Making Tax Digital (MTD) is a project run by HMRC. It aims to transform the tax system so it is more effective, more efficient and easier for tax payers. The government’s aim is to turn the UK into one of the most digitally-advanced tax administrations in the world by 2020! This is a bold vision for the future. With our increasing dependency on digital solutions, it is one that I think is not unrealistic.
The MTD project was in the consultation stage until early November 2016. We are now awaiting the publication of the consulting document. Whatever the outcome, it is likely that MTD is here to stay. MTD is likely to be relevant to most individuals and businesses.
Most UK companies will already have digital accounts with HMRC through which they submit their VAT, PAYE & NI or self-assessment tax returns. The project is to take these accounts one great big step further and merge them in to one account, with the view of simplifying the tax system.
The scheme will gradually phase in between 2018 and 2020. Income tax & NI obligations will start in April 2018, VAT from April 2019 and Corporation tax from April 2020. Smaller unincorporated businesses and landlords are likely to have a longer period before they start the MTD project.
The system will not mean four tax returns a year but four income and expenditure statements submitted from your software. This will also be a year-end submission to be probably confirmed by an accountant.
Who won’t need to be concerned by MTD?
- Those whose self-employed income < £10k
- Employees without secondary income in excess of > £10k gross
The new regulations require businesses to submit their up to date tax positions at least quarterly via accounting software/apps.
Digital accounts will in the future be pre-populated by your employed income and bank interest as these will be supplied by your employers and the banks directly. This will give individuals and businesses a strong indication of their up to date tax liabilities throughout the year. This seems a sensible idea but relies on the accuracy of the data provided.
At the moment, many taxpayers have to contact different parts of HMRC to find out their financial position relating to different taxes. The aim of the digital tax system is to give all taxpayers a single, personalised view of their overall tax position across all of their liabilities. Those who need to pay more than one liability will be able to make a single payment. This will off-set any tax owed on one liability against an overpayment on another.
At present, small companies pay their corporation tax 9 months after the financial year end so a company that has traded and been profitable for the year ended 31 December 2016 would have to pay the corporation tax on these profits on 1 October 2017. Under the proposed project, the companies will pay tax on their profits on a quarterly basis. This will mean money into the government’s coffers sooner. More importantly, it means there will be a cash outflow implication for many small businesses and they will need to plan for this outflow.
HMRC are promising webinars and digital help assistance to help businesses through the transition.
If implemented properly, this will reduce the administrative burden for businesses and individuals. However, it will also have an impact on their cash flows which will need careful planning.
The material created by HMRC so far makes it quite clear they expect businesses to be maintaining their records in real time. This will mean that cloud accounting solutions with direct bank feeds will become more popular.
As a CEO, can your CFO answer these questions or are you worried?
- Does your financial software deliver real time data?
- Do you feel able to submit monthly or quarter accurate data to HMRC on time?
- Is our accounting software able to cope with these changes?
If the answer to any of those questions is no are you suitably informed to select the right accounting software with adequate data security?
There will be more information on this later on in the year, but I would suggest that the sooner businesses start preparing for it, the better. We have already embraced the digital revolution from online shopping and banking to booking holidays. This is one other change that will hopefully be for the better and one that we should embrace.
Dipali Buch is an accountant and corporate financier with over 15 years experience. One of her specialisms in is the Technology sector. She is a partner at Alliotts Chartered Accountants.
Alliotts are experts in cloud accounting software and are Xero Platinum Partners. If you are concerned about making tax digital or would like to consider cloud accounting solutions please contact us.