For those in the profession, the start date of April 2018 for the first businesses to come within Making Tax Digital (MTD) has always seemed overly ambitious, and doomed to failure or delay. The Government and HMRC are determined that it will succeed, but unsurprisingly the delays are beginning to creep in.
As a reminder, the idea of MTD is that virtually ALL businesses (including landlords) will need to update HMRC digitally, on a quarterly basis, with much of their accounting information. The idea is that fewer mistakes will be made when we do things more regularly and that this will be easier for taxpayers as it will give them more certainty about their tax liabilities. We fear the reality could be very different, with taxpayers being forced to adopt compatible accounting software, and an increased compliance burden, especially for the smallest, non-VAT registered businesses.
The first hint of delay came when the consultations were delayed for the Brexit vote. However, it has taken several more months before there has been an acceptance that more time is needed, and we now understand based on comments by Jane Ellison, Financial Secretary to the Treasury, that many extra small businesses will not have to start their quarterly reporting until April 2019.
So, we may have some much needed breathing space, but what new hints do the consultations tell us about the proposals for the new regime:-
- Businesses will have to have “digital record-keeping software that links to and updates the business’s digital accounts with HMRC”. This software will be commercial; HMRC will not be providing free software, even for the simplest of businesses;
- Businesses will be able to pay their tax early based on quarterly data, if they so choose. This will not be compulsory. The normal payment dates will still apply before any interest is charged;
- There will be no “transactional level data” in the quarterly uploads;
- Accounting adjustments such as accruals and prepayments, and tax adjustments such as entertaining and capital allowances should be “optional” in quarterly uploads, even if not using the cash basis for annual filings. This is why we are assured that this is not about filing four tax returns a year;
- The cash basis for small businesses is to be extended to those with slightly larger turnover, and also to rental businesses (the latter being very positive, although higher rate interest restriction will still apply);
- A single upload will cover accounting and VAT, with filing dates aligned at one month after quarter end (currently one month + 7 days for VAT);
- There will be flexibility to update on different dates, but never more than three months apart;
- End of year activity will need to include appropriate accounting and tax adjustments, and could be completed with the final quarters filing (presumably only in simple cases), but otherwise there will be nine months to file;
- Unincorporated businesses and landlords with annual combined business income below £10,000 are expected to be exempt;
- Further exemptions are to be considered for the digitally excluded (do I fall into this category by living in the Suffolk countryside?!), charities and CASCs (although possibly not their trading subsidiaries) and insolvency practitioners;
- A nominated partner will file on behalf of partnerships, and this data will flow automatically through to the individual partners, removing the need for a partnership tax return;
- The “basis periods” for unincorporated businesses with different year ends will be reformed. In future you will be allowed as many accounting periods as you like, and just be taxed on accounting periods ending in the tax year. This would enable a seasonal business to file accounts for different seasons if they chose. It is not yet fully clear what this will do to existing overlap relief.
Although I am sure some very simple small businesses will benefit from increased certainty, for many, the unadjusted quarterly figures will be too inaccurate so the whole exercise appears to become somewhat pointless for taxpayers. The sceptic in me questions whether there is a benefit for HMRC either, especially if they don’t have transactional level data to help them with enquiry work. The reduction in time limit for annual filings is likely to bring the standard January rush to Christmas time, so I would ask HMRC where their Christmas spirit is?!
All this is likely to change the relationship between accountants and their smaller clients. In future, I expect to see a much more collaborative approach, with adviser and client increasingly working together via cloud-based accounting systems. Advisers will need to adapt, if we are to continue to service our clients in the best way possible.
We are increasingly setting up clients with online accounting solutions that will transition well into MTD. However, at the moment, we need to know more before we can finalise the services that we will offer to clients to help them comply. However, as ever with Ensors, the key will be flexibility from us, so that we can help you work in a way that suits you. This will range from simply supporting clients who will fully adopt an online accounting system and do most of the MTD work themselves, to offering a complete in-house MTD service for those who still want to turn up with a brown paper bag!