HMRC issues six digital tax accounts consultations for business, self-employed and landlords

HMRC’s long-awaited consultations into how its flagship Making Tax Digital (MTD) strategy will work in practice have been published and has been divided into seven documents focusing on specific customer groups or specific elements of the reforms, which HMRC says reflects the scale of the planned changes, which have been subject to some strong criticism from MPs and professional bodies

The move to digital tax accounts is expected to raise nearly £1bn in additional tax revenue. Despite issuing seven consultations in a single day, there are still a number of grey areas with indications that reporting for larger businesses will not fall into the new system for a deferred period, yet to be determined, while there will be a points-based penalty system, which as yet has not been fleshed out.

The move to online filing of tax information by all taxpayers and businesses at quarterly intervals was first outlined in Budget 2015 and has attracted considerable comment over concerns about the potential costs and administrative burden for companies and individuals, despite HMRC’s claims it favoured a ‘light touch’ approach.

Consultation on the issues was set to begin in April, but has been delayed until now, even though the reforms are set to be introduced from 2018.

HMRC says it has made a number of changes to the proposed design in order to ease the transition.  These include removing more of the smallest businesses from the requirement to keep digital records and update quarterly.

All unincorporated businesses and landlords with a turnover under £10,000 a year will be exempt.

In addition, HMRC now says it will delay the start of MTD for some other small businesses, to give them extra time to get used to digital record keeping and quarterly updating, and will exempt digitally excluded businesses. However, it states that it expects to deliver ‘the end of the tax return by 2020’.

HMRC also claims its proposals have been revised to ensure flexibility for how businesses manage their accounts and introducing simplifications, for example extending cash basis accounting to more businesses.

The six consultations are:

1. Bringing business tax into the digital age

This considers how digital record keeping and regular updates should operate. It includes discussion of HMRC’s plans to release a suite of APIs to ensure business software can communicate with HMRC’s systems, and consideration of the requirements of those using spreadsheets for accounting. It confirms HMRC will not provide free software and consults on the possible provision of financial support for businesses who need to purchase new IT.

The consultation also looks at how MTD will work in the context of partnerships, with HMRC stating it ‘considers that MTD offers the opportunity to sweep away a whole tier of the current process’.

Through a nominated partner, partnerships will fulfil the obligations of MTD, namely maintaining digital records and providing regular updates on behalf of all the partners. The partnership’s regular updates would feed directly into each partners’ digital tax account as prepopulated, estimated income. Each partner’s estimated income would be based on the profit allocation as reported to HMRC. As a result, each partner will not have to acquire software, maintain their own digital records or regularly update HMRC, unless they have other business interests.

There is also discussion of how MTD will operate in relation to the Construction Industry Scheme (CIS).  The consultation looks at exempting charities and potentially Community Amateur Sports Clubs from digital update requirements, making these a voluntary process, and also discusses the status of charitable trading operations.

2. Simplifying tax for unincorporated businesses

This consultation looks at changing how the self-employed map accounting periods onto the tax year (reform of basis period rules); extending cash basis accounting to larger businesses and removing the link to the VAT threshold; reducing reporting requirements for businesses; and removing the need to distinguish between capital and revenue for businesses using cash basis accounting.

3. Simplified cash basis for unincorporated property businesses

The proposal is to extend the cash basis for trading income to unincorporated property businesses – providing an option for landlords to be taxed on the cash basis, rather than using the accruals accounting basis. HMRC says this could benefit over 2.5m property businesses.

4. Voluntary pay as you go (PAYG)

This proposal looks at options for taxpayers covered by the requirement for digital record keeping to make and manage their voluntary payments, and considers how voluntary payments will be allocated across a taxpayer’s different taxes. It also explores the best way of dealing with the repayment of voluntary payments and announces the opportunity regular updating provides to make earlier repayments. Voluntary PAYG will apply to those unincorporated businesses, sole traders and landlords, in respect of their Income Tax/National Insurance Contributions/Capital Gain Tax, from 1 April 2018, to VAT from April 2019 and to incorporated businesses, in respect of their corporation tax affairs, from 2020.

5. The tax administration consultation

This covers aspects of the tax administration framework that need to change to support MTD. It also sets out proposals to align aspects of the tax administration framework across taxes, including the simplification of late filing and late payment sanctions. This includes suggestions for adopting a graduated model whereby each failure would attract penalty points and only once the points reach a set level would a penalty be charged. The new model also includes a proposal that customers within scope of the new submission obligations introduced by MTD should have a period to gain familiarity with the new submission obligations before the new penalty regime is introduced.

6. Transforming the tax system through the better use of information

The  consultation focuses on how HMRC will make better use of the information it currently receives from third parties to provide a more transparent service designed to reduce end of year under- and over-payments. From April 2017, HMRC says it will start to use PAYE information during the tax year to calculate whether the right tax is being paid and to notify taxpayers where that is not the case via the digital tax account. The next step is to include common income types in the in-year calculations of tax on a more frequent basis, starting with bank and building society interest from April 2018. HMRC states its ambition is that by 2020, millions of customers will no longer be required to complete a self-assessment tax return. To achieve this goal, the tax authority will need to be able to get information from a wider range of third parties that hold information on other sources of taxable income including other investment income, such as dividends and shares; income from peer-to-peer lending; and income from property.

7. Overview of changes for small business, self-employed and smaller landlords

In addition, a separate consultation document provides an overview of the changes which will have greatest impact on small businesses, the self-employed and smaller landlords.  This highlights what HMRC views as the most critical issues for these groups. HMRC’s updated estimates suggest that the MTD changes will contribute £945m to the Exchequer by 2020-21.

The consultation period runs until 7 November 2016.

Published on: 16 August 2016 - By: CCH Daily

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