TT256: Making Tax Digital

April 21, 2017
Company Law Update 2

With less than a year to go until the rollout of Making Tax Digital (“MTD”) there are still a raft of unanswered questions about thresholds and software provision, not to mention the readiness and ability of HM Revenue & Customs (“HMRC”) to support such a radical overhaul of the tax system.

The concept of MTD was first proposed in the Spring Budget of 2015 with a view to simplifying the tax affairs of businesses and individuals alike, and ultimately helping to reduce the so called ‘Tax Gap’ of some £8billion.

Where are we now?

Two years down the line and 6 consultation documents later, the legislation is still in draft and we do not yet have all the facts.  However, what we do know is that MTD is the biggest shake up to the tax system since self-assessment was introduced in 1996 and therefore the sooner we take action the better.  Outlined below are the key dates and requirements of MTD which have been announced to date, as well as some suggested actions to make the transition easier.

Who will be affected and when?

The MTD regime will affect all businesses subject to income tax (this includes property owners, sole traders, partnerships and LLPs) from April 2018.  This is subject to the following exemptions and postponements:

  • Any business with turnover below £10,000 will be exempted from the regime (The Government are still to confirm the exemption threshold and so this may change!)
  • Any business with turnover between £10,000 and the VAT registration threshold (currently £85,000) will have compulsory entry to MTD postponed until April 2019
  • Partnerships/LLPs with a turnover in excess of £10million will have compulsory entry postponed until 2020
  • Those who are digitally excluded due to age, illness, remoteness, religion etc. will be exempted from MTD

VAT submissions will fall into the MTD regime from April 2019 and Corporation Tax from April 2020.

According to the evidence given to the Federation of Small Businesses, under MTD, businesses could spend three times as much on their tax obligations as they currently do, at a cost of approximately £3,000 a year in time, salaries and accountants’ fees.

What are the reporting requirements?

The two main requirements of MTD are to keep digital records and to make quarterly submissions to HMRC.

HMRC are yet to consult on the process for Companies and so the below relates to landlords, sole-traders, partnerships and LLPs only. However, Companies will be brought within MTD in due course.

Digital record keeping

Digital records of all transactions will be required in as close to real time as possible –  HMRC have indicated they would expect transactions to be recorded on a daily basis!

Digital records can be in the form of an electronic bookkeeping software or maintaining a spreadsheet in an appropriate format.  You will not be required to store electronic images of invoices and receipts.

Individuals are only required to keep digital records of trading or property income and expenses.  The designated member of a partnership or LLP will however be required to maintain digital records on behalf of the partnership, including all sources of partnership income.

Quarterly submissions

The transactional data recorded will then be grouped into various categories, as on a tax return, and reported to HMRC quarterly in line with your accounting period end. You will have 30 days from the end of the quarter to submit the data to HMRC.  Submissions can be made by linking your digital records to our agent software, or using the free software to be made available to smaller businesses.

Accounting adjustments, claims and elections, capital gains, partnership profit sharing ratios etc. will all be dealt with via a year end submission to be made by the 31st of January following the tax year in which the accounting period ends, or 10 months from the end of the accounting period if earlier – very similar to what is done now when a Self-Assessment Tax Return is prepared and filed!

What are the benefits to me or my business?

Although the idea of maintaining records daily and making quarterly submission may sound burdensome, we believe there are a number of positives to be taken from the initiative:

  • We will have access to accounting records in as close to real time allowing us to provide proactive business advice rather than responding to historical accounts data
  • As part of the MTD process, HMRC are simplifying many areas of the tax system, including extending use of the simplified cash basis of accounting to landlords and businesses with a turnover up to £150,000
  • HMRC aim to source increasingly more information from third parties, such as banks, reducing the hassle involved with accumulating information to prepare your tax return
  • Based on the quarterly data submitted and information from third parties, you will be provided with an estimate of tax due throughout the year enabling you to make voluntary payments rather than receiving an unexpected tax bill on the 31st of January

What action should I take?

Barnes Roffe LLP have been working on identifying those of our clients who will be affected from each of the staging dates and will be in touch to discuss with you in the near future.  Tailored information leaflets will also be provided to each of our personal tax clients in the next couple of weeks along with our requests for their 2016/17 tax return information.  We will also be hosting a seminar later in the year.

Over the coming months, we encourage our clients to look into the use of cloud based accounting software, if appropriate, and are happy to provide information and recommendations on such packages.  We would also suggest that individuals register for their Digital Tax Account by following the link:  Finally, for those who do not currently use a smart phone, investing in one may not be such a bad idea!

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