UK tax: going digital

Taxing times

17 January 2020

Business owners and self-employed professionals can take steps to cut through the noise and embrace HMRC’s new Making Tax Digital scheme, writes Steph Fairbairn

During a panel discussion on the future of the construction industry at last year’s RICS Construction Conference, conversation turned to vertical integration, the Construction Supply Chain Payment Charter, project bank accounts and business cases. One attendee noted that she was concerned about how the government’s new Making Tax Digital (MTD) scheme would affect an industry already under severe financial pressure.

The MTD scheme is a key part of HMRC’s ambition to become one of the most digitally advanced tax administrations in the world. The aim is to make it easier for taxpayers to file tax estimates online and to provide:

  • more efficient and effective tax administration;
  • tax costs in real time;
  • a single account where liabilities and entitlements can be viewed; and
  • digital interaction with HMRC through secure messaging.

The idea is to enable a more ongoing and accurate projection of tax due, and improve on the annual loss of more than £9bn from avoidable taxpayer errors.

Yet, despite the promise, many people – small business owners in particular – have questioned the clarity and timeliness of information provided about the new scheme: a YouGov poll found that only 8 per cent of small firms that had yet to move to MTD were ‘very prepared’ to do so. MPs and business groups have also expressed concern that many of the 1.2m businesses affected were not ready for the change.

These questions and concerns have enhanced opportunities for tax and accounting professionals and businesses, resulting in the internet being inundated with ‘how to’ guides and ‘top tips’ manuals. Amid this deluge of guidance, it can be difficult to know what to do and who to trust.

Therefore, despite the guidance available, 120,000 companies missed their 1st quarterly MTD filing deadline of 7 August 2019. HMRC responded by coming good on its light-touch approach, designed to allow businesses time to become familiar with the new requirements during the 1st year of mandation.

This means not issuing record-keeping penalties if businesses are seen to be doing their best to comply with the new scheme. HMRC are also allowing businesses to appeal any penalties that they believe are due to problems arising from the transition to MTD. As such, no fines have been issued to the companies that missed the deadline.

One of the reasons for the light-touch approach is, of course, Brexit. The government recognises that understanding the regulations associated with MTD, in addition to preparations for Brexit, is a difficult challenge for HMRC and businesses alike.

MTD was first mooted in the 2015 budget, but was removed from the Finance (No 2) 2017 Bill ahead of the 2017 general election, leading some to speculate that the idea had been dropped. By autumn 2017, however, businesses, landlords and self-employed people – an Office of Tax Simplification report revealed that the largest number of those self-employed are in the construction industry – with taxable turnover above the £85,000 VAT threshold were informed they should begin using the new digital service for income tax and national insurance contributions from April 2018.

The timetable was then further amended, and compliance with the scheme began in April last year for every VAT-registered body with taxable turnover over the threshold – except for those in a deferral group who started the process in October.

Provided the new scheme proves to work well with VAT, income tax will be the next to be mandated for MTD, yet this won’t take place until 2022 at the earliest. Attention will then turn to corporation tax: every business, self-employed person and landlord who pays the tax will have to use MTD for such purposes.

In a nutshell, taxpayers send HMRC summaries of their income and expenditure 4 times a year, as opposed to the previous system of 1 tax bill at year-end. The new scheme doesn’t mean filing 4 tax returns, but instead updating books throughout the year and reviewing and confirming the accuracy of the data each quarter. This should make the process a lot easier for taxpayers at year-end and allow better tracking of obligations. Tax payments for the whole bill, however, will still be taken at tax year-end.

Barriers to adoption

In its 2019 report Digitalisation of tax: international perspectives, the Institute of Chartered Accountants in England and Wales (ICEAW) highlighted tax morale – ‘a country’s citizens’ general opinion of paying their taxes, and their happiness with the services they receive from their government in return’ – as one of the key factors that make tax systems harder or easier to digitalise.

With one of the most complex tax systems in the world, tax morale is likely to be lower in the UK, particularly in industries under financial strain, such as construction, which has historically always felt under-supported by the government.

The MTD scheme means updating books throughout the year and reviewing the data each quarter, making the process easier for taxpayers

To help ease the process, an element of the new scheme – pre-population – means that certain information, such as individual employment details, income, benefits, tax and national insurance can be downloaded and dropped into a tax return at the click of a button. The ICEAW, while viewing this as positive, recognises how this may also affect morale: ‘Pre-populating returns with information gathered from 3rd parties fundamentally changes the structure of trust and the direction of review, with taxpayers and their advisers now working to review and challenge the work of the authority.’

