A massive change in the way tax is handled in the UK is coming in the next two years as HMRC strives to be more efficient and makes tax compliance “Digital”. This change will affect the vast majority of taxpayers, businesses and landlords who either currently file Self-Assessment Tax Returns or, because of the recent changes to the rules regarding investment income being taxed at source, are about to have to file from 2016/17 onwards.
The basic principles behind “Making Tax Digital” from April 2018 are that:
- You shouldn’t need to tell HMRC details that they should already have, for example, salaries, taxable benefits or bank interest;
- HMRC becomes a one-stop tax shop enabling all taxes to be handled at one contact point within HMRC through your Digital Tax Account and some of these are being rolled out in limited form already;
- You can offset an overpayment in one tax against a liability in another, for example a VAT overpayment against income tax;
- You can keep up-to-date with your taxes throughout the year as adjustments;
- You will have the option to make four income tax payments throughout the year; and
- Fewer end-of-year Self-Assessment Tax Returns will be required
The above principles are all well and good but HMRC is not going down this route alone – there is work involved for everyone. Firstly, you will still have to tell HMRC about anything it wouldn’t know about automatically (for example foreign income, most capital gains, gift aid, claims and elections, etc – doesn’t that still feel like a Tax Return anyway?) and check to make sure that what HMRC has is accurate (no comment). More importantly, some fundamental changes will be needed in the way some businesses and landlords keep records:
- You will need to make a quarterly submission of your income and expenses to HMRC;
- Each quarterly submission must be made digitally.
These two requirements will mean that any business or landlord who prepares their records annually, using manual records or Excel will need to adapt. This could mean supplying the information to your accountant more regularly for upload, or if going it alone, using one of the approved software applications which are being rolled out over the next two years.
Different businesses will be affected at different times. The planned timetable is currently:
- April 2018 – Businesses under the VAT threshold and individuals with secondary income above £10,000 pa;
- April 2019 – VAT registered businesses;
- April 2020 – Companies
You will note that individuals with secondary income such as rental income or self-employment greater than £10,000 will effectively be classed as businesses and will be required to account quarterly whereas those with secondary income below £10,000 will be allowed to continue to file annually and with simpler record keeping. HMRC has yet to announce what would happen in the circumstances where your income fluctuates annually across this threshold or if you had a sudden one-off burst of additional income pushing you from being an “individual” to a “business”. One would hope a degree of leniency would be built into the system in due course.
So what should you do? There is currently a lot we do not know. Therefore, the best advice for now is to be aware that this is coming. If you are a landlord or are in business, start getting in the habit of keeping your records up to date quarterly at the very least. Software is being developed but as yet HMRC themselves are not fully ready so updating your computer programs is not something on the critically urgent list of things to do. After all, HMRC’s record on massive computer projects is not that great so the proposed timetable may yet slip in a few cases. If in any doubt, discuss your current record keeping with your accountant or tax adviser who will be at the forefront of preparing for the changes.
For further information on any of the above points or to discuss your tax affairs generally, please do not hesitate to contact Robin Beadle.