Making Tax Digital – will you be ready?

HMRC issued six Making Tax Digital consultations in August 2016 which outlined its plans to modernise the tax system. The main proposal under consultation was the need for over 5 million businesses with turnover over £10,000 and those receiving rental income from properties, to submit quarterly updates of their business activity to HMRC digitally. The requirement is to keep records digitally using a method that is compatible with the MTD programme. HMRC have stated that they will publish a list of providers who offer compatible services. HMRC initially stated that free software would be available for this but so far details have not ben announced.

On Monday 20 March 2017 the draft Finance Bill was published confirming plans to go ahead with quarterly direct tax reporting for unincorporated businesses (sole traders) and landlords with turnover over the VAT threshold (£85,000 from 2018/19 tax year) from April 2018. Initially this will affect sole traders, landlords and the self-employed.

Those who are below the VAT threshold will have to start mandatory quarterly reporting from April 2019. Partnerships with fee income above £10m will have a deferral to April 2020, aligning them with limited companies which also begin quarterly filing from April 2020.

All VAT registered businesses irrespective of turnover levels will have to report VAT through the new system from April 2019 as current arrangements will be superseded and any online or paper submissions outside the Making Tax Digital IT system will not be permissible. At Budget 2017, the Chancellor confirmed that businesses will be able to continue to use spreadsheets for record keeping (a concern for many VAT registered traders who are partly exempt) but their software must be able to interact with those spreadsheets so that the requirements of digital reporting are met.

The £10,000 turnover entry limit is not mentioned in the bill so it appears that this may still be up for debate as part of the ongoing HMRC consultations.

Agents/accountants

The MTD process for agents is still being refined by HMRC. At the moment it appears that agents will be required to register for Agents Services to allow them to act on behalf of their clients under MTD. To register for this they will need to request a new “clean” set of user credentials from the Government Gateway and carry out a mapping process in order for any existing 64-8 relationships to be carried over to these new set of credentials.

Charities

The Government has confirmed that it will introduce legislation to exempt charities from the Making Tax Digital requirements. It is important to note however, that charities are exempt only from these new reporting requirements and clarification is being requested from HRMC on the process for charities managing their existing ongoing tax reporting requirements,

However, the Government has decided that charity trading subsidiaries should be within the scope of the MTD obligations. The Charity Tax Group had called for trading subsidiaries to be included within the exemption as a charity will often use a subsidiary to make its activities tax effective or to accommodate any trading activities, often a requirement dictated by administrative, legal and financial practicalities. As the charity is responsible for the administration of the subsidiary, processes and staff resources are often shared across the organisation. Therefore, if a charity subsidiary was required to comply with these rules, it would mean that the charity would have to operate two systems (which adds complexity) or consider maintaining digital records for the whole charity group, undermining the proposed exemption. CTG has also questioned how this will work with a charities registered with a subsidiary in a VAT group.

MTD implementation timeline

April 2017 – public testing opens

April 2018 – businesses with turnover above VAT threshold £85k

April 2019 – expanded to cover VAT Reporting and self-employed small businesses with turnover above £10k

April 2020 – corporations and partnerships with turnover above £10m