Several years ago, HMRC announced they had big plans bringing the tax system into the 21st Century with something they called Making Tax Digital (“MTD”). Admittedly, at the time, I was somewhat surprised. After all, I have not submitted much by paper to HMRC for years. VAT returns, payroll, self-assessment tax returns, corporation tax return and most other compulsory filings can all be done via online portals or using software that communicates directly with HMRC. So, what were they planning to change?
The simplest way to explain it is that HMRC wants everyone to be filing their returns via digital software. Rather than transposing numbers from a spreadsheet directly into the portal and keeping paper records of transactions, HMRC’s belief is that there will be fewer mistakes if people use bookkeeping software (or some other digital record-keeping). Apparently, fewer mistakes will lead to there being more tax being collected – which conveniently forgets that a mistake could be both ways and a taxpayer could just as easily be overpaying tax. (Unless HMRC is suggesting there is something more deliberate about the way mistakes are made, which is a completely other issue.)
As much as HMRC does a lot of frustrating things, this seems a wholly sensible idea. The advances in bookkeeping software, especially cloud-based platforms like Xero and QuickBooks, means that there are plenty of options for taxpayers that will genuinely help stopping mistakes. Gone are the days where you have to dig through a pile of receipts just before the filing deadline. Now, you buy a coffee when you’re on a work trip and you can take a picture of the receipt then and there, uploading it directly into your software. Some will even analyse the details of the invoice for you and save you the effort of typing it in manually.
Other perks of software packages include:
- They also allow for more professional invoicing and automatic reminder for payment.
- Recurring invoicing can be automated to go directly to the customer.
- They can connect directly to a bank account so you never miss a transaction again (although it helps if you are using a business bank account to avoid analysing loads of private transactions).
- They are cloud based, so you can access it anywhere in the world.
- This also means your accountant can jump in and help with any queries you might have.
- The reporting should help you (and your accountant) save time when it comes to filing tax returns.
Granted, there is usually a monthly subscription cost for these software packages, but I would argue they are well worth it. If (and it’s a big if) you are using software correctly, the time saved for advisors could also save costs elsewhere, so a bit of time (and money) spent on training initially should be worthwhile too. And don’t forget, this is going to be a big life saver when MTD comes in.
A former colleague said that the name “Making Tax Digital” was misleading and should be instead called “Making Accounts Digital”, but then the acronym would then be “MAD”, which would be too easily ridiculed (especially if mishandled by HMRC). For me, the most logical name for the scheme is “Making Bookkeeping Digital”, as that is what HMRC are really pushing for; they want you to have digital books and records that allow for more regular submissions to them.
If you are wondering when this will happen, well, it already has been introduced for VAT registered businesses with turnover above the mandatory registration (currently a threshold of £85,000). If you are unsure about what VAT is, I recently wrote about it here. For all other VAT registered businesses (i.e. those that have registered voluntarily), it will come into force in April 2022. All VAT returns for these businesses are now being submitted via MTD compatible software.
The MTD plans are being introduced in phases for different types of taxes. They started with MTD for VAT, next is MTD for income tax from April 2024 (only just delayed from 2023) and, finally, they’ll introduce MTD for corporation tax from 2026. (It seems odd they are prioritising income tax over corporation tax when companies typically have better accounting systems and external advisors, but perhaps they think there are more tax errors to be unearthed in income tax filings.)
So how will the MTD for income tax work? Essentially it will be similar to the current system for VAT, i.e. the taxpayer will be required to submit quarterly tax returns to report their taxable profits. There will still be an annual filing on top of these four returns to confirm everything is correct (or adjust otherwise), so annual accounts should still be prepared and reconciled to the quarterly returns. The principle is that quarterly returns require more regular bookkeeping and therefore fewer mistakes. (As I keep saying, mistake can be both ways, e.g. one consequence is that purchase invoices will not be lost in the shoe box so will actually benefit the taxpayer as they won’t forget to make the claim.)
There has been no mention of changes to tax payments, which is currently every six months (on 31 January and 31 July), but I would not be surprised if HMRC moves to quarterly payment dates once the MTD systems are established. Personally, I have no major objection to this as it will help smooth out taxpayers’ cash flow and will mean they are less likely to spend all their tax bill before it is due.
MTD for income tax will be mandatory for anyone who has profits in excess of £10,000, so this will impact the vast majority of self-employed people. Landlords are also included if their rental profits exceed £10,000.
Obviously, for those unrepresented taxpayers, this is a big increase in their compliance burden. It will take non-VAT registered business from one filing per year to five and therefore will incur added time and energy. There will also be the cost of the digitally compatible software itself. For represented taxpayers, us accountants do not work for free (sorry), therefore it is likely there will be greater fees involved. In that, I should stress, that while the bookkeeping software is great, it does not replace the skill, experience and expertise of an accountant or bookkeeper. Simple businesses might be able to handle compliance just using bookkeeping software, but there is a reason why (most) accountants have to pass so many exams – accounting is rarely simple.
One point to make, especially if you have some understanding of the existing systems – the filings from your software will not give HMRC unfettered access to your books and records whereby they can inspect every transaction. It will still be the headline figures as already submitted for VAT returns and income tax returns. However, if they were to initiate an enquiry, it is likely the first thing they would request is a detailed report from the software that should reconcile to the figures you submitted. Any failure in doing so could result in penalties for incorrect bookkeeping (i.e. you cannot simply put in totals directly into software as a workaround).
I should say, that HMRC will accept digital records kept in a spreadsheet but there will still need to be some bridging software that takes the raw data and submits it to HMRC. My personal opinion is this is clunky, will still come at a cost and has none of the added functionality a purpose-built bookkeeping platform has. There are plenty of software options available at varying prices – often discounted if you go through an accountant – so do your research and make sure you’re ready for MTD.
Tax law is constantly changing, so the issues discussed here might now be out of date. Each taxpayer is different; therefore, we recommend that you consider your options carefully with an expert before taking any action.
If you want to discuss any of the above, or any other matter, just give us a call on 020 7183 3383 or email info@kma-spotlight.com.
