HMRC has released six consultations on its Making Tax Digital strategy. These set out their proposals for the implementation of digital tax accounts and the quarterly reporting requirement. The new rules will be introduced for income tax and national insurance contributions from 2018, VAT from 2019 and corporation tax from 2020.
The latest information is broken down into seven documents and hundreds of pages. Some of the key proposals are set out below.
Exemptions
- Three million smaller businesses will not be required to update HMRC quarterly or report digitally. HMRC had already announced that employees or pensioners with secondary income of less than £10,000 would not be subject to the digital reporting. They have now extended this to all unincorporated businesses and landlords with a turnover of less than £10,000 per annum.
- Those who cannot engage digitally (e.g. for practical or religious reasons) will not be required to maintain digital records or make quarterly reports.
- Charities and Community Amateur Sports Clubs (CASCs) are likely to be exempt.
Administration
- Companies will have one month after the end of each quarter to submit their quarterly update.
- An ‘End of Year’ declaration will be required after the four quarterly updates to confirm the final position for the year and to claim any reliefs or allowances. It is proposed that the deadline for this will be nine months following the period of account of the business rather than the current 31 January deadline that applies to individuals and unincorporated businesses.
- Small unincorporated businesses above the £10,000 exemption threshold may be given a one year deferral before being subject to the making tax digital requirements but there is no indication as to what the upper turnover threshold will be as yet.
- Compatible software with HMRC’s digital accounts will be required in order to make quarterly updates. HMRC have confirmed that they will not be providing their own free software.
- Partnerships will have the opportunity to nominate a partner to submit the quarterly updates. This will then feed into each individual partner’s digital tax account, rather than each partner having to update and maintain their own records separately.
Cash basis accounting to be extended
- Cash basis accounting will be extended to more businesses so that tax is only paid based on cash received rather than invoices issued. The threshold to apply the cash basis is currently where turnover is below the VAT threshold (£83,000 currently). The proposals look at extending this to a maximum of double the current level i.e. £166,000 and to most unincorporated property businesses.
Enquiries
- HMRC will not be able to enquire into the quarterly updates but will be able to under the End of Year declaration in the same way and timeframes as with the existing annual tax returns.
Tax payments
- It will be possible to make voluntary ‘pay as you go’ tax payments throughout the year towards your tax liability. The current mandatory payment deadlines will remain as they currently are for now, although it would not be surprising if this moves towards closer to real time once the new rules have bedded in.
Penalties
- Penalties will be charged for late submission based on a ‘points’ system. Each late submission will incur ‘points’ and once a certain level is reached a penalty will be applied for that and future failures. With essentially five reporting obligations a year for income tax alone, along with the points system being adopted for other reporting obligations such as VAT, this could have the potential to lead to substantial penalties.
- Two proposals have been put forward for late payment penalties. The first is that penalty interest (at a rate of around 10%) is applied to those paying more than 14 days late. The second is to align the late penalty regimes for income tax, national insurance contributions, corporation tax and VAT. There are two suggestions for this alignment; the first being a system similar to the current income tax penalties and the second being a tapered system with a higher penalty percentage rate being applied the longer the debt is outstanding.
What’s next?
There are still quite a few gaps in the detail and some unanswered questions and time is running out to finalise the details. The consultations are due to run until 7 November 2016 and the government’s response and draft legislation is expected as part of the Autumn Statement in late November/early December.