The concerns over this change are understandable and HMRC is aware of the resulting backlash. Following consultation, trial periods and feedback from users, it released a myth-busting document refuting claims that MTD means businesses will have to provide more information than they already do.

HMRC stressed that MTD will reduce errors – citing a YouGov poll in which 61 per cent of businesses said they have previously lost receipts – and that it hasn’t underestimated the administration burden and costs to businesses complying with MTD. HMRC has also stated that most businesses will be able to claim any costs for hardware and software needed for MTD against their tax.

Integrating the MTD scheme into everyday business practice will feel overwhelming for some organisations, but more streamlined information and more real-time cost implications can only benefit an industry plagued by financial uncertainty and payment lags.

The postponement of the new domestic reverse charge (DRC) – moving responsibility for reporting a VAT transaction from the supplier to the customer – from 1 October 2019 to 1 October 2020, means that organisations can focus first on mastering MTD.

Getting ready

Considerations ahead of MTD compliance include the following.

  • Ascertain whether you or your business should be complying with MTD. If a business is already exempt from filing VAT returns online, or its taxable turnover is below the VAT registration threshold, there is no need to sign up to the scheme or apply for an exemption. Those with a taxable turnover below the VAT registration threshold can, however, choose to follow the MTD rules voluntarily. This may be advisable both to streamline processes and to prepare for potential future compliance. If a company’s taxable turnover drops below the VAT threshold at any point, it is still required to participate in MTD.
  • Read up on the scheme and determine the work and resources required. Some small businesses undergoing the transition have had to increase staff and resources to get to grips with the new scheme.
  • Comply with the new scheme. To do this, businesses and sole traders must either use a compatible software package, or a bridging software, allowing users to submit VAT returns to HMRC systems. One of the biggest challenges small firms have faced so far is the use of MTD-compliant software.

Advice from HMRC suggests that using compatible software provides maximum benefits, so bridging software should only be used as a temporary measure, and the best – and easiest – time to make the switch is following tax year-end.

Experts advise that cloud accounting software is best suited to MTD – it reduces IT spend, is available any time and means that data is stored securely online, reducing the risk of losing it. To this end, the HMRC website offers a non-comprehensive list of software providers that can be narrowed down depending on suitability.

Although the software is used to hold most key information as a digital record, such as business name, address of principal place of business or VAT registration number, there are still records that, by law, must be kept in their original hard-copy form, such as the C79 import VAT certificate.

The complete set of digital records to meet MTD requirements does not all have to be held in 1 program: digital records can be kept in a range of compatible digital formats and then combined to form the digital records for the VAT-registered entity. If using multiple programs, data transfer or exchange between them must be digital – called digital links by HMRC – so that a digital journey can be tracked. In order to ease the transition, HMRC is allowing a soft-landing period for the 1st year of compliance, where businesses are not required to have digital links.

After sourcing the software – 1 program or multiple – the next step is to sign up for MTD for VAT, and then authorise the software to interact with HMRC. Individual software companies can help with this if needed.

Once all of the elements are in place, companies and individuals must make sure they stay informed. Although HMRC will send reminders for due dates, make sure you keep note of all relevant dates and regularly check whether they have been adjusted.

Integrating the scheme into business practice may feel overwhelming, but it can only benefit an industry facing financial uncertainty

At the time of writing, the light-touch approach for MTD for VAT is due to end on 31 March 2020, and a new penalty points system for late filing, along with a new late payment regime, should come into force. However, this may change: these systems were originally due to be in place by the time MTD launched but were deferred. In terms of late filing, missed VAT returns will accrue penalty points, and a fine will be issued after a certain number of accumulated points. Late payments will be penalised, in the worst case with an HMRC interest rate charge of 100 per cent plus daily interest charges.

Also consider the implications of Brexit. Not only is Brexit contributing to the difficulties business are facing in getting to grips with the MTD scheme, but it will also change the tax system. If the first MTD submission is during or after Brexit, additional adjustments may need to be made.

Above all, embrace the change. Similar schemes have had positive impacts in other countries. In Estonia, for example, a tax return now takes 5 minutes to complete through the single shared platform X-Road, to the satisfaction of many taxpayers.

HMRC, like the construction industry, is trying keep pace with technology and use it to positive effect. For any change, challenges are inevitable – and an adjustment period helps. Ultimately, however, the success of the new MTD scheme will depend on 2 things: users committing to its use, and HMRC ensuring it operates as well as possible. The best you can do is to stay informed so your business complies by the deadline. That way you stand the greatest chance of avoiding penalties and reaping the potential rewards.

Steph Fairbairn is editor of the RICS Construction Journal

Further information