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Making Tax Digital is Going Live

Thanks to Ian Fletcher FCA, of 2020 Innovation Training Limited for this up to the minute article.

This is the most fundamental change to income tax since the introduction of the self assessment tax system in 1997.    

On the 31 January HMRC announced a policy statement summarising the 1200 consultation responses it had received. See Article Here

HMRC also announced MTD legislation will be included in the Finance Bill 2017. See Article Here

BRINGING BUSINESS TAX INTO THE DIGITAL AGE

HMRC comment:

“Respondents overwhelmingly support the move to a digital tax system. The main concerns raised focused on: the pace of change the capability of the smallest businesses and those who struggle with digital technology to adapt burdens on businesses agents’ ability to access digital services to support their client’s data security when using third party software”

The result is that:

Businesses will now be able to continue to use spreadsheets for record keeping, but they must ensure that their spreadsheet meets the necessary requirements of Making Tax Digital for Business – this is likely to involve combining the spreadsheet with software (The importance of retaining the ability to keep records in this way was requested by a wide range of stakeholders, particularly small businesses); Businesses eligible for three line accounts will now be able to submit a quarterly update with only three lines of data (income, expenses and profit); Free software will be available to businesses with the most straightforward affairs; The requirement to keep digital records does not mean that businesses have to make and store invoices and receipts digitally; Activity at the end of the year must now be concluded and sent either by ten months after the last day of the period of account or 31 January, whichever is sooner; Charities (but not their trading subsidiaries) will not need to keep digital records; For partnerships with a turnover above £10 million, Making Tax Digital for Business is deferred until 2020.

On the matter of initial exemption threshold and deferring the changes for some small businesses, HMRC state:

“Given the range of views expressed on this matter from respondents to the consultation, the government will take more time to consider these issues alongside the fiscal impacts. Final decisions will be made before legislation is laid later this year.”

TAX ADMINISTRATION

The consultation covered proposals for compliance powers and for late submission and late payment penalties. It proposed that current interest rules for Income Tax and Class 4 National Insurance Contributions should continue to apply and asked for views on the possible alignment of interest rules across tax regimes. On the matter of late submission penalties HMRC state that more work is required in this area.

HMRC state:

“Having considered the responses to the proposals for late submission penalties, we recognise that more work needs to be done and will look again at this. We can confirm that in order to support customers during the transition to Making Tax Digital for Business, customers will be given a period of at least 12 months before they are charged any late submission penalties.

Most respondents considered penalty interest to be the most attractive proposal for a late payment sanction. Current interest rules for Income Tax and Class 4 National Insurance Contributions will continue to apply. We will now consult further on specific proposals for late payment penalty interest and the alignment of interest rules in 2017”.

SIMPLIFYING TAX FOR UNINCORPORATED BUSINESSES 

As far as simplifying tax for unincorporated businesses, HMRC concludes that:

“The vast majority of respondents supported the objective of simplifying the tax system. Some were concerned about the timing of the reform in this consultation and whether businesses have the capacity to understand multiple changes at once. The government has chosen to proceed with two of the measures published in the consultation. The measures being taken forward are increasing the entry threshold for the cash basis to £150,000 and simplifying the rules on capital and revenue expenditure within the cash basis to make it easier for businesses to work out whether their expenditure is deductible for tax.”

Further consultation is being given to the reform to the basis period rules and measures to simplify period end reporting requirements.

UNINCORPORATED PROPERTY BUSINESSES

On the cash basis accounting for unincorporated property businesses, HMRC comment:

“Although a majority of respondents supported having no entry threshold for using cash basis, others felt that the cash basis is not suitable for the largest unincorporated property businesses and that we needed a threshold. The government has therefore decided to include a maximum rental income threshold of £150,000 per property business. This excludes only 0.5% of businesses, leaving approximately 2.36 million eligible businesses with up to 1.8 million expected to benefit from the administrative savings of using cash basis.”

 VOLUNTARY PAY AS YOU GO

This consultation looked at options for those businesses, self-employed people and landlords required to use digital record keeping to make and manage voluntary payments of their tax throughout the year. It considered how voluntary payments will be allocated across different tax bills, explored the best way of dealing with the repayment of voluntary payments and the opportunity regular updating provides to make earlier repayments.

The majority of respondents wanted voluntary payments to be easily and speedily repayable.

HMRC have decided that a repayment will not be repayable shortly before a liability becomes due only if the customer failed to pay on time in the previous 12 months.

HMRC agrees that early repayments are better left until Making Tax Digital for Business is fully embedded.

They will allocate voluntary payments against tax liabilities as they arise, instead of the customer and decided to proceed with their proposal on payment allocation despite reservations from respondents.

They state:

“We believe this will reduce the need for customers to have to access their digital tax account to tell HMRC where payments should go. We will ensure that robust allocation rules are in place and publicly available.”

TRANSFORMING THE TAX SYSTEM THROUGH THE BETTER USE OF INFORMATION

This consultation focused on how HMRC will make better use of the information they currently receive from third parties to save customers providing information they already hold and to provide a more transparent service.

In 2017 HMRC will start to use PAYE information during the tax year to calculate whether the right tax is being paid.

They state:

“In the short-term, customers will still receive letters directing them to their digital account to check this, but in future, customers will be prompted digitally to check their tax account.”

HMRC have been working with third party information providers and individual customers on co-designing a process for resolving queries when a customer believes the information provided by a third party is incorrect. They will continue to use customer feedback and engage with stakeholders to ensure that this process is clear and easy to use.

HMRC will gradually adopt a phased approach to using further sources of third party information and will seek to make better use of information we already hold.

SUMMARY

HMRC proposals mean Digital Tax will become a reality. There are still areas from their consultations that need clarifications and further research, however, all accounting firms should start preparing for MTD and ensure they educate their clients on these proposals and take action now to ensure a smooth transition to the Digital world.

Author: Ian Fletcher FCA, 2020 Innovation Training Limited.

Article extracted from Gov.uk website Click Here

 

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