Following recent consultation, HMRC is pressing ahead with its Making Tax Digital (‘MTD’) reforms, albeit with a few key elements still to be decided.
The new system is designed to convert the vast majority of taxpayers into the online tax world, enabling income and expenses to be reported digitally to HMRC every quarter via new software.
MTD is expected to reduce tax errors by 10% and the quarterly nature of reporting should enable taxpayers to plan for their tax payments more effectively. There will even be an option for making quarterly payments on account which is likely to prove popular with sole traders and smaller businesses looking to smooth their cash flow.
Some key points:
Reporting under MTD is due to start in April 2018 with sole traders, partnerships and landlords the first taxpayers to switch to the new system. Limited companies will comply with MTD from 2020.
How do I report under MTD?
Income and expenditure will be reported to HMRC via compliant software. It is expected that HMRC will provide free software for smaller, less complex businesses and this may include an excel-style data capture which represents a relaxation of the original proposals. Whilst details are not yet known, we expect there to be software apps available for download, capturing data from expense receipts and similar which go on to form part of the quarterly reporting figures.
What if I get it wrong?
The penalties for error are expected to be less severe in the first year as taxpayers get used to the new system. Going forward taxpayers will find HMRC will apply penalties as stringently as at present.
Is this the end of the tax return?
There will still need to be adjustments made at the end of the year as not all expenses are eligible for tax relief, for example.
Is there a threshold before MTD applies to me?
It’s looking like businesses and landlords with a turnover of less than £10k per annum will be exempt from reporting under MTD.
MTD is a hugely ambitious and revolutionary new system which many smaller businesses are likely to struggle with initially. The objectives are good but the tight timescale means that many businesses are likely to fall short of the new requirements.
If you would like to discuss how Making Tax Digital affects you, please call [email protected] or call Helen on 01527 558539.