HMRC’s plans for a fully digital tax system will see the biggest transformation to the tax system in 20 years. Our clients have already been contacted by HMRC encouraging them to sign up for the digital tax account. This is a pre-curser to the fundamental changes due to come in from April 2018.
The new system will see the end of the tax return for individuals, partnerships, trusts and companies. Instead, business owners, trustees and some individuals will be required to maintain digital records using software which is compatible with HMRC’s systems and to report to HMRC on a quarterly basis. Employees who have buy-to-let properties will also need to report quarterly if rents are in excess of £10,000 per annum. Owners and landlords will have one month from the end of each quarter to report turnover, expenses and any accounting adjustments such as stock, accruals and prepayments. There will also be a final sign-off nine months from the end of the accounting period to confirm that the information is correct and complete. Penalties will apply for late returns.
The new reporting procedures will start with smaller businesses. VAT will move onto the new system a year later, and by 2020 all businesses and companies will be captured. To assist smaller businesses and in order to simplify the tax system there are likely to be new rules for revenue and capital expenditure, interest restrictions and restrictions to loss relief.
At present there are no plans to change the tax payment dates but a voluntary ‘pay as you go’ option will be introduced. Whilst some businesses will wish to pay tax on profits as they arise, the impact on cashflow should not be overlooked. Details on how to obtain a repayment of tax if cashflow is tight have not been finalised.
HMRC already receives certain information direct from third parties such as payroll details, interest from banks and rental income from letting agents. This information will be used to pre-populate the digital tax account. Whilst this should reduce the burden to obtain and supply this information separately, concerns have been raised that the information sent to HMRC is not always correct and it will be up to the taxpayer to sort out any discrepancies with the third party.
The proposals are currently out for consultation and only when HMRC has considered the responses will the detail be finalised. For our clients, this will be a real-time system with more frequent contact, greater review, greater workloads, a change to timetables and in some cases, additional costs.
In the meantime, our staff are working with professional bodies to ensure we are at the forefront of the changes; Hazel Gough, our Tax Director, sits on the Institute of Chartered Accountants of Scotland’s Making Tax Digital steering group, and will provide regular updates as changes are announced.