Making Tax Digital (MTD) – aka the Death of the Tax Return

25th October 2016

On 15 August HMRC finally released its consultation documents on MTD. Since then there’s already been a change – the smallest businesses and landlords will be exempted from digital record-keeping and quarterly updates. This means that over a half of them (2.9m) won’t be affected by the switch to MTD. But for those who are, there is a short outline of the consultancy papers below.

The costs and benefits

From 2018 those affected will need to use software or apps for their record-keeping and update HMRC quarterly. This should give more certainty over likely tax bills and allow them to manage cash flow more effectively throughout the year. However at the end of the year the information previously provided will need to be reviewed for any necessary accounting or tax adjustments.

At the moment HMRC is still assessing the costs and benefits of MTD and is seeking more information to help them to improve their understanding of how the changes will affect businesses.

Simplifying the rules

Currently businesses may enter the cash basis accounting (a simplified way for businesses with trading income to calculate their profits, taking account only of amounts actually paid and received within a period) if their turnover is below the VAT threshold (£83,000). HMRC is looking to raise this threshold even higher, to £166,000.

There is a proposed change to allow upfront relief for all types of expenditure i.e. capital and revenue to make it easier for businesses to determine which costs can be deducted in calculating their taxable profits.

Also some types of landlords will benefit from the changes as they will now have a choice to use the cash basis rather than the accruals basis. There is no turnover limit for landlords as their business complexity does not necessarily increase with increased turnover.

Pay as you go

The new rules will allow businesses to make voluntary payments throughout the year towards their tax liabilities. This will help to better manage cashflow and will be allocated against tax liabilities as they become due.

Tax administration

The new system is intended to be easy to understand and give people a chance to settle their liabilities before they are charged any penalties. The consultation proposes a graduated model with each non-deliberate failure to submit information on time attracting penalty points. Only once the points reach a set level would a penalty be charged.

Better use of information

Better use of information will reduce the number of customers who build up under- or over- payments. Customers will see a complete and up-to-date picture of all their tax liabilities in their digital tax account and will be able to use their digital tax account to give information on any additional income to HMRC. 

 

Since the release of the consultations HMRC reported that it has already received more than 300 responses, and professional bodies and other stakeholders have been equally active in compiling feedback from across the profession. The main issues that have emerged include the digital awareness of UK business, as many may struggle to implement MTD, the costs and burdens of adopting new accounting systems and technical requirements for new reporting software. With the consultation response deadline approaching (7 November 2016) now is the time to start engaging with MTD. Although more sceptic voices in the UK already expressed their serious doubts about viability of the project, especially now following the Brexit vote and uncertainty surrounding the issue.

Blog written by Ela Bagan, Accounts and Audit Assistant

Ela Bagan, Accounts and Audit Assistant

Any views or opinions represented in this blog are personal, belong solely to the blog owner and do not represent those of Plus Accounting. All content provided on this blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. 

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