TaxCalc Blog

Digital Tax Accounts and Quarterly Reporting

The Government today released a new document about Digital Tax Accounts. Entitled Making Tax Digital, it consolidates information that has been released into the public domain since the March Budget and lays out the roadmap by which HMRC will transform from its current regime to the new digital one.

Having read numerous articles in the press these last few days, many reporters have reiterated the fact that Digital Tax Accounts, both for individuals and businesses, will be the norm by 2020. However, what seems to have slipped somewhat under the radar by a few is the requirement for “most” self employed people and landlords to make quarterly returns from April 2018.

What we do know

Ever since their announcement in March 2016, we have been following the progress of Digital Tax Accounts with a keen eye and where opportunities have presented themselves, have shared what we know at the time with the taxpaying public and their accountants.

Indeed, we have taken many steps to become as involved and as informed as we possibly can – even by agreeing to chair an Industry Forum on the matter.

Here’s what we know thus far:

• The Personal and Business Tax Accounts already exist. Whilst Business Tax Accounts have existed for some time and are used by some two million small businesses, Personal Tax Accounts were launched just two weeks ago in the form of a public beta. They will be officially launched in 2016.
• The tax return form will be replaced with a digital tax account. Rather than submit a tax return form, taxpayers and agents will work with an online tax account. Like a tax return, it will still enable taxpayers to submit information to HMRC, although it will be HMRC that carries out the assessment of tax.
• HMRC will share information it already knows with you. For those that use their Personal Tax Account directly, information that HMRC receives (such as employment income) will automatically appear in the account. Similarly, HMRC will also be able to share this information with tax software, meaning TaxCalc can download what HMRC already knows.
• The self employed and landlords will need to make quarterly returns. HMRC intend to collect and process information as close to the event and, on page 7, says this must be at least quarterly (my emphasis). Tax assessments will be raised on this basis, although it doesn’t say when or how long a taxpayer has to pay. This will be phased in from April 2018.
• Capital gains tax on property disposals will be paid within 30 days after the disposal from April 2019. This is a substantial change to the CGT regime and dramatically cuts short the amount of time a taxpayer has to pay this tax.
• Quarterly reporting will be rolled out to limited companies in 2020. Right at the end of the document, on page 12, it mentions that Corporation Tax is to follow Income Tax into the quarterly reporting regime.

What we don’t know

Of course, those that have completed at least one tax return in their life know that tax can be a rather complicated beast. Attempting to make assessments on a quarterly basis raises many immediate questions, such as:

• What about seasonal trade? A profit in one quarter would lead to a higher than necessary liability when smoothed out by smaller profits or losses in later quarters.
• What about losses not yet realised but that would otherwise reduce an annual tax liability? For example, a taxpayer may pay taxes in quarters one, two and three but could have paid a reduced amount in those quarters due to a disposal at a significant loss in the forth quarter.

There are other matters to consider. Sending data to a tax account straight from bookkeeping software isn’t feasible due to the tax adjustments that need to be made. These include amounts to be added back such as depreciation, disallowed expenses and private proportions. Similarly, there are amounts to deduct, such as capital allowances.

Will HMRC receive detailed or summarised data that is then adjusted as it would have been on a tax return? Or does HMRC expect to receive everything already adjusted for tax?

Of course, there are other transitional considerations to make. For example, as sole traders and landlords begin to submit information on a quarterly basis, they still have their affairs from the previous tax year to get into order. Will these taxpayers begin making payments from April 2018 with a further tax final payment to be made in January 2019 for the 2017/18 year?

For some businesses, the cash flow implications would need to be looked at carefully to ensure that payments can be made in time. Will HMRC look at some sort of smoothing or easy introduction to quarterly reporting, perhaps in a similar way to the introduction of Self Assessment where two tax years were averaged into one?

For limited companies, questions are raised concerning the future interaction between HMRC and Companies House, whether annual accounts will be required by either (or both), how or in what form they will be submitted and what format the tax computation will take.

What will happen next?

In the dealings that we have had with HMRC, whether working as TaxCalc or in consortium with the software industry, we have raised these issues, scenarios and many more questions to HMRC.

Fortunately, the response is that not only are these concerns heard but that the complications of the current tax regime will necessitate some detailed investigation and planning as to how to address them.

As such, we should expect consultation to commence from April 2016 to put meat on the bones and I can assure our customers that we will play an active part in this just as we have done with many issues over the years.

However, until these questions are answered, it makes it very hard for anybody to plan. Nonetheless, on the basis of the information available to us thus far, we are already working out what these changes mean for our software and how we will help all taxpayers and/or their accountants keep everybody's affairs in order in a timely and efficient manner as possible.

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