Making Tax Digital – Bean Counter’s view

Making Tax Digital – The views of the Helpful Bean Counter

Background

The reasons for the change according to HMRC’s website are the following:

  • Making Tax Digital (MTD) is a key part of the government’s initiative to transform HM Revenue and Customs (HMRC) into a world-leading, digital tax authority, reducing the burden for individuals and businesses to keep on top of their tax affairs, with digital tax accounts meaning the end of the annual tax return for millions.
  • The majority of businesses want to get their tax right, but the recent tax gap figures show too many find this hard. The amount of tax not collected due to taxpayer error and carelessness has risen to over £8bn a year.
  • HMRC needs to do more to help businesses get their tax right up front rather than tackling them once things have gone wrong. That will reduce the likelihood of errors, lowering the chance of unwelcome compliance checks and giving businesses greater certainty.
  • The introduction of digital record keeping and quarterly updates for the majority of businesses will take out around 10% of error, and lay the foundations to go further with digital nudges and prompts to help improve voluntary compliance. It will also give businesses a clearer view of their tax position in-year.
  • MTD also brings the tax system into line with what businesses and individuals expect from other online service providers: a modern digital experience.
  • Last year more than one million small businesses accessed digital help and support from HMRC.
  • The government believes that, for the majority of businesses, the transition to the new system will be straightforward because they already use digital tools on a regular basis, for instance, online banking, and and/or keeping their records digitally and sending HMRC data quarterly, for example, Value Added Tax (VAT) returns.

Overview from the Helpful Bean Counter

The above are the views expressed by HMRC. Do you agree? Or do you feel this is another step towards more State control and bureaucracy? I will try to keep our comments as clear as possible, but this is a major change and the legislation is complex.

MTD will be introduced over the next 4 years. Unlike most tax and legislative changes, it is normally the larger organisations that implement the change first. With MTD the Government has highlighted the tax gap or shortfall being due to small businesses, and they are the organisations that will be affected by the change first. This includes unincorporated businesses (sole traders / partnerships) and landlords. Please refer to our comments on the implementation dates.

The most significant impact will be on those businesses that keep basic accounting records. For example, a trader that maintains a simple spreadsheet and a file of invoices, or where we receive a bag of receipts and if we are lucky a few bank statements. This will no longer satisfy the requirements of HMRC!

All businesses, except those defined as small (Sales less than £10,000 per annum), must keep records that record individual customer transactions. An exception is made for retailers, who are only required to keep daily cash takings! All records must be connected to a digital record, such as your bank account.

Based on these records you will need to provide HMRC with quarterly financial information via their online website. At this point in time we have not been able to determine the information that will be required, but it is reasonable to assume it will be include basic categories of income and expenditure, and some balance sheet information, such bank balances.

So I hope you agree this is a significant change and will require even very small businesses, such as landlords, internet traders, small market traders, building trades and many hobby based businesses to keep up to date accounting records.  All records must be connected to a digital record, such as your bank account.

HMRC would like to see all businesses with their own accounting systems. In anticipation of MTD most of the accounting software companies have products that are aimed at the small company market. Many of these are cloud accounting packages, which can be linked to the business bank accounts. They can also prepare customer invoices and record digitally costs and other expenses. HMRC have also agreed that spreadsheets, such as MS Excel can be used, so long as they are able to record digital bank transactions and comply with their standards (to be announced!)

We feel it is important that you contact your Accountant before MTD is introduced to discuss the best options for your business to record their accounting transactions. We can provide advice on most of the cloud and non-cloud accounting packages.

The implementation of MTD(following changes in the 2017 Budget)

I will ignore involvement in the pilot, although if we have clients who want to get involved we are willing to help.

The first key period is April 2018. This will be for those unincorporated businesses (not companies) whose sales are above the VAT threshold, which in the tax year 2017/18 is £85,000. These businesses and landlords will have to provide a quarterly return to HMRC of the information required under MTD commencing from the start of their accounting period, which is called the staging date. For example, if their accounts are prepared to the 31 August, then the first MTD return will be for the quarter to 30 November 2018.

The next key start date is April 2019. Firstly, all unincorporated businesses and landlords with sales over £10,000 will need to comply with MTD. Secondly, all businesses (including companies) will need to comply with MTD if they are VAT registered.

For accounting period commencing after April 2020 all companies will have to comply with MTD.

