Although there has been widespread criticism of the Government’s Making Tax Digital (MTD) proposals, business and political groups agree that the only way forward for taxation is for it to go online, so it looks as though, whether next year or by 2020, businesses will have to get to grips with the changes.
What is MTD?
It will mean the end of the annual tax return. Once the changes come into effect, currently stated to be April next year, most businesses will need to submit quarterly online tax returns using software approved by HMRC. These updates will be followed by an end-of-year reconciliation to ensure the activities for the entire year have been properly recorded for tax. According to the taxman, the changes will achieve the following: reduce the burden on taxpayers; benefit the exchequer; and make the tax system more accessible and transparent.
The government consulted on their proposals last year and say they will respond to the consultation. Consequently, by the end of this month, the draft Finance Bill, including clauses to legislate for the necessary changes, will be published.
However, critics claim that the plans are being rushed through to meet the April 2018 deadline and the Commons Treasury Committee maintains that the radical plans could spell disaster for small firms, possibly even putting some of them out of business.
In its report, published last week, while the Committee supports the idea of digitising the reporting of tax, it believes that the benefits of mandatory digitisation of record-keeping and quarterly reporting have not been conclusively proven and that there should be a comprehensive set of pilots of the system before it is made obligatory for all businesses.
The Committee is also very concerned about the costs to businesses of introducing MTD, as well as the continuing costs of maintaining digital records and submitting quarterly updates, as there is currently insufficient information about the free software that will be available. It feels that these extra costs may well exceed the benefits to the exchequer in terms of a tax gap reduction as a result of fewer taxpayer errors and the overall impact of MTD could even be negative.
In the conclusion to the report, Committee Chair, Andrew Tyrie, said:
Carefully introduced, the digitisation of tax records and reporting (MTD) can be an opportunity greatly to improve the administration of the tax system for the long term. Without sufficient care, MTD could be a disaster.
Implemented carefully, with long transitional arrangements where necessary, and, having drawn on information from fully inclusive pilots, Making Tax Digital could be designed for the benefit both of the economy and of the tax yield. But with a rushed introduction, it will benefit neither.
Treasury Committee recommendations:
- The £10,000 threshold for reporting through MTD should be raised to match the VAT threshold of £83,000
- The start date should be pushed back to at least 2019/20 and possibly later
- There must be comprehensive pilots of the proposed system with full protection for those firms required to participate
- The pilots must be designed to gather information over the entire reporting cycle, including an end-of-year reconciliation. These must then be evaluated, with the evidence of the pilots presented to Parliament before full implementation
- There must be a functioning market to produce appropriate software, which should be free for smaller and less complex businesses
- Once the precise shape and timing of MTD is known, HMRC must publicise taxpayers’ obligations
- Since it is likely that the scope for hacking and cyber attack could increase with MTD, HMRC will need to provide adequate assurance about the security of taxpayers’ data held by software providers
What happens next?
If the Government takes note of the Committee’s recommendations and other concerns and suggestions voiced by bodies such as the Chartered Institute of Taxation (CIoT) and the Institute of Chartered Accountants in England and Wales (ICAEW), then the start could be delayed and the other recommendations taken into account. However, what is certain is that MTD will be enshrined in legislation in a relatively short space of time.
Don’t be caught out by it.
Contact Briars Group today and find out what you need to do to be prepared for MTD either as it stands or with the recommendations taken into account.
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