What does HMRC’s Making Tax Digital Scheme mean for you?
Making Tax Digital forms the main part of HMRC’s big plans to reform the UK tax system. The Making Tax Digital scheme was announced in March 2015 and since then, there have been various consultations and government debates on the topic.
This is the largest single change to the tax system for many years and unsurprisingly, we have received many questions about it. Therefore, we’ve written this blog post to shed more light upon how Making Tax Digital may affect you.
What is Making Tax Digital?
Making Tax Digital will eventually enable taxpayers to see all of their tax affairs in one place via the Internet. It will also enable HMRC to make better use of information that is provided by someone other than the customer or their agent. This includes banks, employers and more.
HMRC anticipates that this new system will vastly improve income tax compliance by reducing incorrect and late reporting. The Government has allocated a total of £1.3 billion to this project and they believe that it will increase tax revenue by £945 million by 2021.
Implementation of this scheme has already started. Every taxpayer and individual business owner has been provided with access to an online account that they can use to check their records and update their details with HMRC. The scheme is being piloted from April 2017 onwards.
How will Making Tax Digital Affect Individuals?
Making Tax Digital will affect individuals and businesses. Currently, the information that HMRC holds on individuals is held on 3 separate computer systems. This means that customers need to report information already held by HMRC on their Self Assessment tax return. This will soon cease to be the case, as the 3 systems will be joined up in order to provide each customer with only one account.
This also means that individuals will be able to view all of their tax affairs and liabilities in one place; that HMRC will collect and process information in real time, so that payments do not build up; and you won’t have to wait until the end of the tax year to find out how much tax you need to pay.
HMRC tell us that this will eventually mean that over 10 million individual taxpayers will not need to provide a Self Assessment tax return.
How will making Tax Digital Affect Businesses?
Making Tax Digital will mean that the majority of landlords, small businesses and self-employed people will need to use a digital record keeping system linked with HMRC’s system and provide quarterly updates. It has been argued that the main benefit of this will be the ability to be aware of one’s tax obligations throughout the year. A customer could log on and find a complete picture of their business’ tax affairs at any time of day or night.
Of course, not all self-employed individuals or small businesses use digital bookkeeping software at present. Therefore, using this new approach is likely to be one of the key challenges of the scheme for the self-employed. Software providers are already engaging with HMRC to work out how they can design a system to meet these needs.
When will these changes take place?
Businesses, self-employed people and landlords will be required to start using the new digital service from:
Businesses, self-employed people and landlords with turnovers under £10,000 may be pleased to hear that they are exempt from these requirements! However, those in employment and also with a secondary income of more than £10,000 per year, from self-employment or property, will also be required to use the digital service.
What does this mean for the future?
There have been reports that HMRC are underprepared for this change, although it should be noted that this is often the case with any change of this magnitude.
Here at Whyfield, we think that it is likely that HMRC will adapt the Making Tax Digital scheme over time. Engaging with businesses and listening to feedback will be beneficial to all involved. There is bound to be a learning curve associated with implementing such large changes in legislation and technology.
HMRC recently mentioned that they plan to offer people the opportunity to pay their tax liabilities as soon as they report them. This is likely to help boost short-term cashflow to the Treasury, but experience tells us that not everyone will be keen to pay their tax bill in advance of the deadline and we can’t say we blame them!
This new system is likely to be the source of a lot more work in the short-term. This will impact upon individuals, businesses and accountants. However, we remain optimistic and hope that it will make tax reporting a little easier in the future. After all, there should be no Self Assessment tax return.
The Whyfield team have been hard at work to stay up to date on how Making Tax Digital will affect you. Please do feel free to get in touch if you have any questions about this new process. We are available on (01872) 267267.