UK 'Making Tax Digital' consultation confirms quarterly reporting system
The UK government has published its plans for a complete overhaul of the income tax reporting system.
The Making Tax Digital programme (MTD) was published in broad outline last year. It announced that, from 2018, most businesses, the self-employed and landlords will need to provide HM Revenue & Customs (HMRC) with quarterly updates, and to use special software to keep their business records.
Despite widespread criticism, the detailed proposals, published today in six separate consultation papers, have not dropped this central theme. Tax reporting will be 'integrated into day-to-day business activity' with compulsory continuous reporting for many taxpayers, says HMRC, leading to the end of the annual tax return by 2020. This, it says, will provide 'greater certainty over tax bills so businesses do not have to wait until the end of the year to find out how much they have to pay'.
Businesses will have to record and categorise receipts and expenses in their record-keeping software – which will have to be custom-designed for the purpose. It seems that spreadsheets will not meet the requirements of MTD. Where the software will come from, and who pays for it, is not clear. HMRC states: 'The government is considering what support might be provided to help with transition. This might be financial support, extra tax relief or practical help such as online training sessions.' The software will generate summary updates of total categorised income and expenditure data, to be sent to HMRC when they are due, at which point an automatic prompt will be issued. HMRC says it has not yet decided how detailed these summaries should be, and whether the level of detail should be different depending on the size of the business.
All businesses will be given nine months from the end of their accounting year to complete and make a final declaration of their annual accounts – as self-assessment taxpayers are already. This period, however, is also subject to consultation.
Penalties for failure to comply are also being introduced, though due to industry protests they are likely to be less significant than the current automatic late filing penalty. Many small businesses interpret MTD as a plan to set four or more self-assessment deadlines every tax year, with a proportionate increase in the opportunities for HMRC to charge penalties. However, the consultation proposes a graduated model with each non-deliberate failure to submit information on time attracting penalty points. When the points reach a set level, a penalty will be charged. There may also be a delay before sanctions are introduced.
One passage which may prove controversial suggests that HMRC will use the quarterly reporting system to challenge taxpayers' accounts as they are received. This is likely to happen more often as HMRC develops its plans to collect more information from third parties – which was also announced in today's consultations. 'If we reach the end of the tax year and a query has not been resolved, we will make an estimated assessment using the information we believe to be correct, on the understanding that this assessment may change upon resolution of the query', it says. There is no mention of an appeals process, or even of the option to hold over disputed tax to the following year.
However, for those who believe that the new system will impose an unacceptable cost and time burden, some concessions are being made to the very smallest businesses and will be confirmed by HMRC in due course. The eligibility thresholds are subject to consultation. However, HMRC anticipates that the proposed concessions will exempt 1.3 million small businesses from the quarterly update and digital record-keeping requirements. Also, 'those who genuinely cannot use digital tools will be exempt, though the meaning of 'genuinely' is not specified. It is unlikely to include people who will merely incur significant extra costs from MTD, as the next question in the consultation asks taxpayers to estimate the extra costs they will incur by using it.
Other concessions are also being made: the option to keep cash-basis rather than accrual accounts will be extended to all individual and unincorporated landlords, and to some larger businesses, perhaps by extending the maximum cash-basis turnover threshold to twice the current VAT threshold of GBP83,000. Such businesses will also be exempted from the need to account separately for capital and revenue.
Recognising that the proposals are both far-reaching and deeply controversial, the government has set an extended 84-day consultation period, closing on 7 November 2016. A separate consultation paper for limited companies will be published later this year.
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