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Making Tax Digital – what you need to know

1st February, 2017

HMRC’s Making Tax Digital initiative is gathering momentum and it is important that those required to comply are prepared. Nottingham chartered accountants Clayton & Brewill explain what’s involved and how you can ensure you and your business are ready for the changes ahead.

Making Tax DigitalWhat is Making Tax Digital?

Making Tax Digital is HMRC’s plan to modernise and simplify the tax system, by moving to a digital system.

The plan is that all taxpayers will have access to a secure digital tax account, like an online bank account, where they will be able to interact with HMRC.

You will be able to register, file, pay and update your information at any time of the day or night, and at any point in the year, to suit you. The vast majority, will no longer need to submit the dreaded annual tax return.

When is the new system being introduced?

HMRC are introducing the new digital tax system using a phased approach to allow taxpayers time to adapt.

Individuals and many small businesses already have access to their digital tax accounts and HMRC has already started using real-time PAYE data to reduce end- of-year under and overpayments, by changing tax codes in-year.

From 2017, HMRC will further develop its use of real-time data — checking income, benefits-in-kind and personal allowances each month to make tax code adjustments that will help avoid under and overpayments altogether.

It was initially planned that from April 2018, some businesses, those who are self-employed and landlords with a turnover over £10,000, would be required to update HMRC at least quarterly where it is their main source of income (or a secondary source of income above £10,000 and their main income is from employment or a pension).

However, the government announced at Spring Budget 2017 a one-year deferral for unincorporated businesses and landlords with turnovers below the VAT threshold. This means that only those businesses, self-employed people and landlords with turnovers in excess of the VAT threshold with profits chargeable to Income Tax and that pay Class 4 National Insurance contributions will be required to start using the new digital service from April 2018. The rest will follow in 2019.

By 2020, most businesses, self-employed people and landlords will be required to keep track of their tax affairs digitally and update HMRC at least quarterly using their digital tax account. The full range of HMRC services will also be available through the accounts.

What’s the impact for individuals?

All taxpayers will be presented with a complete financial picture of their tax affairs in their digital account, enabling them to see and manage all their liabilities and entitlements together in one place.

By 2020, the full range of tax and child benefit services will be available for taxpayers to access from their digital account. The system will also automatically send prompts through secure messages e.g. when someone has a baby or approaches retirement. The new system should simplify things.

Through the current system those who pay tax through PAYE, often pay too much or too little and have to wait until the end of the tax year to resolve the issue, which can be frustrating. The new system will eliminate this reducing end-of-year under and overpayments.

If you are self-employed you will no longer have to wait until the end of each tax year before knowing how much tax you should pay, avoiding any surprises and helping you to plan your financial affairs with more certainty.

The fact that the system will use real-time data will be of particular benefit to taxpayers with more than one job or those with low or fluctuating income, many of whom contact HMRC regularly to change how their personal allowances are shared between jobs and pensions

What’s the impact for businesses?

From April 2018, businesses, self-employed people and landlords with turnovers in excess of the VAT threshold will need to start updating HMRC quarterly using the new digital system.

Currently, it is estimated that 75% of businesses do not maintain their accounts electronically or use accounts software. This means that 1,000s of businesses will need to adapt to using digital technology to ensure they have the digital records of their trading and transactions. Putting in place new technology, and the associated processes, is likely to be a huge barrier for many businesses. Although, many may find that once the initial monetary and time investment has been made, it makes their life easier.

The main benefit of the new digital system is that businesses should not have to wait until the end of the tax year, or even longer, before knowing how much tax they should pay; making it far easier to budget and keep their affairs in order throughout the year.

Will I have to upload all my information to get started?

No, taxpayers should not have to give HMRC information that it already has, or should be able to get from elsewhere — for instance, from employers, banks, building societies and other government departments.

Taxpayers will see the information that HMRC holds through their digital tax accounts, and be able to check at any time that their details are complete and correct, with the ability to update if needed.

Do I have to comply?

Individuals who are in employment or pensioners will not be required to update their information quarterly, unless they have secondary incomes of more than £10,000 per year from self-employment or property.

All self-employed businesses or landlords with a turnover or total income of less than £10,000 a year, won’t have to keep digital records or provide information quarterly, but can do so if they wish.

Charities will not be required to comply. Along with those businesses who can genuinely not go digital –  although this area is yet to be clarified by HMRC.

What do I need to put in place to ensure I am able to provide the required quarterly updates?

Those who are required to comply with the new quarterly update requirements, will need to ensure that they keep full electronic records of all their transactions. HMRC have recently stated that records can be kept on spreadsheets, but these will need linking to software to automatically generate and send the relevant updates.

Many businesses will benefit from utilising specially designed software and apps, to assist them in maintaining accurate records that can be fed to HMRC. It is important to ensure, at the outset, that these tools are compatible with the HMRC system to ensure the process is streamlined.

Since publishing this article there has been various changes to HMRC’s Making Tax Digital plan. You can find out more here.

Clayton & Brewill can help you navigate the new digital tax system, helping you to make  the necessary changes to efficiently and effectively manage your financial and compliance requirements. Please contact us to discuss how we can help ensure you’re equipped for the changes ahead.

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