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Digital Tax Returns - what will the changes mean for you?

Matthew Grief

You’ve probably seen the headlines such as ‘the end of the Tax Return’ and heard the Government talk about ‘reducing the burden’ for tax payers by building a ‘transparent and accessible tax system for the digital age’, but you may not be aware of what the changes will mean for you.

The Government’s ‘Making Tax Digital’ (MTD) initiative was announced in the last Budget and is designed to transform ‘tax administration so it is more effective, more efficient and easier for tax payers.’  By 2020, the Government says, ‘for the vast majority of tax payers there will be no need to fill in an annual tax return.’

Instead, from April 2018, tax payers will be required to submit information to HMRC electronically each quarter with an annual review to confirm accounting adjustments and submit final year-end figures. 

The plans for the changes are currently out for consultation, and we will of course provide updates as and when more information is available.

Who is affected?
  • Currently businesses, the self-employed, individual taxpayers, pensioners and landlords lie within the scope of the current consultation. 
  • Limited companies aren’t included, and will be covered in a separate consultation exercise.
  • Small businesses with a turnover of less than £10,000 a year are exempt from the Making Tax Digital scheme.
What’s changing?
Under the new regime, businesses will need to send summary data to HMRC about their business each quarter.  This will include total income and total expenditure with the expenditure broken down into categories such as travel and advertising.

Businesses will need to send this information to HMRC using online accounting software. (HMRC has confirmed that they will not be providing their own bookkeeping/accounting software.)  The use of online software will be mandatory, (except for taxpayers who are exempt from MTD), paper returns will no longer be accepted.

Each business will have a proposed nine months from the year end to file an ‘End of Year declaration’ submitting final figures. This is a month less than the current tax return filing deadline which is just under 10 months after the end of the tax year.

If the businesses needs to make accounting adjustments, such as revaluations of closing stock then this could be done either mid-year or at the end of the year.

There will still be a requirement to submit an annual review to confirm accounting adjustments, tax relief claims and to submit final year-end figures.  This will be essential to ensure you mitigate your overall liability to tax.

Allowances and reliefs, such as the Annual Investment Allowance for example, could also be notified to HMRC either in-year or at the end of the year – so for instance, if an asset has been bought, the suggestion is that HMRC could be informed at the time the asset is bought that it’s going to be eligible for the Annual Investment Allowance.

HMRC has suggested that the cash basis of accounting should be extended to larger businesses as this will be simpler for them to use.  It proposes doubling the current entry threshold (which matches the VAT registration threshold) so that all businesses will be able begin using the cash basis of accounting if it has sales up to £166,000.  This is yet to be confirmed however.

The payment of tax deadline will not change (however, this may be a precursor to future developments in this area.)  Taxpayers will be able to make voluntary payments sooner than the deadline if they wish.

What happens if a deadline is missed?
HMRC is proposing to abolish the current penalty system for late tax return submissions and instead impose a points based system with a financial penalty to be imposed only when the points reach a set level. That level is suggested as four points, with the slate cleaned 24 months after the last points were added.  Penalties for inaccurate information will only apply to the End of Year update and quarterly VAT returns.

In the first year after launch there will be a ‘soft landing’ for the penalty regime, meaning penalties won’t be in full effect.

Timetable for changes
  • Taxpayers have been able to access their digital account and to communicate with HMRC digitally since April 2016. 
  • From 2017 onwards, HMRC will develop the RTI (real time information) payroll/PAYE system to incorporate benefits-in-kind and to check income and personal allowances. This will enable tax codes to be adjusted more quickly to prevent over or underpayment of tax.
  • From April 2018 businesses, landlords and the self-employed will have to update HMRC quarterly.  However there is a suggestion that this may be delayed to 2019 to allow for more time to prepare.
  • By 2020, HMRC are aiming to have businesses and individual taxpayers able to register, pay their taxes and update their information online at their convenience.  Taxpayers will be able to see their entire tax position in once place.
How Moore can help
We have been assured by HMRC that as your agents, we will be able to view your digital account information online on your behalf and check that this is correct.  The advantage of having more up to date information available means that we will be in a position to provide regular advice and guidance on your current tax position than previously.

We are monitoring the proposals and will update you as HMRC’s plans take shape. We will be able to offer advice on the best software provider for you and give training on how to make the submissions or even deal with the whole process on your behalf – letting you get on with the day-to-day running of your business.