (ITSA) will apply from April 2023 for unincorporated businesses (i.e. non-limited company businesses) and landlords with total business or property income over £10,000 pa. Most businesses will have two years to prepare and test the service voluntarily prior to its introduction. You should note that the £10,000 threshold relates to gross income and not profit.
Many accountants and business taxpayers were hoping that the originally suggested £10,000 threshold would be increased substantially and possibly to £85,000 to coincide with the VAT threshold. This is even though the business or landlord may not be VAT registered. It would remove many small businesses and landlords from the system.
MTD requires quarterly submissions of business income and expenditure. The required amounts of income and expenditure must be capable of being extracted directly from the underlying digitally maintained business accounting records and submitted directly to HMRC through electronically submission without any manual interaction or rekeying of accounting transactions.
Those businesses that are VAT-registered, and in particular those with a turnover over £85,000 should already be familiar with making quarterly submissions.
Quarterly submissions
Many smaller businesses write-up or prepare their accounting records once a year, sometimes with the help of their accountant by analysing bank statements and invoices. This will shortly become a quarterly process!
The timing of the quarterly submissions is determined by the accounting period of your business. If your accounting period follows the tax year, the four quarters are:
6 April to 5 July
6 July to 5 October
6 October to 5 January
6 January to 5 April
A quarterly submission will be required for each business and also for landlords who rent out UK property. Therefore, if you are involved in two businesses and are also a landlord you would be required to maintain three sets of separate accounting records and make 12 quarterly submissions each year.
Individuals and businesses will receive an estimated tax calculation based on the information submitted each quarter to help them budget for their tax. At the end of the year, they can add any non-business information and finalise their tax affairs using MTD-compatible software.
Generally speaking, at the tax year-end, amendments are required to adjust the four quarterly submitted accounting profit amounts to produce profits for tax purposes.
Some expenses are not allowable for tax purposes e.g. depreciation, entertaining, fines and certain professional costs.
Purchase of fixed assets e.g. plant and equipment, fixtures and fittings and motor vehicles have special tax rules to determine when the amounts can be claimed for tax purposes.
This is why an additional year-end submission will be required, once again through digitally compatible software.
The year end submission, if required, would be for each business and also for landlords who rent out UK property. This could therefore increase the above mentioned 12 quarterly submissions to 15 submissions per year.
As quarterly submissions will be made, together with a year end correcting submission if required, then there will be no need to submit an annual Self Assessment tax return. However, as can be seen from the above there will be a substantial amount of additional information and submissions required during the year as well as at the year end.
Conclusion
One of the original overriding purposes of introducing MTD was to reduce errors in the tax system. This was supposed to work by ensuring that businesses and individuals maintain digital records and make digitally submissions each quarter.
In January 2020, in a survey of businesses and their advisers by the UK professional tax bodies (CIOT and ATT) nearly 90% of respondents said that MTD for VAT had not reduced errors and just 14% of respondents said there had been an increase in productivity in their organisation as a result of MTD for VAT.
The same survey also showed that the costs of MTD compliance had far exceeded government estimates.
I think that any experienced accountant or business owner would agree that simply digitalising a process does not necessarily save money or reduce errors.
We all know it's a silly idea but HMRC have it in their heads that ‘Bob the Builder’ only has to snap a picture of a receipt and their software will do the rest!
It should be remembered that MTD is a key part of the government’s plans ‘to make it easier for businesses to get their tax right and keep on top of their tax affairs’. I will leave you to reach your own conclusion as to whether things will be easier going forward!
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