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The long-awaited consultation documents on how HMRC see Making Tax Digital (MTD) working in more depth have finally been released. Emily Coltman FCA, Chief Accountant to FreeAgent – who provide award-winning cloud accounting software – gives a summary of what this means for small businesses and their accountants:
At this stage, the Making Tax Digital proposals only apply to sole traders and partnerships – the consultation doesn’t address limited companies or their directors, which will be covered in a separate consultation later this year.
HMRC is also proposing that Making Tax Digital would only apply after £10,000 annual income or turnover, so a sole trader with one small business that makes sales under £10,000 a year would be exempt from MTD. However, a sole trader with two businesses, each making sales of £6,000 a year, would have to comply with MTD, because his/her total income for the year is £12,000.
HMRC has clarified that “The small minority who genuinely cannot use digital tools will not have to do so,” for example due to religious reasons. Also excluded are those for whom “online filing is not reasonably practicable for reasons of disability, age, remoteness of location, or any other reason”. HMRC consider that anyone with access to 2Mbps broadband or faster will be able to send their updates online.
As promised by the government, Making Tax Digital would not require businesses to file four tax returns every year. Instead, businesses would send summary data to HMRC about their business each quarter, or more often if the business prefers. The summary data would consist of total income and total expenditure, with the expenditure broken down into categories such as travel and advertising.
Businesses would need to send this information from online accounting software such as FreeAgent – HMRC has confirmed that they will not be providing their own bookkeeping / accounting software and that the use of “digital record keeping software that links to and updates business’s digital accounts with HMRC” will be mandatory, except for taxpayers who are exempt from MTD. The business won’t have to keep any additional paper records.
Each business will have a proposed nine months after the year end to file an “End of Year declaration”, submitting final figures. This would be a month less than the current tax return filing deadline, which is just under 10 months after the end of the tax year, and would potentially mean accountants are very busy in December rather than January!
HMRC believe that the cash basis of accounting should be extended to larger businesses, as this will be simpler for them to use. It has suggested doubling the current entry threshold, which matches the VAT registration threshold – so a business would be able to begin using the cash basis of accounting if it has sales up to £166,000, using today’s VAT registration threshold.
MTD is planned to start in April 2018, but for the smallest businesses that come within its scope, a year’s extension has been suggested. Again, the threshold for what “smallest businesses” means has yet to be set so we’ll need to wait for more details.
HMRC is not planning to change the current payment dates, but they have asked as part of the consultation if they should review the payment on account regime, to which I would give a resounding “Yes” as they are complicated and can severely compromise a small business’s cash flow in its early stages.
Under MTD, businesses may have the right to make “voluntary payments” towards their tax liabilities, which would be aggregated together. HMRC has tentatively suggested it may need to be warned of upcoming voluntary payments.
HMRC is proposing to abolish the current penalty system for late submissions and instead impose a “points” system similar to driving licence penalty points, with a financial penalty to be imposed only when the points reach a set level. That level is suggested as four points, with the slate cleaned 24 months after the last points were added.
We would encourage you to read the consultations for yourself and give your feedback to HMRC.
If you’d like to provide further information to your micro-business or freelance clients FreeAgent has put together this handy guide to Making Tax Digital for you to share.
To find out more about how FreeAgent can help you prepare for Making Tax Digital, visit their website or call 0800 025 3900.