Making tax digital
2017 saw some significant changes to the timetable for the UK’s Making Tax Digital (MTD) programme. In this article we consider where MTD is now, and what we might expect to see in the near future.
Businesses need to be aware of the following two key dates:
- April 2019 – digital reporting for VAT (‘Making VAT Digital’) becomes mandatory
- April 2020 – possible introduction of quarterly digital reporting for income tax and corporation tax.
Making VAT Digital
From April 2019, all businesses with turnovers over the VAT threshold (£85,000) will be required to use MTD-compatible software, rather than the current online service, to submit their VAT returns. This will include overseas businesses making supplies which are subject to UK VAT, although they will only need to consider the element of their turnover subject to UK VAT when considering whether they have reached the threshold.
Relatively few businesses – around 12% – currently file their VAT returns via a software package, and it is likely that the majority of these are straightforward. The complexities of the UK’s VAT legislation means that many businesses, even if they use a software package for accounts purposes, will currently use spreadsheets or manual calculations to arrive at their VAT return figures. The shift to digital reporting will not change the information actually reported to HM Revenue & Customs (HMRC), but the changes to underlying record keeping requirements are likely to present a challenge for many businesses.
There will be no requirement to keep underlying records (invoices and receipts) in a digital format. Businesses will, however, need to store transactional information, including the time and value of each supply, together with the applicable VAT rate, digitally. Where a business uses a combination of software packages to keep the required records and generate their VAT return, HMRC’s aim is that – with limited exceptions to take account of the complexities of the VAT regime – information should then flow directly from one software system to the next (ie there should be no manual re-entry of data), to reduce error. For some businesses, this will require a shift to keeping digital records for the first time; for others, the key issue will be ensuring that they can put in place the necessary digital links between their (and their agent’s) software. In practice, this could prove complex for many businesses.
A trial of digital VAT reporting has just started, and we expect a range of different software options to become available over the next few months. Businesses should, therefore, talk to their advisers now to understand the specific steps they need to take and to identify both the best software options and any changes needed to current record keeping processes.
Quarterly reporting for income tax
Quarterly reporting for businesses within the charge to UK income tax was initially intended to be the first key milestone in the MTD for business programme, with a planned start date of April 2018. In July 2017, however, the UK government recognised that the timetable was too tight to guarantee successful implentation, and pushed back the start date until after the introduction of digital VAT reporting. Quarterly reporting for income tax will now not be mandated before April 2020 “at the earliest”.
Once the new rules are introduced, businesses will have to keep records digitally and submit a quarterly update to HMRC, summarising their income and expenses for the quarter. There will be no requirement to include accounting or tax adjustments in these updates, which will need to be submitted within a month of the quarter end. Where a business has more than one trade or property business (or a combination of trading and property income), it will need to keep records and return quarterly information separately for each.
Following the year end, the business will have to submit an end of period statement which will incorporate relevant accounting and tax adjustments and will finalise the business’ position for the year (again, with separate figures for each trade/property business).
The deferral of mandatory quarterly reporting was a welcome step, but has meant that businesses face continued uncertainty about the best way to prepare. Much of the focus – from both software developers and the government – has, understandably, shifted to ensuring that systems are ready to support Making VAT Digital reporting. There has, therefore, been limited progress in the rollout of software packages to support quarterly income tax reporting. A trial has been in progress since last year, and we would expect more software to become available over the coming months, but it is likely that we will only see a strong takeup of these once the government confirms the start date for quarterly reporting.
It seems likely that the UK government will also bring in similar quarterly reporting requirements for corporation tax, perhaps also from as early as 2020. However, to date, there has been no formal consultation on how MTD for corporation tax would work in practice. Companies, therefore, need to continue to watch this space – and be prepared to engage with government once proposals are published.
Digital tax for individuals
Quarterly reporting as outlined above will only apply to an individual’s business income. However, the MTD project aims to digitise other aspects of tax reporting. Individuals can already access a Personal Tax Account, which brings together information such as employment income and state pension details, and which allows the individual to update certain information. Over time, the intention is to feed more data through to these accounts – including details of any partnership income and bank account interest. At the same time HMRC are making more use of data in real time, to – for example – adjust tax codes to take account of changes in-year, meaning that those in employment are more likely to have the correct amount of tax deducted by the Pay As You Earn (PAYE) system.
In summary, the UK may not quite be on track to realise the government’s initial vision of “the death of the tax return” by 2020, but it is on the cusp of significant change in tax reporting and record keeping. Taxpayers need to make sure that they are prepared for the changes ahead.
David McGeachy and Alison Hobbs, Saffery Champness