HMRC want businesses (including property rental businesses) to submit accounting records quarterly with a post year-end submission which reconciles to the annual accounts.
The Current Position
At present HMRC receive accounting information annually through the tax compliance process. This is either through the partnership tax return, an individual’s tax return or attached to a corporation tax return. HMRC do not have a feel for levels of income and expenses, and therefore tax receipts until these are submitted.
The tax return filing window for the unincorporated business opens on 6 April and closes on 31 January. A considerable percentage of filings are made in the last two months of the window and therefore it is not until nine or ten months after the end of the tax year do HMRC gain a reasonable view on profitability and therefore the quantum of income tax receipts that they can expect.
Although the largest corporate taxpayer pays tax on account during their year, the vast majority of companies pay tax nine months after the end of their accounting period. The tax return filing deadline for all companies is 12 months after the end of their year ends. As with income tax this makes it difficult for HMRC to project tax receipts.
HMRC believe that the vast majority of taxpayers already have digital interactions with HMRC. All companies are required to interact digitally and the consultation document estimates that 92% of unincorporated businesses use the internet and digital tools. HMRC therefore believe that all sole traders, partners in partnership, landlords whose annual income is in excess of £10,000 and companies should therefore be subject to the requirement for digital interactions.
The proposal is that these parties produce quarterly reports which provide accounting information to HMRC. Within nine months of the end of the accounting period a final report is submitted which adjusts the previous reports to reflect year end matters, such as accruals. From HMRC’s perspective this allows for a better understanding of UK profit flows and therefore a better understanding of tax receipts.
The consultation is at pains to highlight that quarterly reporting will be for the benefit of taxpayers. It states that the taxpayer will “be able to view an up to date picture of their tax affairs, providing greater certainty about tax due and entitlements …. and this will …. help businesses manage their affairs effectively and to understand their tax position more easily.
Many businesses have told us they want more certainty over their tax bill and don’t want to wait until the end of the tax year, or often longer, to find out how much they have to pay”.
The proposals are that the reporting will commence from 2018 for unincorporated businesses and companies will be required to report quarterly from 2019.
The concerns already identified are:
- Businesses already employ advisers to identify potential liabilities in advance of payment dates. HMRC’s perceived benefit to taxpayers is therefore illusionary.
- Unincorporated businesses do not necessarily have an obligation to interact with HMRC electronically as they can file income tax returns in paper form. Why should those businesses be forced to convert to electronic submissions?
- Some taxpayers do not need advance forecasting of liabilities. If the primary benefit of quarterly reporting is for the taxpayer then those taxpayers who do not want this benefit should be able to elect out of quarterly reporting.
- It is unusual for business profits to accrue even over the four quarters and therefore the belief that tax liabilities can be identified throughout the year is not correct.
- There is no legal requirement for quarterly accounts to be prepared and therefore why should a business incur costs for HMRC filings?
- HMRC have already confirmed that they will not be providing the necessary software for interactions. If this remains the case then how can HMRC guarantee that developers will issue free software? Who will pay for the costs of developing and maintaining software required to produce quarterly accounts or the software to make submissions?
- The quarterly filing dates may not be co-terminous with the VAT filing dates. Should they be aligned?
- The consultation assumes that discretionary (often year-end) matters such as bonus posts are already known in advance. This is simply not the case.
- The proposals are a “big-bang” change in process. Why will HMRC not have a period of piloting the proposals with a sample group of taxpayers?
- Incorporated businesses have a greater degree of interaction with HMRC than unincorporated businesses. Why are the proposals suggesting that the order of implementation is the other way round?
- The consultation document suggests that the changes will reduce the tax gap and contribute £945m to the Exchequer by 2020/2021. Many believe that this is the real reason that HMRC are pressing ahead with these proposals. If this is the case then it is inaccurate for HMRC to sell this process as being for the benefit of the taxpayer. Again those taxpayers who do not wish to reap this benefit should be able to elect out of it.
Summary of Consultation Questions
Acquiring Digital Tools
- Question 1: What are the challenges for businesses that currently keep their records on paper or simple spreadsheets in moving to an integrated software package for record keeping, and what further measures or support would help businesses to meet these challenges?
- Question 2: What information and guidance would you find helpful in choosing the appropriate software for your business?
- Question 3: What types of business should a free software product cater for? What functionality would be necessary in a free software product?
- Question 4: What level of financial support might it be reasonable for the government to provide towards investing in new IT, software or training, to whom should such support be aimed, and what is the most appropriate form for delivering such support?
- Question 5: What other forms of support would help to make the transition to Making Tax Digital easier?
- Question 6: What facilities would make it easier and more secure for businesses to enrol for Making Tax Digital and use software regularly?
Digital record keeping
- Question 7: Do you have any comments about the practicalities of keeping evidence of transactions and trading when using digital tools?
- Question 8: Do you agree with the minimum transaction data fields proposed for trading businesses, including retailers? What other data fields might the record keeping software usefully include as a minimum?
