AUGUST 2016 - Making Tax Digital; The Reincarnation of the Tax Return
In his 2015 budget, the then Chancellor George Osborne boldly announced the death of the annual Tax Return. Further details of the possible changes, under the “Making Tax Digital” banner, have recently been released and while the previous reports of the death of Returns appear to be greatly exaggerated, there will be somewhat of a rebirth.
For many, smartphones and the internet has taken over the way they deal with banks. The same change will now apply to dealing with HMRC. There are many potential advantages with this: dealing with tax becomes more straightforward and clear for taxpayers; HMRC have more and better information and so are better able to clamp down on those that do not pay their taxes.
Under the new rules there will be a requirement for businesses (including sole traders and landlords) to make “updates” to HMRC at least once a quarter. The quarterly reporting is (or rather is intended to be) light touch, and involves providing income and expenditure totals to HMRC electronically. The knock on implication is that taxpayers will need accounting software that links directly with HMRC’s system. It is important to choose the right software in the first place and to be able to use it (or to get help from those that do!) There would be a tight one month deadline for submitting these quarterly updates.
HMRC will not be producing their own software to allow taxpayers to meet their obligations under the new regime. Instead it will be necessary to use software provided by third parties. French Duncan has already embraced such systems, in particular cloud accounting software, and can provide the help and guidance needed to put these in place. Under the new regime, it will also be important that your accountants have the ability and experience in dealing with these systems.
In all but the simplest cases, there will still be the need to finalise the figures, which sounds suspiciously similar to lodging a Tax Return. This will be at least annually and is in addition to the quarterly updates. At this stage it will be important to consider matters such as claiming capital allowances, considering loss relief and other such matters which often have a large impact on the tax position. There is likely to be a deadline of 9 months from the end of their accounting year, which is intended by HMRC to allow time for your accountant to deal with any adjustments required.
The new reporting system will apply from April 2018. There is therefore not much time before the new rules come into effect to put in place new software and procedures. However, it is worth bearing in mind that quarterly reporting will not be required where turnover is less than £10,000 and there will be a delayed introduction for businesses with turnover above that figure, but below a to-be-announced threshold. There are also likely to be some other exemptions from the new rules - this includes those that would struggle to deal with the requirement for digital reporting due to age, disability, connectivity or religious reasons.
In addition to the new rules on reporting business profits, changes are to be introduced to the way business profits are calculated and taxed. This will include penalties that apply for late filing of the quarterly returns.
HMRC will aim to obtain more information from third parties in order to build up the picture of each taxpayer’s liabilities that are currently collated on the Tax Return. This will firstly involve better use of information it already holds, such as details of pension and employment income and bank interest. The second stage is for them to start obtain information on investment income and dividends. This is a larger change and it is unclear how it will work, or indeed what the procedure is for notifying HMRC of the omissions or inconsistencies which are likely to arise. There would also be the necessity to claim certain reliefs or report other matters that are personal to the taxpayer, such as residence information. It is difficult to see how this could be collected other than by some form of annual return.
In many ways these changes add up to a welcome modernisation of the tax system, with less requirement for transferring figures from one form to another. However, while the Tax Return will hopefully be a less imposing beast to tackle in the future, it is one that is far from dead.
If you would like to discuss, please click here to get in touch or call 0131 225 6366.