By Phil Ellerby

Making Tax Digital is a key initiative for HM Revenue and Customs (HMRC) as part of their vision to modernise the whole tax system.

In order to make it easier for businesses and individuals to get their tax affairs right, every individual in the UK now has a digital tax account.

For many years, HMRC has allowed personal and business tax information to be submitted in many different ways, including via payroll submissions, information from the Department for Work and Pensions (DWP) and securely online.

Businesses and some individuals also complete an annual Tax Return called a Self-Assessment, which substantiates the information received from the third parties.

But some big changes are on the way!

Because HMRC want to rely less on the traditional end of year Self-Assessment Tax Returns and more on third party information via our digital tax accounts, all businesses and many individuals will be legally obliged to keep digital records and send HMRC quarterly updates.

Making Tax Digital will allow the tax man to collect ‘real time’ information that is 100 per cent up to date – with the ultimate intention of abolishing Self-Assessment for many individuals.

Although the introduction of this legislation has been delayed previously (and it could happen again), the likelihood is that this WILL be implemented sooner rather than later!

That’s why we want to let you know what’s happening and the timetable for the changes over the coming months and years.

What are the main Making Tax Digital changes?

  • The biggest change is paper records will no longer be acceptable in the UK
  • Keeping digital records will become the law
  • Digital records and digital filing of quarterly reports will be mandatory
  • You must provide quarterly updates of income and expenses online
  • After the end of the fourth quarter, a year-end statement will be required, pulling together all of the submissions made. This provides the opportunity to make any final adjustments.

Who will be affected by Making Tax Digital for Business (MTDfB)?

Individuals, businesses and landlords of residential properties where the gross income is less than £10,000 will be exempt from Making Tax Digital for Business (MTDfB).

Anyone who is not able to engage digitally for religious reasons, or due to a factor such as age, disability or location (e.g. no availability of broadband) is also exempt.

Everyone else will be affected by the changes to the way information is reported.

It is the current understanding that property businesses will make MTDfB statements on a quarterly basis for the business as a whole, rather than by individual property. The addresses of each property let will be required to be reported, but the gains on sales will only need to be reported on the year-end statement.

When will MTDfB apply to you?

Making Tax Digital for Business (MTDfB) will be phased in depending on the accounting period start date. Businesses with a turnover above the VAT registration threshold applicable on 1st April 2018 will be the first to be affected.

Your entry date will be the first day of your accounting period which starts after the date in the table below:

*Further consultation is underway to clarify the entry points of companies and large partnerships

ǂ Dates are subject to change

Will penalties be imposed if you fail to comply?

The new tax system does not change the dates on which tax liabilities are due to be paid.

There will NOT be any penalties imposed for the first 12 months after entry to MTDfB as the Government adopts a soft-landing approach for everyone to become familiar with the new tax system.

But, after a period of further consultation, they are planning to impose fines for non-compliance or late submissions.

How can you prepare for Making Tax Digital?

The introduction of Making Tax Digital basically signals the end of manual record keeping as we know it.

When the new regime comes into action, businesses and individuals who are affected could face a tax deadline or VAT submission in most months of the year.

As a proactive accountant who helps clients with record keeping, this could mean spending more time working on accounts – leading to additional charges potentially being incurred.

The easiest and simplest way to reduce this risk of incurring extra charges is to use Xero, Quickbooks, Carbon, Sage or one of the many other pieces of software available online.

Even if you are a business which only uses an accountancy professional once a year to submit Year-End Accounts for approval, you could still face increasing costs if you do not embrace this technology.

HMRC are currently running a pilot scheme for businesses who wish to ensure their procedures are working well prior to their official entry date. If you feel it is beneficial to be part of the pilot, please get in touch.

If you’re a business which is comfortable with technology and you regularly file your payroll, Automatic Enrolment and VAT submission online you may simply want a discussion about your obligations and procedures to ensure you are compliant with the new regulations.

Other small businesses and landlords with residential properties may require more support. You may even want us to deal with all of the MTDfB submissions for you. Whatever help or support you need, please call 0113 2189552 or get in touch to arrange a meeting – we’ll be happy to advise you about how to lessen the impact of these substantial changes on your business.