One of George Osborne’s later announcements was the ‘making tax digital’ initiative.
Simply put, to give all tax payers an online account of their tax affairs and a conduit for communication between the taxpayer and HMRC.
This of course comes with its own additional rules and requirements, not least the quarterly reporting of income, rather than the current annual requirement.
The proposal is that online quarterly reporting will commence on the first accounting period ending after 5th April 2018.
Online Tax Account
All taxpayers will have access to an online tax account, a central point of record of the taxpayer’s tax affairs. This will feature:
- A statement of the income tax account, with ability to pay and claim refund of tax.
- Notices of employed PAYE codes and calculation of.
- Ability to apply for some state benefits.
- A State Pension forecast.
- Portal to report quarterly trading income for sole trades and partnerships.
The account will be fed from external sources as well as from client/accountant input. Thus HMRC will receive PAYE detail from employers, interest from account providers, pensions from pension providers, and so on. This will be a useful feature to take the devil out of the detail in compiling tax returns.
Quarterly Reporting of Income
Presently sole traders and partnerships complete one annual return, submitted and tax paid by January 31st of the following tax year.
From 2018 for businesses with turnover greater than £10k per year, or property investment businesses, the requirement will be introduced to make an additional three income returns through the tax year, as well as retaining the annual return.
The additional returns need not be as fully accurate as the ‘sweep-up’ annual return. Nonetheless there is a practical implication that they should have firm foundation. So
affected businesses will need a standard of accounts from which this information can be extracted.
At Accounting & General we shall be guiding our clients through this process. In fact for clients that currently use our online accounts solution of Liberty Accounts, the system is there. And for those using our tailored spreadsheets, the system will be there.
For businesses presently seeking an accountancy service a key question is to ask the practice if they are ‘MTD ready’?
Timing and Detail
Gone will be the days of putting aside a week after the year end to do your accounts. Each quarterly report will need to be filed within 30 days of the end of the quarter. We view this aim as laudable – clients will be forced to have up to date trading information at their fingertips. But even for our own business, 30 days can be a challenging target, when there is so much else to give attention to.
We also question the worth of this data in highly seasonal businesses, which to make sense in the round require 12 months of trading. However, ours is not to reason why!
At present capital allowances are claimed within the annual figures. Now it will be possible to incorporate them (or a smoothed estimate) within the quarterly return. Mathematically fine, but an asset purchased in the final quarter with 100% allowance could cause quite a distortion in that quarter figures.
The Workload and Who to Do It
Clients for whom we presently produce monthly or quarterly accounts and tax returns will see little change in the way things work, or in our accountancy charge.
Clients that presently use our Liberty Accounts or spreadsheets and keep them up to date themselves will again notice little change, other than perhaps to seek our lookover of the figures and comment on any impact with HMRC of the returns. This is a great way of getting value from your accountancy service, making us aware of current issues and getting an accountant’s input, rather than us finding information out after the close of the tax year.
Clients that complete records on an annual basis will need to change the way they work, and produce quarterly figures. We can help with this, or complete records on the client’s behalf in a cost-effective way. Once forced to do so, it possible to see benefits in having more current profitability data – to help with product pricing and purchase cost decisions for instance – and avoid the annual stress and panic.
At the moment MTD is not proposed for companies. This may encourage some businesses to incorporate, thus simplifying personal income down to a salary and dividends, with an advantage of some tax flexibility on the timing of dividend payments. Talk to us for a discussion on this idea.
They key is to make making tax digital work for you!