This is the new initiative by HMRC for which the consultation document has come out. Consultation will close 7th November with draft legislation in December and the start of implementation in 2017 with full implementation as from 5 April 2018 with all taxpayers on stream by 1st January 2019.
It will apply to all taxpayers both business and SA taxpayers. For businesses it will be a major change to the way they relate and report to HMRC.
In this article we will only address Make Tax Digital (MTD) as it is applicable to businesses.
The MTD for businesses will apply to all businesses with a turnover greater than £10,000 p.a. Submissions to HMRC must be made quarterly with a 5th adjusting submission 9 months after the financial year-end. Submissions must use commercial software. The free HMRC software has been withdrawn. Micro businesses used to keeping their records on spreadsheets which are submitted to their accountants once a year will now be required to purchase software or alternatively submit data to their accountants to use their software, quarterly. The rationale for commercial software is that the software providers must link to the HMRC software so that “prompts” can show on the software if HMRC thinks there is incorrect data entered or tax arrived at. HMRC calls it “assistance”. Is letting HMRC prompt you a good method to arrive at your tax liability?
The danger here is if you ignore the prompt and HMRC uses that to investigate then if HMRC is right you will incur penalties. HMRC has indicated they will initially use the soft approach to get all on-board.
In any event there will be an additional cost to the business. Estimates are an extra 25% to the current accounting fees.
For those businesses who are on the accrual system they may adjust the data by the accruals or if preferred leave it till the 5th adjusting submission. As the intention is that you pay corporation tax quarterly this may mean that you over or underpay tax in any quarter. This is not as yet clear but as HMRC has talked about getting the tax in earlier it will happen. Losses in one quarter will be allowed to be carried forward to the following quarter. HMRC will not penalise you for simple errors unless it is found that figures were deliberately adjusted to minimise the tax.
The intention is to have the quarterly reporting for CT purposes align with VAT periods where the entity is registered for VAT. The quarterly period start will be determined by the first financial year-end of the company. This would be the first quarter after a year-end as from 5 April 2018.
HMRC will not look at the data in detail only in summary. That is essentially the trial balance. However, one of the motivations of HMRC is to close the tax gap they think exist of £5 Billion which they think is due to SME’s poor record keeping so they will scrutinise the submissions for items which may give rise to a tax charge or a tax penalty. Typical would be where a company pays exactly the same dividend each quarter to a director – a common occurrence, which can then be classed as deemed salary especially, as is the norm, the Boards minutes/resolutions are missing. Another example would be where directors loan accounts are in debit and no S419 tax payment was made.
A further complication is that in the past the statutory accounts would be drafted and this with adjustments in the tax return sent to HMRC. This now will not be the case with the quarterly submissions plus the adjusting 5th submission being the only submissions made. The alignment of the statutory accounts and the Company Tax return has been broken. So a whole separate exercise must still be done for the statutory accounts to be drafted with the abbreviated to Companies House.
This initiative is not unique to the UK as some other jurisdictions have similar digital tax returns. However, concern is expressed by the professions to the low threshold and the speed of implementation. As the software developers only now have sight of the full intention they must still write the software with accountants having to become familiar with it as will the tax payers. Recommendations are therefore to extend the implementation by one year.
With regards to the threshold more than 75% of accountants feel it’s too low and should be £25,000 or preferred the VAT threshold, currently £83,000.
Irrespective and whichever way the legislation will turn out, businesses will have to up their game as to record keeping as it is a major change and accountants, businesses and software developers have only 2017 to familiarise and test systems. One cannot be too early in the planning of quarterly reporting and getting one’s record keeping sorted
The foregoing is just a brief extract from the 112-page consultation document (plus appendices) and should only be used as a warning to act. For detailed advice one should contact your accountants.
If you would like to discuss your business taxes further you can also get in touch with me at firstname.lastname@example.org