As already stated MTD will require all business categories to provide quarterly digital financial information to HMRC. In addition to MTD the following tax information will also be required digitally:

April 2018 starters – Will also provide information for Income Tax purposes, such as self assessment.

April 2019 starters– Companies registered for VAT will only provide VAT information. Unincorporated businesses will provide Income Tax and VAT.

All Companies from April 2020 will also provide Corporation Tax digitally.

It is assumed that quarterly MTD returns will need to be prepared by the same deadline as for the VAT returns. Within 5 weeks of the quarter end. The business will also prepare an annual return, as well as complying with other reporting requirements, such as Companies House submissions. The final annual position must be submitted to HMRC no later than 10 months after the end of the accounting period.

We will keep our clients aware of the actual reporting deadline once they are announced.

Key implication for our clients to consider

  1. Responsibility for compliance with MTD is with the business owner, rather than your Accountant. We are happy to discuss with you how MTD will impact on your business.
  2. How to maintain your records.

You must keep a record of all your business transactions. In many cases the primary record will be your business bank account, and should be directly linked to your accounting records. Based upon current information from HMRC there is no requirement to hold scanned images of invoices, sales or purchases. For many businesses it is suggested that they use an accounting package to hold your transactions. We can help you evaluate what is the best solution for your business, from a regularly updated excel spreadsheet to a cloud accounting package, such a Xero, Sage or Quickbooks (and many others).

  1. Do I need to consider changing my accounting year end date?

There may be some advantage in changing your accounting period before your staging date (the date you start to prepare quarterly MTD information), as it could delay the start of the MTD reporting. The basis or accounting period will however be apportioned over the tax period, so it is unlikely to create any tax saving.

It was mentioned during the HMRC webinar that they are considering removing the basis period for unincorporated businesses, so that your accounting period would be the same of the tax year.

  1. Relationship with local adviser / accountant

The fundamental change is that all businesses need to keep the accounting records up to date. Not a data gathering exercise at the year end! By keeping the records up to date and reporting financial statement on a quarterly basis, many businesses will require a closer relationship with their Accountant. It is hoped that the closer relationship will be of benefit to both parties

  1. Increase in Accountants fees

There will be more involvement with the client and the additional reporting requirements may involve increasing our fee. We hope to counter to this by improving your book-keeping processes so that the records are up to date and this should simplify the year end reporting

Quarterly billing

For many smaller clients, the relationship with their Accountant is only once a year. This obviously will change, unless the client is able to deal with the quarterly reporting. We believe it would be reasonable to move our clients onto quarterly billing.

Conclusion

To sum up, this is a significant change in the reporting requirements of small businesses. Although, MTD does apply to larger companies from April 2020, they already have more comprehensive reporting requirement and will either employ that own tax advisers or use the services of the large firms of Accountants. As stated by the HMRC objectives their aim is to find the missing £8bn not collected caused by ‘tax payer’ errors, and their target is small business and landlord sectors.

It will also be a cultural change for small business owners, in that they must keep their records up to date. Real time to use the jargon. Many small businesses keep a basic record, perhaps they list their receipts and payments on a simple spreadsheet. Not all small businesses have a dedicated bank account, and the transactions are processed through a mixture of personal bank accounts and credit cards. This will need to change if the information is to be reported upon quarterly to HMRC. It is the view of the Helpful Bean Counter that all businesses need to look at their processes for recording transactions. Certainly, it will be helpful to have a dedicated bank account and it may be worth considering using an accountancy package to record all the transactions. We can provide advice on improving your procedures.

On a recent HMRC webinar on MTD a question was asked why HMRC wants quarterly financial information, as at least in the short term as it is not being used for tax collection purposes. Their view was a little confused, but their main reason was to ensure that businesses owners maintain up to date accounting records.

The 2017 budget has already delayed the start of MTD for businesses whose income is below the VAT registration threshold. We would not be surprised if there are not further delays. Once the processes are established there will be severe penalties for non-compliance, but the early message from HMRC is that they will be relaxed during the early stages of MTD. But we at the Helpful Bean Counter believe it is important that our clients carefully consider the implications to their business now to ensure that they have the right processes to comply with the requirements.

Views of the Helpful Bean Counter

31 March 2017

Contact for help: info@helpfulbeancounter.co.uk

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