TaxCalc Blog

HMRC Making Tax Digital – What You Need To Know

We received a number of emails and calls yesterday and today following a webinar presented by another company in our industry. The webinar purported to be in connection with HMRC’s Making Tax Digital strategy but turned out to be not much more than rouse to sell mobile app development services.

Unfortunately, its content rather unsettled the customers that contacted us, so I’ve written this blog to set out where the industry currently sits with the strategy and how it could affect practitioners and their firms.

A bit of background

One of the things that makes me proud of my senior management team is the amount of time that they have committed to representing both TaxCalc and our customers with HMRC. There is not one meeting, seminar or consultation that we miss.

Our Commercial Director, Steve Checkley, also chairs an industry forum on the matter, which is comprised of other software companies and professional bodies such as ICAEW, ACCA, AAT and ICPA. We keep each other informed to ensure that HMRC do not attempt to divide and rule.

Between us, we have been able to shape and tone down some of HMRC’s plans but unfortunately, it’s clear that some of the more contentious measures are politically driven and we are unable to influence them.

What is Making Tax Digital?

Although it has been covered in this blog before, I shall run through the basic premise behind Making Tax Digital.

1          The Digital Tax Account

Every taxpayer and business in the UK has been provided with a Digital Tax Account. In the case of individual taxpayers, they have a Personal Tax Account and every business, whether sole trader, partnership or limited company, has a Business Tax Account to handle PAYE, VAT, CT, duties and so on.

Generally, the industry considers that this is a good thing, placing better information about a taxpayer at their fingertips. Unfortunately, accountants are unable to access these accounts directly but I’ll explain below how this is to be overcome.

2          Feeding the Digital Tax Account with data

The Digital Tax Accounts will be capable of having data fed to them by various software products. Currently, payroll software, as a result of using RTI, feeds employment data into a Personal Tax Account and the result is that the account can display a payroll history.

In time, HMRC want other sources of information to feed the account to include bank interest, dividends, rental income and self employed income. This would give a taxpayer a broad overview of their income streams in real-time.

3          Quarterly Updates

From April 2018, HMRC want either some or potentially all sole traders and landlords (or those with an employment but also a self employment or property income over £10k a year) to keep records in an as yet unspecified digital format and submit headline information to them, online, on a quarterly basis.

These updates are called Quarterly Updates and the administrative overhead forced upon small businesses has been heavily debated on AccountingWeb.

We have also fiercely lobbied HMRC to drop this requirement as it will clearly be detrimental to small businesses and landlords, whether they undertake this work themselves or pay for their accountants to do so, but it is evident that this has come from a higher power within Government.

HMRC advise that spreadsheets will no longer be an acceptable format to be keeping records in but somehow think that businesses can keep all of their records on a mobile phone!

4          Prediction of tax liabilities

HMRC would use all of this information to predict a potential tax liability. Of course, some income streams, such as self employment and property, assuming they were absolutely correctly put together, will be wholly unadjusted for tax purposes and therefore be wrong. 

In the case of the webinar that we watched, there was a suggestion that taxpayers would undertake these adjustments themselves but I firmly believe that clients would still rather use accountants to complete the process.

If clients submit Quarterly Updates themselves, they will surely need correcting and amending for accounting adjustments. In fact, when you consider the changes to the tax regime, such as dividend tax, interest allowances, new micro entrepreneur allowances, two new rates of CGT, cash accounting rules and so on, the tax regime will be more complicated than ever!

We believe that there is an opportunity for accountants to be able to visibly demonstrate the savings in tax that they will make and therefore their value to their clients.

Now, if we take points 2 and 3 above, whilst an accountant may not be allowed to have direct access to an individual’s Personal Tax Account, software such as TaxCalc will be able to download the content of said Personal Tax Account in order that it can be finalised for final submission to HMRC.

You will see in our software this year, once HMRC turn the system on at their end, that we have added the capability to fetch employment data into a tax return from the Personal Tax Account and avoid having to key in P60 and P11D data. Furthermore, through the use of these Application Programming Interfaces (or APIs), TaxCalc has the potential to become even more useful and could, for example, make checks to see whether clients have paid their tax bills on time, update HMRC of changes to clients’ affairs and so on.

The accountant/client relationship

As mentioned above, there is a potential that clients will actually be more dependent upon their accountants due to the complexities of the tax system.

And, with Quarterly Updates, it is very likely that a proportion of clients will need to use accountants or bookkeepers to prepare these records and make submissions to HMRC. Of course, there is an issue here with regard to the fees that will be necessarily incurred.

Thirdly, HMRC advise us that they are still going to keep a regime in place whereby accountants receive copy correspondence sent to clients. There has even been talk of an API that can send copies of digital messages received by clients to their accountants via their software. I think that claims made in the webinar that HMRC are going to cut out accountants from the accountant/client relationship are misconceived.

Our future

We were asked by one customer what we intend to do about all of this.

As well as investing a considerable amount of senior management time into our relationship with HMRC to influence their plans as best we can, once the specifications for the digital record keeping are known, we plan to develop products that will be suitable for both small businesses and practitioners to meet HMRC’s requirements.

As a TaxCalc product, you can be certain that it will be simple and efficient to use and meets the needs of its target audience. It will also integrate seamlessly with our other TaxCalc products to ensure efficient transfer of data.

We will post to our blog with more information as the story unfolds.

Come and meet us

If you would like to discuss the matter face-to-face with us, there are many opportunities this year. In May, we will be exhibiting at Accountex where our senior management team will be in attendance to answer any questions you may have.

We are also running a series of seminars up and down the country called TaxCalc SmartPractice. Indeed, one of our headline topics is Making Tax Digital and to find out more about these and how to book, please visit our Events page.

Further reading

For those that are new to our blog, please find below links to earlier articles regarding Making Tax Digital.

• Making Tax Digital – Quarterly Updates, Petitions, Debates and Research
• HMRC's New APIs – How They Work in TaxCalc 2016
• Behind the Scenes of Working with Government
• Digital Tax Accounts and Quarterly Reporting
• The Digital Tax Account – Public Beta and a New Name