27 Apr 2017

Making Tax Digital

31 January 2017

HMRC has published the responses to the Making Tax Digital consultation:

Making Tax Digital for Business - An overview for small businesses, the self-employed and smaller landlords

Business Income Tax: Simplified cash basis for unincorporated property businesses

Business Income Tax: Simplifying tax for unincorporated businesses

 

See foot of this page for links to individual response documents.

The £8bn tax gap is mentioned by HMRC as part of the reason for introducing a digital tax system, although the department believes that about 10% of this will relate to errors that should be reduced under MTD.

The department says there was ‘broad support’ for MTD among the 3,000 responses, but acknowledged concerns on the pace of change, cost and that the smallest businesses will struggle to adjust to the new system.

Two aspects of MTD have yet to be decided on:

  • the appropriate level for exemption from MTD; and
  • the time to prepare.

Responses on these points will be announced before legislation is placed before Parliament later this year.

It is understood that spreadsheets will still be able to be used for record-keeping, but this must comply with digital requirements, which probably means compatibility with MTD software.

Businesses that are able to submit three-line accounts will still be able to submit information under MTD in a three-line format.

Free software will be available for businesses that:

  • have a turnover below the VAT threshold;
  • have no employees; and
  • use the cash basis.

The cash basis will be available to unincorporated businesses and unincorporated property businesses with a turnover below £150,000. HMRC estimate that more than two million property businesses will fall within that limit.

 

Penalties

On the subject of penalties, there will be a ‘soft landing’ for at least a 12-month period.

 

Costs and testing

HMRC estimates that there will be an average implementation cost of £280 for the first year, but a ‘small saving’ thereafter.

The department has been undertaking ‘private beta testing’ of software in readiness for testing from April 2017. Over the next year, the testing will apply to an initial small group of businesses gradually expanding to several hundred thousand businesses.

 

 

HMRC Press release

HMRC’s press release says:

 

‘Digital tax revolution moves a step closer

More information has been published today on how businesses, the self-employed and landlords will benefit from government plans to modernise the tax system.

Following extensive consultation, with more than 3,000 responses over the last eight months, HMRC has issued in-depth details on how digitising the tax system through its flagship Making Tax Digital project will help millions of businesses to get their tax bills right first time, without the need for an annual tax return.

Alongside draft legislation, HMRC has also published its responses to the six consultation documents issued in August 2016. After listening to the concerns of businesses and agents, HMRC can now confirm that under Making Tax Digital:

  • businesses will now be able to continue to use spreadsheets to record receipts and expenditure, which they can then link to software to automatically generate and send their updates to HMRC; this was requested by a wide range of stakeholders, particularly small businesses and the Treasury Select Committee
  • free software will be available to the majority of the smallest businesses
  • businesses that cannot go digital will not be required to do so
  • all self-employed businesses and landlords with a turnover under £10,000 a year will not have to keep their records digitally or make quarterly updates, but can do so if they wish
  • the option to account for income and expenditure on a simple ‘cash in, cash out’ basis will be extended, helping an extra 2.5 million self-employed businesses and unincorporated landlords
  • charities will not have to keep their records digitally or make quarterly updates
  • customers will have at least 12 months to become familiar with the changes before any late submission penalties will be applied; following feedback from respondents, HMRC will also consult again in the spring on a new penalty model

HMRC will pilot these digital systems with hundreds of thousands of businesses before rolling them out to ensure the software is user friendly, and to give businesses and landlords time to prepare and adapt.

HMRC also confirmed that the government will need to consider further issues, such as the initial exemption threshold and deferring the changes for some small businesses alongside their cost, with final decisions to be made before legislation is introduced later this year.

During the consultation period, HMRC ran a series of public events across the country and online to hear views direct from businesses and agents. It also ran a short online survey for small businesses on some of the key questions from the consultations, which received over 1,200 responses.

Under HMRC’s plans to move recording and paying your tax online, most businesses, self-employed people and landlords will be able to keep track of their tax affairs digitally and update HMRC quarterly by 2020. This is part of the government’s commitment to make the annual tax return a thing of the past for millions of people and businesses.

With millions of businesses already banking, paying bills, shopping and interacting online, integrating tax with the day-to-day running of a business is a natural next step.

This will help businesses steer clear of errors – reducing the £8 billion a year cost to the public purse, get their tax bills right first time, and give them a clearer view of their tax position as they go through the year. Reducing the amount of avoidable errors will also reduce the cost, uncertainty and worry that businesses face when HMRC is forced to investigate them.

Director General, Customer Strategy & Tax Design, HMRC, Jim Harra said:

“We know that the majority of businesses want to get their tax right first time, but the latest tax gap figures show that too many find this hard, with more than £8 billion a year lost in tax as a result of avoidable taxpayer error by small businesses.

“Making Tax Digital will help businesses to get their tax right first time; it will help reduce the likelihood of errors, lower the chance of unwelcome compliance checks and give them greater certainty that they are getting things right.

“There were more than 3,000 responses to the consultations and I’d like to thank everyone for their time and effort. We are pleased that there was a broad welcome for the principle of Making Tax Digital and HMRC developing a transparent and accessible tax system fit for the digital age. The appetite for digital services is growing and traditional paper-based processes make no sense in the 21st century where the vast majority use digital services.”

HMRC will continue to work closely with stakeholders, including small businesses and agents, to ensure their views are reflected in the development of making tax digital.’

 

For further information: https://www.gov.uk/government/collections/making-tax-digital-consultations

 

Links to HMRC response documents

Making Tax Digital

Making Tax Digital for Business – An overview for small businesses, the self-employed and smaller landlords

 

Bringing business tax into the digital age

This consultation considered how digital record keeping and regular updates should operate.

Making Tax Digital: Bringing business tax into the digital age

 

Simplifying tax for unincorporated businesses

This consultation asked for views on:

  • changing how the self-employed map accounting periods onto the tax year (reform of basis period rules)

  • extending cash basis accounting to larger businesses; reducing reporting requirements for businesses

  • removing the need to distinguish between capital and revenue for businesses using cash basis accounting

Business Income Tax: Simplifying tax for unincorporated businesses

 

Simplified cash basis for unincorporated property businesses

This consultation considered the extension of cash basis accounting to landlords.

Business Income Tax: Simplified cash basis for unincorporated property businesses

 

Voluntary pay as you go

This consultation:

  • looked at options for customers covered by the requirement for digital record keeping to make and manage their voluntary payments

  • considered how voluntary payments will be allocated across a customer’s different taxes

  • explored the best way of dealing with the repayment of voluntary payments.

It also announced the opportunity regular updating provides to make earlier repayments.

Making Tax Digital: Voluntary pay as you go

 

Tax administration

This consultation covered aspects of the tax administration framework that need to change to support Making Tax Digital. It also set out proposals to align aspects of the tax administration framework across taxes, including the simplification of late filing and late payment sanctions.

Making Tax Digital: Tax administration

 

Transforming the tax system through the better use of information

This consultation focused on how HMRC will make better use of the information we currently receive from third parties to provide a more transparent service for customers that reduces end of year under- and over-payments.

Making Tax Digital: Transforming the tax system through the better use of information

 

Simplified cash basis for unincorporated property businesses

 

Simplifying tax for unincorporated businesses

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