TaxCalc Blog

Making Tax Digital - Consultation Documents

HMRC have now published their consultation documents on the Making Tax Digital (MTD) strategy. Covering six separate documents and totalling 243 pages, together they set out HMRC’s vision for the future for the UK’s tax system.

For some time now, we’ve been taking time to inform our customers of the key concepts behind Making Tax Digital: Digital Tax Accounts, Application Programming Interfaces (APIs) and Quarterly Updates. The consultations not only help explain these plans but introduce some new ideas not previously imagined.

We’ve dissected the first of the six documents and here are our high-level findings.

£10k gross income exemptions for Quarterly Updates

From April 2018, Quarterly Updates were initially going to be applied to:

• unincorporated businesses (sole traders and partnerships)
• landlords
• those in employment but with second incomes of the above in excess of £10k gross

The consultation sets out that any taxpayer with self employment or property income of a combined £10k^[1] will be exempted from Quarterly Updates. This £10k is determined before any deduction of expense, so based upon turnover and rents receivable. It is also irrespective of whether they have an employment or not.

To provide examples, let’s say someone has a sole trade turnover of £9k. They will be exempted from Quarterly Updates. However, if they were to also earn £2k of rents from property, this would exceed the £10k threshold and they would have to submit Quarterly Updates on both of these income streams.

With regard to other types of income, let’s say someone earns £25k from an employment and £6k from property. Since the property income is under £10k, the taxpayer doesn’t have to make Quarterly Updates. If it were, say, £25k of employment and £12k of rents received, they would enter the Quarterly Update regime.

Deferment of introduction of Quarterly Updates on smaller incomes

The consultation also sets out a potential deferment of entering the Quarterly Update regime for the next smallest businesses or landlords. These taxpayers will have turnovers exceeding a combined £10k but lower than a figure still to be determined.

Qualifying taxpayers would be deferred for one year and enter the regime in the 2019-20 tax year. HMRC are inviting responses to help determine this turnover threshold.

Whether a taxpayer is exempt or able to defer, the first consultation document doesn’t explain what happens with regard to disclosure to HMRC. It’s likely that an annual declaration is made at the year end.

Change in partnership income disclosure

The first two matters above are probably expected, given the professional and public responses to MTD. The next few matters are rather more surprising.

With regard to partnerships, it is envisaged that taxpaying individuals will no longer have to disclose their share of partnership incomes personally. Instead, the partnership will designate one of the partners as being responsible for sending information to HMRC on behalf of everyone in the partnership. The information, once received, would show up on the partners’ Digital Tax Accounts.

HMRC are also inviting feedback on whether this this approach could be applied where taxpayers have joint incomes, although it’s appreciated that this may not be straightforward.

Accounting periods, Quarterly Updates and the end of the January rush

As had been expected, taxpayers will enter the Quarterly Update regime in the first quarter following their usual accounting year end and will have one month after the quarter end to file the Update^[2].

At each quarter end, the taxpayer has to provide summarised information to HMRC which may or may not be adjusted for accounting and tax adjustments. Now, HMRC have gone to great pains to say that Quarterly Updates is not four tax returns a year. Yet if the taxpayer submits unadjusted information, their tax position will be incorrect!

As such, HMRC will allow a nine month period after the accounting year end in which all accounting and tax adjustments can be made. This period also gives time for taxpayers to work with their accountants to close off their year end position.

To provide an example, consider the following timeline:

• a sole trader has an accounting year end of 30 September 2018
• they enter Quarterly Updates on 1 October 2018
• their first quarter ends on 31 December 2018
• their first Quarterly Update has to be filed by January 2019
• a few quarters later, the taxpayer has a final quarter ending 30 September 2019
• the final Quarterly Update is made by 31 October 2019
• the tax year is closed off by 30 June 2020

With regard to the January rush, most tax information should already be in the taxpayer’s Digital Tax Account. For example, employments and pensions will be received via RTI, interest from banks and so on. TaxCalc will fetch these values from HMRC for review and adjustment, if necessary. Correcting positions on trade and property will complete the taxpayer’s affairs.

Combination Income Tax and VAT submissions

The final matter sounds relatively simple but will require further thought. The theory goes that if a taxpayer is registered for VAT, they will be attuned to making returns, usually on a quarterly basis. The taxpayer could be relieved of some administration if one return covered both taxes.

Now, the regimes for both taxes are different. Quarterly Updates may yet require taxpayers to submit summarised information, perhaps categorised by expense (similar to the SA103F) or three line accounts (turnover, expenses and profit). Conversely, VAT returns submit grand totals of input and output VAT and the net incomes and expenditures to which they relate. There are also requirements to disclose interactions with EU countries.

There are also other issues to address, such as accounting year ends and VAT quarters not lining up or the taxpayer doing what HMRC appear to be hoping for and submit data on a frequency greater than quarterly.

Thinking about this further, it’s also likely that a VAT registered business will be using bookkeeping software with a nominal ledger structure of their choosing. If HMRC require a categorised summary by income and expense types for both types of tax, this would extend current VAT reporting. Nominal ledger codes would then need mapping to expense categories and to set this up will require some effort by the taxpayer or their accountant.

Summary

This article summarises our thoughts of our first review of the first consultation. There are another five documents to go that further explore other facets of MTD and changes to the tax regime.

To download and read the consultation documents for yourself, you can find them on the GOV UK website here:

https://www.gov.uk/government/collections/making-tax-digital-consultations

[1] Probably £10k – HMRC ask in the consultation documents whether this is the right value.
[2] HMRC also propose some alternatives, which would introduce Quarterly Updates to taxpayers earlier than this but concede that this is probably unnecessary.