- Question 9: Do you have any comments about reflecting the current VAT requirements in MTD-compatible software?
- Question 10: Do you have any comments on the additional data capture requirements for property income and capital gains?
- Question 11: What should the minimum categorisation in the software be? Would additional sub-categories be useful?
- Question 12: Do you have any comments on how businesses should reflect transactions and expenditure with non-deductible elements in the software?
- Question 13: What prompts and nudges would be most useful to businesses?
Establishing taxable profit
- Question 14: Do you agree that businesses should have the choice as to when to record accounting adjustments?
- Question 15: Do you agree that business should have the flexibility to reflect reliefs and allowances when they choose?
- Question 16: What do you consider is the most appropriate approach to reflecting the effect of the personal allowance on an individual’s taxable business profit?
- Question 17: Is this the right treatment of partnerships? Are there any additional partnership issues that need to be considered?
- Question 18: Is this the right treatment of individuals who receive income from property, let jointly?
- Question 19: Is this the right treatment of subcontractors within the Construction Industry Scheme? Are there any other CIS issues that need to be considered?
Providing HMRC with updates
- Question 20: Do you have views on how detailed the summary data in the updates should be, and whether the level of summary data should be different depending on the size of the business?
- Question 21: Do you have any comments on the categorisation of summary data in the updates?
- Question 22: Do you have any views on what VAT data the updates should contain? Do you have any views on the advantages or disadvantages of including VAT scheme data in the updates? If so, which schemes and which data should be included in the updates?
- Question 23: What flexibility around update cycles would be useful?
- Question 24: Do you agree businesses should be allowed one month to submit their update? Would any problems be caused for VAT registered businesses by standardising the time limit for updates for all taxes?
- Question 25: What method of deriving a business’s start date for providing updates under Making Tax Digital would be most straightforward for businesses?
- Question 26: Do you wish to make any comments about the operation of ‘in-year’ amendments to updates for the purposes of profits taxes or VAT?
‘End of Year’ Activity
- Question 27: Do you agree that the process of finalising the regular updates should be separate to the regular updates?
- Question 28: Do you agree that businesses should have nine months to complete any End of Year activity?
- Question 29: What criteria should be applied in determining whether to exempt a particular business or business type from the requirements of MTD?
- Question 30: Should charities be exempt from the requirements to maintain digital records and to update HMRC at least quarterly?
- Question 31: Should trading subsidiaries of charities be exempt from the requirement to maintain digital records and to update HMRC at least quarterly?
- Question 32: Should CASCs be exempt from the requirement to maintain digital records and to update HMRC at least quarterly?
- Question 33: Should businesses within the insolvency process be included within the scope of the requirement to maintain digital records and to update HMRC at least quarterly; and are any special arrangements required for this group?
- Question 34: Which businesses should be included within a consistent definition of persons ‘unable to engage digitally’?
- Question 35: Do you agree that £10,000 annual income is an appropriate threshold for exempting businesses from Making Tax Digital? Do you have any other comments on how the exemption should operate?
- Question 36: Should the smallest unincorporated businesses that are not exempt have an extra year to prepare for Making Tax Digital? How should eligibility for this group be defined?
- Question 37: Do you agree that the principles set out in Fig. 7.3 are the right ones to use in determining eligibility for an exemption? Are there any additional principles which should apply?
- Question 38: Which additional groups (if any) should be exempt from the requirements to maintain digital records and to update HMRC at least quarterly?
Initial Assessment of Impacts
- Question 39: Do you believe that there is the opportunity for MTD to create savings for your business? What percentage time reductions would you see from the following?
a) Targeted software tax guidance (prompts and nudges to get information right first time).
b) Gathering, collating and inputting data.
c) Reporting obligations through providing regular updates.
d) Any other potential savings not covered above.
- Question 40: Do you think there are different business sectors or sizes likely to benefit more from MTD? If so, what would these be?
- Question 41: What costs might you expect your business to incur in moving to the new regime? Please provide details of the costs for:
a) Time spent in your business familiarising with the new processes and conversion to these new processes.
b) Software expenditure costs (new or upgrading software).
c) Hardware expenditure costs (purchase of a computer, tablet device, etc).
d) Any other costs which are not covered above.
- Question 42: Do you expect that your business will incur additional on-going costs as a result of these changes? Please provide the details of the additional costs or time for:
a) Additional support from your accountant or tax agent.
b) Additional time spent gathering, collating and inputting data.
c) Additional time reporting obligations through providing regular updates and any end of year activity.
d) Any other costs or time spent not covered above.
- Question 43: Will particular businesses (e.g. partnerships) experience more difficulty in adapting to the changes? If so, please provide details, including any additional one off costs or ongoing costs.
- Question 44: If you are an agent, please provide details of how these changes will impact on your own business, including details of any one-off and ongoing costs or savings. How do you perceive that these changes might affect your clients?
What do you think?
Other areas covered by the consultation
This is only one part of the consultation. See summaries of the other areas here.