Making Tax Digital

    Making Tax Digital
    HMRC aims to make tax digital by 2020

    The digital revolution has taken over the way people and businesses connect, bank, travel and trade; from booking theatre tickets online to paying our invoices. Businesses are benefiting from the convenience and ease of technological solutions, and HMRC are attempting to do the same by Making Tax Digital by 2020 for a more efficient, accessible and interactive service for taxpayers—or so they say.

    The Making Tax Digital scheme aims to eliminate bureaucratic form-filling and time delays found in current processes that can cause unnecessary penalties and debts.

    HMRC’s vision for making tax digital by 2020 is more than just an implementation of digital aspects to the taxpaying process; it is a complete overhaul of the traditional process to something that ‘feels completely different’. The use of older systems meant that taxpayers had to wait until the end of each year before knowing how much tax they had to pay. With this new system, the taxpayer can theoretically keep tabs on their taxes in real-time, avoiding any nasty surprises.

    But how will Making Tax Digital affect companies? ‘The simple truth is, we don’t know how it will affect companies,’ said Tom Herbert, business editor at AccountingWEB in conversation with Global Britain. ‘Many companies will have a head start on small businesses, as they are more likely to be using accounting software and therefore be familiar with the processes involved,’ he continued. ‘However, traditionally, software has struggled with complex processes like VAT, and this will bring its own challenges.’

    HMRC has set out the four foundations to the transformed digital tax system:

    1. Tax Simplified

    HMRC is joining up its internal systems to populate digital tax accounts of taxpayers for a more efficient and simple tax collection process. 

    1. Making tax digital for businesses

    The new digital system allows businesses to input and process their information as close to real time as possible to eliminate debt from tax due and owed repayments building up; a landmark move in the initiative. According to HMRC, by 2018 businesses will be able to update HMRC at least quarterly. Small businesses needn’t worry about the transition to digital platforms, either. Jane Ellison of HMRC has said ‘we [HMRC] have committed to ensuring that free software is available for a number of small businesses.’ This supplement, however, seems to be mainly for small, unrepresented businesses, and not the entire business population of the UK. The treasury has estimated that the transition will cost around £250 per business entity, but estimations elsewhere have produced numbers anywhere between £200 and £3,000. Lamont Pridmore, a major accountancy practice, have estimated that costs could reach £1,250 annually for software and accountancy fees as a result of the strategy.

    1. Making Tax Digital for individual taxpayers

    Individual taxpayers have digital accounts that present them with a ‘personalised picture of their tax affairs’, offering support and advice where necessary.

    1. Tax in one place

    By 2020, taxpayers will be able to see a picture of all of their liabilities and entitlements in a single environment; a process that is not currently possible. The Making Tax Digital campaign will see taxpayers able to manage their affairs via their digital account.

    Problems with the Making Tax Digital scheme

    While the direction and proposed aim of the Making Tax Digital scheme is widely welcomed by business leaders, it has proven to be controversial for a number of reasons. According to Tom Herbert, these include ‘the lack of detail provided in the consultation documents, the ambitious timescale of the project, and the cost to businesses adopting it being chief among them.’ He explains that many businesses are also ‘concerned that they will be forced by law to use accounting software, some for the first time, to update HMRC on their tax affairs.’

    Concerns were raised after the initial ‘Making Tax Digital: Bringing Business Tax into the Digital Age’ proposal about how businesses will not have enough time to prepare over the next three years—especially since many still bookkeep manually.

    The Association for Independent Accountants and Lawyers states that 65 percent of SMEs do not currently use accounting software and the UK200 group says that 27 percent of firms across the nation still use basic computer programmes, such as spreadsheets, for their taxes. The HMRC responded to the concern, saying that businesses ‘will be able to continue to use spreadsheets for record keeping, but they must ensure that their spreadsheet meets the necessary requirements of MTDfb.’

    The cost of complying with Making Tax Digital for small businesses would be inversely related to business turnover, but expected savings after compliance would be only proportional to turnover. This means that the smaller business would potentially have to work with the scheme for upwards of 10 years before seeing profitable savings from the conversion, even after paying the same initial costs as companies thrice their size.

    HMRC will run a public beta testing programme from April 2017 to April 2018 which allows 400,000 people to test the new Making Tax Digital environment. This won’t be enough time for businesses to run end of year reconciliation reports, nor does it allow time to analyse its efficiency before its official implementation date. ‘The pilot scheme for MTD is due to run from April 2017 to April 2018, but many of the software providers HMRC has been working with have already announced that their products will not be ready until the summer,’ adds Tom Herbert. ‘A successful pilot and a range of fully functioning products would give businesses confidence that the system will be workable.’

    At present, HMRC have not fully considered alternative ways of submitting tax data, and the types of companies exempt from digitisation are very limited. This is particularly important to companies who do not allow internet usage for security reasons, for example, who will be unable to submit tax data via cloud-based software.

    The National Farmers Union (NFU) raised a similar complaint at the House of Lords Economic Affairs Finance Bill sub-committee on February 20. They are concerned that 80 percent of farming areas have slow broadband speeds which would prove too difficult to upload tax data when using cloud-based accounting software.

    HMRC should further look to improve its communications infrastructure in the Making Tax Digital platform. ‘The government has announced that there will be communication between HMRC and businesses via ‘nudges and prompts’ in the software to remind businesses about deadlines and flag up potential exemptions or benefits,’ said Tom Herbert. He agrees that a messenger plugin would be one way to improve communication ‘but it needs to be flexible and customisable for each business or it will risk being ignored.’ At present, communication between HMRC and taxpayer is only one way, meaning that taxpayers cannot get an immediate response from HMRC without first calling.

    AccountingWEB’s business editor gave us an overview on what businesses should do to prepare for the Making Tax Digital strategy:

    Businesses should first see whether or not they are affected. ‘As the current exemption threshold is a£10,000 turnover they probably will be, but there are also exemptions such as charities, amateur sports clubs and the digitally excluded. Check with HMRC for further details.’

    ‘Do you use software, and if you do will it be MTD-compatible? HMRC will release a list in due course, but we know they have been working with around 30 software developers to come up with a range of products. Free software will be available to the “simplest” of businesses, but this has yet to be defined. Spreadsheets will be allowed for MTD use, but the data they contain will need to be submitted by MTD-compliant software.’

    He concluded that being signed up for the business tax account already will make registration for Making Tax Digital simpler.

    Currently, resources and awareness—particularly among small businesses—concerning the transition is limited. It is key to for organisations engage with HMRC’s press releases and the government’s nationwide campaign surrounding Making Tax Digital in the coming months.