Plugging The Tax Gap? Making Tax Digital
Guy Smith takes a look at some of the key features of making tax digital, with the pilot due to launch shortly, including HMRC ‘prompts’ and ‘nudges’.
Making tax digital (MTD) is going to radically change the administration of tax in the UK. By 2020, every individual and business will have access to a digital tax account and the annual tax return will have been abolished.
At the 2015 spending review, the government announced it would invest £1.3 billion to transform HMRC into one of the most digitally advanced tax administrations in the world.
There were three objectives underpinning the announcement:
- the government was keen to see a reduction in the tax gap and an increase in tax yield;
- it wanted tax to be simpler for individuals and businesses to get right first time, thereby reducing the scope for errors contributing towards the tax gap; and
- lastly, it wanted the changes to result in sustainable cost savings at HMRC.
Against that backdrop, what is the impact of MTD going to be on individuals and businesses?
Individuals will have a personal tax account (PTA), accessible via a digital device of their choice, at any time of their choosing. Over eight million people have already signed up.
HMRC talks in terms of the PTA being similar to online banking, in that individuals will be able to check their tax account for a personalised picture of their tax affairs, supported by secure messaging and webchat for help with a tax problem.
At the moment, HMRC receives data from a wide range of sources and holds it on separate stand-alone systems, asking people to complete tax returns and enter figures it already knows. Moving forward, HMRC is going to pre-populate more of this information within PTAs, to ease the ‘reporting burden’ and the scope for mistakes.
HMRC believes avoidable errors and carelessness by businesses constitute £8 billion of the tax gap.
MTD is going to mean mandatory digital record keeping and the submission of quarterly updates to HMRC, followed by an end of year declaration. Businesses and landlords will need to acquire MTD compatible software to store their accounts information, ready for onward transmission to HMRC.
There are some exemptions to MTD.
Charities and community amateur sports clubs are exempt from MTD, as are the digitally excluded.
The ‘digitally excluded’ fall into two categories:
- a person who is a practicing member of a religious society or order whose beliefs are incompatible with the use of electronic communications; or
- a person for whom online filing is not reasonably practicable for reasons of disability, age, remoteness of location, or any other reason.
At some point in the future, there is likely to be an online route, for those who believe they are digitally excluded, to apply to HMRC for a ruling confirming their exemption from MTD.
Unincorporated businesses and landlords
Unincorporated businesses and landlords with a total gross income below £10,000 per annum are also exempt from MTD.
HMRC is going to launch an MTD pilot in April 2017 to encourage unincorporated businesses and landlords to effectively adopt Making Tax Digital early.
Any unincorporated businesses and landlords who wish to volunteer to enter the pilot will need to have MTD compatible software and an annual gross income above the exemption limit.
Willing volunteers will initially need to go through a subscription process to join the pilot. This process is only likely to accept a limited number of applicants per day, as HMRC gradually builds capacity and tests its systems.
This is the MTD ‘go live’ date for unincorporated businesses and landlords who pay income tax and who have a gross turnover in excess of the VAT registration threshold limit.
The VAT registration threshold limit is due to rise to £85,000 on 1 April 2017 and may well have risen again by April 2018.
Qualifying landlords will enter MTD straight away on 6 April 2018, as rental accounts are prepared on a tax year basis.
This is the MTD go live date for unincorporated businesses and landlords who pay income tax and who have an annual gross income above the exemption limit, but below the VAT registration threshold limit.
April 2019 is also the MTD go live date for VAT. Businesses registered for and that pay VAT will be required to report their VAT return information through MTD.
This is the MTD ‘go live’ date for corporation tax.
Incorporated businesses, in other words, limited companies, will be brought into MTD from 6 April 2020.
Very large partnerships with a turnover in excess of £10 million are also likely to enter MTD at this time.
Prompts and nudges
By forcing businesses and landlords to record accounts information digitally and to upload accounts summaries every quarter, tax reporting is moving closer to real time.
HMRC is going to use a series of ‘prompts and nudges’ to maintain the regular flow of data and to improve the quality and accuracy of accounts information being uploaded.
What is a ‘prompt’?
In simple terms, a prompt is a reminder to do something.
In the context of MTD, HMRC may send a prompt to a business or landlord to upload a quarterly summary or to submit an end of year declaration or to make payment.
What is a ‘nudge’?
Again, in simple terms, it is a reminder to check something.
In the context of MTD, HMRC is likely to send a nudge to a business or landlord if a figure appears to be wrong in a quarterly update. The nudge may also refer the business owner or landlord to guidance on the Gov.uk website, such as HMRC’s manuals or factsheets.
Will a nudge constitute a tax enquiry?
No. A nudge from HMRC will not mean a tax enquiry has begun.
Under MTD, HMRC’s enquiry powers are going to apply to the end of year declaration. An end of year declaration has to be submitted after all four quarterly updates have been provided to HMRC.
Will nudges only come from HMRC?
HMRC has been analysing the common mistakes made by businesses and landlords and is sharing that information with software companies to build into MTD products.
As businesses and landlords upload accounts data, the MTD software may well nudge for a figure to be checked as it is being entered.
In other words, the software may nudge for a figure to be checked first and then HMRC may well send a further separate nudge after the quarterly update has been received.
As time goes by and MTD becomes bedded in, HMRC’s prompts and nudges are likely to become more personalised as HMRC builds a fuller behavioural history of each business and landlord.
What accounts information does HMRC want from unincorporated businesses?
As a minimum, HMRC is looking for quarterly updates to reflect the same categories as currently required by a self-assessment return:
- other business income;
- cost of goods bought for resale or goods used;
- construction industry – payments to subcontractors;
- wages, salaries, and other staff costs;
- car, van, and travel expenses;
- rent, rates, power. and insurance costs;
- repairs and renewals of property and equipment;
- phone, fax, stationery, and other office costs;
- advertising and business entertainment costs;
- interest on bank and other loans;
- bank, credit card, and other financial charges;
- irrecoverable debts written off;
- accountancy, legal, and other professional fees;
- depreciation and loss/profit on sale of assets; and
- other business expenses.
In reality, it may be best practice to expand some of the categories to help prevent nudges from HMRC, especially those which include expenditure subject to business/private apportionment.
What accounts information does HMRC want from landlords?
As a minimum, HMRC is looking for quarterly updates to reflect the same categories as currently required by a UK property page contained within a self-assessment return:
- rent paid, repairs, insurance, and costs of services provided;
- loan interest and other financial costs;
- legal, management, and other professional fees; and
- other allowable property expenses.
A large number of landlords use letting agents to manage properties on their behalf. Letting agents typically collect the rents due and often pay for occasional repairs to a property on behalf of the landlord, deducting the repair expenditure and their fees from the gross rents collected. The letting agent may then provide the landlord with an annual statement of gross rents collected, less any expenditure. The landlord will then usually take the statement, along with his mortgage interest certificate, to his accountant to prepare his rental accounts.
Quarterly reporting is going to change that type of arrangement. The landlord is going to need quarterly statements at the very least and will need to upload any expenditure receipts.
Will MTD really happen?
Good question! This article has been written based on what has currently been decided, but MTD is receiving intense, often critical, political scrutiny. Whilst HMRC may be ready to launch the pilot and roll out MTD, further political input could well mean adjustments to the timelines and exemptions and, perhaps, the mandatory element, too.
Guy Smith is Head of Technical Research at Abbey Tax, a Consultant Editor and Author for Tolley and a member of the ICAS Technical Bulletin editorial panel.