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Making tax digital: The known unknowns

The move towards quarterly reporting has started, but there will be many known and unknown issues to be resolved along the way. A major unknown is whether quarterly tax payments will follow on from quarterly reporting. This matter has not been decided either way by government ministers, or so we were told by HMRC.

The purpose of these early Making Tax Digital events appears to be to educate advisers about quarterly reporting, and to test reactions to the idea of quarterly payments. It was emphasised that quarterly reporting is not about securing a cash flow advantage for the government [much laughter from the audience]. The purpose of quarterly reporting is to modernise the tax administration system and to encourage taxpayers to interact with HMRC on a more current basis.

A further more formal consultation on Making Tax Digital will follow from April 2016 onwards, which will consist of series of events held around the country. HMRC wants to reach out to smaller businesses and their advisers in those events.

Who will report?

All businesses will be required to report at least quarterly to HMRC, this is not up for negotiation. Individuals with secondary sources of income (non-PAYE) of £10,000 or more will also be within scope of quarterly reporting. When questioned on how this £10,000 was arrived at, the answer appeared to be “taxable income”. So a landlord with rental income of £1,000 per month gross, and interest payments of £500, will be brought into quarterly reporting as the interest will not be tax deductible, as the their taxable secondary income will be £12,000 per year from 2020.

When will it start?

The timetable for bringing taxpayers into quarterly reporting is expected to be: For accounting periods or tax years starting after:

Type of business:

Businesses under VAT registration threshold and individuals with secondary income of more than £10,000

5 April 2018

VAT registered businesses

5 April 2019

Companies

1 April 2020

This approach; starting with the smallest and least sophisticated businesses, was challenged by the accountants present as being the wrong way round. HMRC was urged to start quarterly reporting for businesses which have the greatest capability to cope i.e. large companies with in-house tax departments.

What will be reported?

What type of data will be reported quarterly: A summary of receipts and payments or the detail of every single business transaction? – HMRC doesn’t know; as no decision has been made. This response calls into question how HMRC can be negotiating with software providers (see below) as this fundamental point has not been decided.

HMRC believes that businesses won’t have to hire tax professional to do quarterly updates. This implies that all business data items will be submitted (every invoice issued and receipt for expenses), with no analysis of whether the items submitted are tax deductible or not. The HMRC mantra is: “reporting to HMRC closer to real time will reduce errors”. Exactly how more frequent reporting will reduce errors was not demonstrated.
Tax agents’ involvement

Every business will have access to an HMRC digital tax account from April 2016. Tax agents will be able to manage their clients’ digital accounts. Work to give tax agents access to those accounts is being synchronised with Agent Online Self-Serve (AOSS).

At present AOSS is being piloted with tax agents who have no more than 200 clients. HMRC could not say when AOSS will be available to all tax agents, as currently that programme appears to be running behind its predicted schedule.

It was not clear when tax agents will be given access to clients’ digital tax accounts, or even that all tax agents would be given access from the same date. The accountants asked for access to clients’ digital tax accounts from April 2017, when the first businesses are expected to start trailing quarterly reporting.
Software

HMRC is consulting with commercial software providers to provide free software for smaller businesses and for those with less complex tax affairs. There is no definition of “smaller” or “less complex” in this context as yet.

The HMRC vision is that the software will flag-up data items which are potentially wrong and HMRC will send a personalised message to taxpayer as guidance.

Ona accountant asked: What research has HMRC had done as to the types of software already used to record business transactions? It was emphasised that many businesses used spreadsheets, or bespoke software, as there is no commercial software available for their particular form of business, e.g. financial advisers.

Penalties

Will penalties be imposed for late quarterly reporting or for inaccurate reports, or both?

HMRC doesn’t know the answer to this, other than; “there will be a light touch approach.”

VAT

Will the flat rate scheme for small businesses be abolished, and if not, how will it tie into quarterly reporting? – No decision has been made on this.

CIS repayments

The consultation paper on simpler payments promised that tax repayments would be obtained quicker. This implied that off-sets of tax owning and tax deducted such as CIS tax would be made. As CIS repayments are currently delayed for months due to security issues, how are those issues going to be over-come? HMRC had no answer on this.

Conclusion

HMRC acknowledged that Making Tax Digital will be as fundamental an alteration to tax administration as the change to self assessment. For those of us who worked through the move to SA, which also involved a change from the prior year basis to current year basis for the self-employed, the move to digital tax accounts and quarterly reporting appears to be indecently rushed.