Fans of horror movies might care to view this innocent looking trailer from HMRC for something called ‘Making Tax Digital’ (MTD for short), which promises to make tax simpler and free us all from the annual stress of getting our tax returns completed and filed by 31 January. The government have said that freeing businesses from red tape and allowing them to flourish is a central part of Britain’s long-term economic plan. And this short video gives the impression they are doing us a huge favour by making it all so very simple. But don’t be fooled. MTD is a diabolical game which every self-employed business owner will have to play. It’s a game with new rules, new time limits and new forfeits for making wrong moves. And it’s going to change how you’re allowed to keep your business records and how you and your accountant interact with HMRC.
What’s the plan?
This is the first of two articles. In this one I’ll set out what the proposed changes involve and then, probably next week, discuss why along with many other tax advisors I believe the plans are misconceived and likely to cost anyone running a micro-business time, money and probably peace of mind.
Last year George Osborne (who you may remember) announced he would be abolishing the annual Tax Return. There’s actually quite a lot of sense to this plan: the taxman already has information about any employment income you may have (because your employer has to report it every month) so there is no point in requiring you to tell him again on your Tax Return form. The same goes for Job Seekers Allowance, Universal Credit and some savings income. Instead of filing a Tax Return we are all being given a secure digital tax account (a bit like an online bank account) where we can see and check the information that HMRC holds about our income. We will also be able to do other useful stuff like see how much tax we owe, claim tax refunds, make payments online and communicate with HMRC without having to resort to letters or join the dreaded call centre queue. So far, so good: if they can get the IT right MTD could make the tax system more efficient and easier to use.
But what about reporting the income from your self-employed business? This is where it starts to go wrong. At the moment the process goes like this. You keep some kind of bookkeeping records through the year – you can keep them in more-or-less whatever form you like, the only requirement is that they must be sufficient to enable you (or maybe your accountant) to accurately fill in the self-employed pages of the annual Tax Return. Some time after 5 April your records are used to complete a set of annual accounts, which then get summarised onto your Tax Return, and that’s filed with HMRC by 31 January. Your tax bill is then calculated either by your accountant or by HMRC.
HMRC propose to modernise and streamline this process by making it far more complicated:
- Every business will have to do bookkeeping digitally using either accounting software or an App. The Revenue refer to this as ‘acquiring digital tools’ (which kind of sounds like it involves doing something slightly questionable with your fingers.)
- Once every 3 months you will have to press a button in your accounts software to submit your total income and expenditure online to HMRC. And you’ll have 30 days to do that. You won’t have to submit records of individual transactions, just the totals split between various categories of income and expenses: advertising, travel, professional fees etc.
- Then at the end of the tax year you will have 9 months in which to carry out what’s called ‘End of year activity’ which basically means checking the 4 quarterly updates that have already gone in and making any accounting adjustments that are needed.
- Some accounting rules are being simplified so that more businesses will be able to keep their accounts on the ‘cash basis’ rather than the ‘accruals basis’. If you’ve no idea what either of those terms means you’re not alone. When the House of Commons Treasury Committee asked three owners of small businesses not one of them had a clue what this simplification meant. If you’re a sex-worker you probably insist your customers pay you straight away, and wouldn’t dream of offering them credit terms, in which case there’s no real distinction between the cash basis and the accruals basis.
- Changes are also being made to what’s called the Revenue v Capital rules. Again this isn’t very exciting because unless you’re spending more than £100,000 per year on capital equipment the tax effect is the same.
Some things are not changing
- The tax year will still end on 5 April each year. If there’s one piece of nonsense that’s crying out to be simplified it’s surely this?
- The payment dates for tax will stay the same – at least for now. Your digital tax account will show you how your tax liability is building up through the year, but it will still be payable in the same instalments on 31 January and 31 July each year. If you so wish (and it’s not clear to me why anyone would want to) you will be able to make voluntary tax payments in advance.
Questions and answers
Can I opt out?
Almost certainly no you can’t. Very small business will be exempted, but at the moment HMRC are only talking about businesses with annual income (before you even take off expenses) below £10,000. The so-called ‘digitally excluded’ will also have an opt out. But don’t get your hopes up, you’re going to have to persuade HMRC that you are too infirm to use technology, live in a broadband black hole, and hold religious beliefs that prevent you from using electricity. OK that’s a slight exaggeration but if you’re managing to read this you aren’t digitally excluded.
Will I be able to continue doing my bookkeeping in a handwritten diary or account book?
No, every business will have to use what HMRC calls digital tools – basically an accounts package or an App that is capable of submitting information online to HMRC.
Does that mean I’ll no longer be allowed to carry on keeping my basic records in whatever form suits me and then handing them over to my accountant every three months for her to summarise and report the totals to HMRC?
That’s about the size of it. HMRC want all the individual transactions to be recorded digitally although only the totals will need to be submitted to them.
What about keeping my records in an Excel spreadsheet?
You probably won’t be allowed to do that either. HMRC are thinking about this one, but they are clearly not at all keen.
If I have to acquire digital tools isn’t that going to cost me money?
Probably, yes it is. At the moment none of these Apps exist. HMRC are expecting that software suppliers will produce a range of different solutions, some of which may be free. But a half decent accounts package is likely to cost at least £20 per month.
I’m very good at what I do but I’m nervous about sending stuff to the tax man. Can I get my accountant to do the quarterly updates?
Yes you can but it going to add to your accountant’s work and therefore significantly increase your accountancy fees.
What happens if I submit the quarterly updates myself but make a mess of it?
Your accountant can correct everything as part of the Year End Activity but it’s likely to ring alarm bells and may result in HMRC deciding your records must be unreliable and triggering a tax enquiry.
Why are HMRC insisting I use a digital tool?
They believe it will help to reduce errors because accounting software and apps can include intelligent prompts that guide users to enter transactions correctly.
What is the point of submitting updated accounting information once every 3 months?
HMRC believe that by forcing business owners to keep their records up to date there will be fewer errors. It will also mean you will be able to use your Digital Tax Account to get a more accurate estimate of your tax bills.
Is this all set in stone?
Not yet. There is a consultation process under way but if you want to have your say you will have to be quick because it only runs until 7 November. You can find details of the consultation as it relates to business here:
In the next episode …
So there you have it. By now you’ve probably already thought of a few practical problems with MTD and in part two I’ll discuss them in a bit more detail.