Making tax digital consultation: How will it impact your practice?
Philip McNeill, Head of Taxation (Tax Practice and Small Business Taxes), gives his initial reactions to the Making Tax Digital consultation documents.
HMRC has finally launched its suite of Making Tax Digital (MTD) consultation papers
And very dense reading matter they make.
Let’s note, though, at the very outset, that practitioner concerns about the system have – to a degree – been heeded. HMRC is listening to input about how MTD can be made to work.
So please email us with comments and suggestions and consider making a reply to the consultation documents, to make the profession’s voice heard.
MTD, it seems, isn’t going to come in alone. As the proposals at present stand, it is going to bring with it a raft of other measures – billed as ‘changes to the underlying tax rules.’
Hence traditional basis periods, overlap relief, and opening and closing year rules could all become things of the past, with the possibility of non-annual basis periods instead. Quarterly – even monthly – tax basis periods are mooted as one route forward. Further coverage of these points on the ICAS website will follow.
Then comes the digital change. And for most businesses with an adviser, this looks set to mean four quarterly updates, and a year-end reconciliation. The quarterly update will be performed within a month, and there will be nine months allowed for the final submission.
Inter-relating agent and client
‘Bringing business tax into the digital age’ focuses on small – mainly unrepresented business. The role of agent seems to have been tagged on almost as an after-thought.
In the proposals currently put forward, digital record keeping will be mandatory for businesses and landlords with gross income over £10,000. This means, at the very least, all cash book transactions for any business using the cash basis of accounting (3.11).
Spreadsheets are still a vexed issue (2.12). There still has to be a final verdict here. But given that agents will need to adjust client records, it’s probably more likely than not that represented businesses will need digital book keeping software rather than spreadsheets.
In the new regime, a client’s book keeping software would connect, via their Business Tax Account, to HMRC’s system (p.8 fig 1.2). In the examples HMRC gives, agents then correct figures within the client’s software (p.49 fig 6.2). This is a radical change from the current position where an agent would make submission via their own software.
There are big questions about access involved here. Cloud-based systems could certainly accommodate the level of access and functionality on which this is all predicated. How it could work otherwise is uncertain. Software access and compatibility will also be important considerations. Processes will need to adapt to create the audit trail of amendments to client data required (para 5.46).
Businesses under the VAT registration limit will probably submit an update in the form of a three-line account. Greater detail will be required to back this up, however.
Larger businesses are likely to need to prepare information similar to current self assessment requirements.
This will be introduced from April 2018, although we are told that there will be a year’s delay for some smaller businesses. Which businesses will be eligible for the delay is yet to be decided.
Quarterly submission will be expected to reflect the taxable profit as closely as possible. It will include an adjustment for the personal allowance.
Quarterly accruals accounting would be optional – although tax liabilities based on such figures would have only limited value. This is something that is acknowledged (but not resolved) in the consultations.
In HMRC’s fictional case studies in the consultations, quarterly submission is done by the client on their own. Agents appear only at the year-end.
Whether this is a workable arrangement, or a complete misunderstanding of the reality of business remains to be seen.
Your Institute needs YOU
There are 12 weeks to put a coherent case to HMRC in reply to these documents. Your input on points like those above would be invaluable. The importance of practitioner opinion and experience cannot be overstated.
The system still needs shaping in very key areas. With your input, it will be the more robust.