Making Tax Digital and Its Effects on Businesses
Making tax digital is hitting many headlines over recent months, especially after Mr Hammond’s announcements of adjustments in the March 2017 budget.
The government announced its vision to modernize the tax system in the March 2015 Budget. After debate and consolation this has resulted in the Making Tax Digital framework, a road map by which HMRC aims to make the tax system digital by 2020.
At the March 2017 Budget it was announced that small businesses would now have an extra year to conform to the new digital system, this was primarily due to concerns raised during the consultation period.
HMRC have issued an overview of Making Tax digital. Our clients are often confused by what Making Tax Digital means and the impact on their business with the most reoccurring questions being:-
What is Making Tax digital
In essence businesses (individual and corporate) will be required to maintain quarterly digital records with HMRC of their income and expenses. This is in addition to the annual filing requirements.
The quarterly reporting is not binding with HMRC as many adjustments only arise a the year end, it will however no doubt assist in the reviewing of year end returns.
The quarterly information will be recorded on each businesses digital account, aimed at assisting cash flow by providing current tax liability forecasts.
Why Make Tax Digital?
Statistics show that the internet is used daily by 82% of adults (41.8 million) in Great Britain in 2016, compared with 78% (39.3 million) in 2015 and 35% (16.2 million) in 2006.
In 2016, 70% of adults accessed the internet ‘on the go’ using a mobile phone or smartphone, up from 66% in 2015 and nearly double the 2011 estimate of 36%.
These statistics clearly outline Great Britain has a digitally aware community seeking real-time information and quick methods of access in keeping with their everyday life.
When will this Affect my Business?
The date your business is effected will vary, current proposals are:-
- April 2018 – unincorporated businesses (including landlords) in excess of the VAT threshold
- April 2019 for unincorporated businesses (including landlords) where turnover is below the VAT threshold (subject to the £10,000 turnover exemption). Mr Hammond confirmed that the reason for the delay for smaller businesses to 2019 is to “provide them with more time to prepare for digital record keeping and quarterly updates.”
- April 2020 for companies liable to UK corporation tax
Why are HMRC Making Tax Digital?
HMRC believes that the Making Tax Digital has 4 foundations, to benefit tax payers:-
- Tax simplified – Taxpayers will see the information that HMRC holds through their digital tax accounts, and be able to check at any time that their details are complete and correct.
- Making tax digital for businesses – HMRC will collect and process information affecting tax in as close to real time as possible, to stop tax due or repayments owed from building-up
- Making tax digital for individual taxpayers – Individual taxpayers will interact with HMRC digitally, and at any time to suit them.
- Tax in one place – By 2020, taxpayers will be able to see their complete financial picture in their digital account, just like they do in their online banking.
The vision is to remove duplication, sync information and create a process akin to online banking or mobile app usage. Whilst it is likely at the outset the system will cause confusion HMRC states: “The government is committed to reducing burdens for taxpayers and building a transparent and accessible tax system fit for the digital age.”
How will this affect my business’s R&D tax relief claims?
The main benefit of real-time data is in tax planning. R&D tax relief claims and their preparation in many ways will not be affected, however the key to maximizing a claim is understanding that you can claim and ensuring all costs are recorded.
We work with many accountants to assist their clients, usually retrospectively following year end discussions or annual reviews. The new method of quarterly reporting will open communications much earlier in the year ensuring that rather than a cash refund companies can potentially incorporate their R&D into the quarterly reporting reducing the tax payable. For profitable companies this will be a valuable cash flow tool. Equally for loss making companies, understanding the likely R&D tax credit and enhancing its timing due to quick year end preparation will be key. (For more advice on R and D tax credits speak with one of our members here at R&D Tax Solutions)
What impact will this have on my business?
Businesses will require a software system which meets HMRC’s criteria. This system will store all accounting records and be used to report quarterly to HMRC.
Businesses will need to manage their time ensuring quarterly reporting deadlines are not missed, so those who usually pass all their records to the accountant at the year end will now find themselves having to pass all their records across quarterly.
There are several benefits this new system will bring to businesses most obvious are:-
- The quarterly submissions will generate an estimate of the tax bill
- Assisting tax cash flow planning to all businesses
- A single Digital Account with all taxes in one place
- access to management style information, akin to that used by large businesses for all business sizes usually reserved for those businesses
- access to real-time information, enhancing the relationship between businesses and their advisers.