Making Tax Digital: Bringing business tax into the digital age
In the sixth of a series of articles on the making tax digital consultations, Philip McNeill, ICAS Head of Taxation (Tax Practice and Small Business Taxes), looks at the ground breaking changes set out in the HMRC consultation Making Tax Digital: Bringing business tax into the digital age.
This is a mammoth document, running to 78 pages and 44 questions. It would be hard to overstate the depth of change. We have mandatory accounting software and quarterly updates to HMRC. Basis periods are revolutionised. Overlap relief goes out. It is the most radical change in twenty years. It comes on a very tight timescale.
Simple and cost saving?
Unincorporated businesses and landlords join MTD from April 2018. There is possibly 12 months’ delay for the smallest businesses, and exemption for gross incomes under £10,000. VAT joins MTD from April 2019 and companies from April 2020. It’s a challenging schedule.
The foreword to the document sets the tone:
‘This reform does not mean ‘four tax returns a year’. In fact, it will eliminate the burdensome annual return and simplify tax for businesses.’
In this context, digital tax means digital accounting. It is hard to see where MTD will save businesses money, but digitalisation and cloud accounting might. The guide, How to create your firm’s cloud proposition looks at how this might work.
The annual tax return disappears, to be replaced by four quarterly ‘updates’ and a year-end submission or declaration. An overview of the main proposals, is contained in the article MTD in ten.
Results for agents
All this has very significant implications for agent workload, resourcing and firm structure. Agents have an opportunity to improve profitability, but there is also a significant risk of being left behind in a rapidly changing market.
Agents: Preparers or reviewers?
The focus of the consultation is on bringing record keeping into real-time, and incorporating tax adjustments (such as for apportionment and disallowable expenses) into the accounting records.
Businesses will use apps and software packages to enter data, and ‘get it right first time’ due to prompts, nudges and the overall constraint of digital accounting.
The role of the professional adviser changes to reviewer, rather than preparer. Digital accounts will be pre-populated with third party data, from banks, DWP and employers. Partnerships profit shares may even be streamed in from the partnership digital tax account.
With adjustments made at the point of data entry, quarterly and year-end submissions become a check and change routine.
This is the ideal. And for straightforward SME businesses which operate on cloud - or large firms - the transition may be relatively straightforward.
Results for business
Businesses with a turnover above £1.5 million, probably need regular management accounts. With in-house staff and external professional advisers, the MTD transition may be within reach.
From £1.5m to the VAT registration threshold, we have a diverse range of business using a combination of accounting package, stand-alone, bespoke and cloud, as well as spreadsheets and paper records.
There is a significant distance for these businesses to travel before they have MTD compliant digital records. Within this group, there are many business sectors where quarterly figures would appear to be of very limited value, or simply an additional and unwelcome expense – both in terms of time and money.
For the non-VAT registered business and individual, the changes required are likely to be even more extensive. A change in lifestyle and attitudes would be needed in many cases.
Help from HMRC
HMRC webchat, virtual assistants, messaging, webinars and tax toolkits take stage front positions. The new policy is ‘one to many’ communication rather than one to one of telephone and face to face.
Quarterly updates are likely to comprise three-line accounts for businesses who are under the VAT registration threshold. More detailed analysis will be required to support this.
The information required for larger businesses is likely to mirror current self assessment requirements. The start date will be delayed for a year (from April 2018) for some smaller businesses – thresholds to be decided.
The consultation document assumes for its examples, that clients will make quarterly updates themselves: the accountant will only be involved in the year-end submission.
Given that most clients have an accountant so that they do not need to make submissions to HMRC themselves, this could a very big gap between HMRC’s expectations and reality.
Quarterly submission will be expected to reflect the taxable profit as closely as possible, and will include an adjustment for the personal allowance. Quarterly accruals accounting would be optional; though tax liabilities based on such figures would be of limited value – an issue that is acknowledged in the consultations, but not resolved.
The position of spreadsheets is undecided (para 2.12. It would seem likely that digital book keeping software, rather than spreadsheets, will the norm.
HMRC is keen to see prompts and nudges within the book keeping package, with a view to error reduction; and the data must feed directly into the business digital tax account from the accounting software – which spreadsheets alone will not do.
Digital records and agents
Client book keeping software will be connected to HMRC’s system, via the client’s Business Tax Account. (see p8 fig 1.2). This contrast sharply with current practice where agents make submission via their own software.
Under the new system, according to the HMRC examples, agents would correct figures within the client’s software (see p49 fig 6.2).
This has significant implications in terms of processes and access. There will need to be an audit trail of amendments to client data (para 5.46). The level of access and functionality which is assumed in the consultation examples can be envisaged on cloud-based systems; but it is unclear how it will work otherwise.
Where clients are digitally excluded, it will be necessary for agents to operate a separate system.
Apportionment and classification of income and expenses
Businesses will be expected to apportion income and expenses between business and private elements and to separate deductible / non tax deductible expenses in their accounting records. This will be done before making quarterly submissions.
For SME businesses, this potentially pushes what is normally a year-end task carried out by the accountant, into one undertaken on a transactional basis by the client.
Clients generally may not feel confident to make this sort of adjustment. It’s therefore likely to mean earlier and more real-time engagement for agents: and consequently more expense.
The consultation assumes that ‘nudges’ within the software will enable businesses to make such decisions. This does not generally match practitioner experience. Businesses have an agent so they don’t need to make cutting-edge decisions and judgment calls.
Getting involved – influencing the outcome
This is a long consultation paper, but it is worth reviewing.
The gaps are as important as the text itself. Look at the impact assessment, from p67 onwards. This indicates potential savings to business of £250 million and increased tax revenue mounting to £625 million by 2020-21.
The impact of all these changes is likely to vary greatly between different businesses and accounting practices. Your view is vitally important.
HMRC is running webinars on MTD. You can register for these, as well as for face to face and other events on the Gov.uk website. Recording of previous sessions are also available.
To be part of the ICAS response, please let us have your comments at firstname.lastname@example.org and complete our short poll below.