Recently, a number of our offices have taken questions surrounding HRMC's "Making Tax Digital" initiative. One of the most commonly asked questions is, "how will Making Tax Digital affect my small business?". We will discuss the HMRC initiative, address that very question and take a look a case study, showing you that moving your tax affairs online can be a simple process and managed quite easily by your local TFMC accountancy office.
Stuart Masters, of The Financial Management Centre says …
“It’s more important than ever that accountants empower their clients when it comes to online bookkeeping and managing their cash flow. At The Financial Management Centre we believe in offering our services as business advisors and accountancy consultants rather than double entry bookkeepers. The accountancy world has changed significantly over the last 10-15 years and at last HMRC is catching up. Making Tax Digital will allow our offices to focus on business growth for their clients.”
What is "Making Tax Digital"?
In the March 2015 Budget, the government announced its vision for the future of taxation – a bold plan of modernisation aimed at making it easier for individuals and businesses to manage their taxation on an ongoing basis and spelling the end of the dreaded annual tax return for millions. Initially, the aim was to get everyone "digital" by 2018, but during consultation in 2016 a number of queries arose that meant a slight delay for some was announced in the Budget 2017.
The government is committed to "transforming tax by 2020" and the aim is for ALL individuals and businesses to be able to login to their HMRC account day and night to register, file, pay and update their information at any point during the year. This means that most people and businesses won't need to file an annual tax return. Taxpayers will be able to log into their digital account and manage their financial affairs and plan in almost 'real time', avoiding the inevitable surprises that come with annual tax returns.
The 4 Foundations of the transformed tax system of 2020
The plan is for HMRC and the UK Taxation System to be fully reformed by 2020. To enable this, HMRC have conducted 6 consultations during 2016 and received over 1200 responses from a variety of sources.
HMRC have laid down 4 foundations which will form the framework and guidance during the Making Tax Digital transistion …
Taxpayers should not have to give HMRC information that it already has, or should be able to get from elsewhere — for instance, from employers, banks, building societies and other government departments.
Taxpayers will see the information that HMRC holds through their digital tax accounts, and be able to check at any time that their details are complete and correct. HMRC will use this information to tailor the service it provides, according to each taxpayer’s individual circumstances. In 2016, HMRC will consult on how information from more third parties might reduce the reporting burden on taxpayers.
Making tax digital for businesses
Businesses should not have to wait until the end of the tax year or even longer before knowing how much tax they should pay. HMRC will collect and process information affecting tax in as close to real time as possible, to stop tax due or repayments owed from building-up.
From April 2018, businesses, including everyone who is self-employed and those letting out property, will update HMRC at least quarterly where it is their main source of income (or a secondary source of income above £10,000 and their main income is from employment or a pension).
Tax in one place
At the moment, most taxpayers cannot see a single picture of their liabilities and entitlements in one place. HMRC is changing that.
By 2020, taxpayers will be able to see their complete financial picture in their digital account, just like they do in their online banking. And they will be able to set an over-payment of one tax against the under-payment of another: it will feel like paying a single tax.
Making tax digital for individual taxpayers
Individual taxpayers will interact with HMRC digitally, and at any time to suit them.
By April 2016, every individual and small business will have access to a digital tax account. The digital accounts will present individual taxpayers with a personalised picture of their tax affairs, along with prompts, advice and support through webchat and secure messaging.
The End of the Tax Return
Does "Making Tax Digital" spell the end of the tax return? Pretty much. In 2015, HMRC processed 10.2 million tax returns and they plan to see that number rapidly hit zero by 2020/21. They believe that almost everyone will be able to manage their tax and financial affairs online and most small businesses will have made the transition to using digital/online tools to submit their information at least quarterly to HMRC by 2018 with only a few issues to be resolved later.
A new system of online billing will be in place to collect outstanding tax which cannot be collected through PAYE and the need for self assessment will disappear.
People in employment who have a secondary income of more than £10,000 per year through self-employment or property will also be required to use the digital service.
January – June 2017
- Testing starts for digital reporting of income from letting property
- New online billing system begins
- Taxpayers able to report additional sources of income through their digital tax account
July – December 2017
- Digital tax accounts show taxpayers an overview of their tax liabilities in one place
- Automatic tax code adjustments prevent PAYE under and overpayments
January – June 2018
- Interest paid by banks and building societies starts to be shown in digital tax accounts
July – December 2018
- Most businesses, self-employed and landlords start updating HMRC quarterly for income tax and National Insurance obligations through their accounting software
- Taxpayers who currently report their Child Benefit to HMRC no longer need to do so
- Go Live for most businesses, self-employed and landlords start updating HMRC quarterly for VAT obligations through their accounting software
- Capital Gains Tax on the disposal of residential properties needs to be paid within 30 days
- Most businesses, self-employed and landlords start updating HMRC quarterly for Corporation Tax obligations through their accounting software (also for partnerships with turnover greater than £10m
- The full range of HMRC services are available through digital tax accounts
** Update **
Unincorporated companies and businesses with an annual turnover below the current VAT registration threshold (£83,000) now have until April 2019 to prepare before Making Tax Digital becomes mandatory, allowing them more time to prepare for digital record keeping and quarterly updates.
HMRC have created 3 case studies which give a good overview of the benefits of and changes involved in Making Tax Digital. Click on the image to view them.
What does "Making Tax Digital" mean for small businesses?
In short, HMRC is planning to have ALL your taxation 'online' by April 2018, although some of the transition may not be completed unti 2020/21. You should plan on having to submit your tax return 'digitally' in April 2018 and you will have to submit digitally from that date. These changes will for some, be minor, but for others they will be significant. We recommend speaking to your local TFMC accountancy office asap, as you may need to move to an online bookkeeping system during 2017. If nothing else, we will be able to give you the right advice to prepare for this significant change.
Businesses, self employed people and landlords with a turnover of under £10000 are, at present, exempt from these requirements.
If you would like to find out more about HRMC's Making Tax Digital and how it will affect your business,
call The Financial Management Centre free, on