In 2015 the Government announced a major plan to modernise the tax administration system by introducing digital services for tax. This is the most substantial change to tax administration in the UK since the introduction of self-assessment some twenty years ago. The following is proposed:
- the creation of personalised digital tax accounts for individuals and for businesses
- quarterly digital reporting of income and expenditure by corporate businesses, self-employed individuals and landlords
- options for paying tax on a voluntary basis.
Six consultations documents were published by HM Revenue & Customs (HMRC) on 15th August 2016, which provide further details of these proposals.
The consultation window for these proposals closed on 7th November 2016 and Rayner Essex have submitted a response to the consultation. In the Autumn Statement delivered on 23rd November, the Government stated that they will respond to the consultation in January 2017.
As we believe this to be the biggest change since the introduction of self-assessment, we are contacting you to advise you of HMRC’s intentions and to assure you that we are taking all the necessary steps to prepare ourselves for the upcoming changes and seek ways of helping our clients to adapt to the new tax reporting system when introduced.
Digital tax accounts
Digital tax accounts for individuals have already been created by HMRC. These are called Personal Tax Accounts. These accounts have been linked to HMRC’s internal systems so that they will be pre-populated with income and tax details that HMRC already hold, i.e: employment income, PAYE and National Insurance Contributions (NICs) and any state retirement pension.
Individuals can access their digital tax account at: www.gov.uk/personal-tax-account. You will be required to verify your identity by answering questions that are specific to you. Please note that at present your tax agents have not been granted access to your personal tax account. HMRC have informed us that in due course you will be able to invite your agent to view and update your Personal Tax Account on your behalf.
From April 2018, it is intended that interest paid by banks and building societies will be included in the digital tax accounts. Taxpayers will also be able to report any additional sources of income through their digital tax accounts in 2018.
Digital tax accounts are also being established for businesses and in the tax year, these will show an overview of the income tax or corporation tax, VAT and NIC details of the business.
In order to show the details of the profits subject to income tax or corporation tax, businesses will be required to make available the details of their income and expenses on quarterly basis. It will therefore become an obligation to comply with a new quarterly update system.
By 2020, most businesses, including self-employed people and landlords will be required to keep track of their tax affairs digitally and update HMRC at least quarterly through their digital tax account. These changes will be phased in from April 2018. The current proposals are that these measures will not apply to unincorporated businesses or landlords whose business turnover and / or gross income from the property business is under £10,000. Charities and Community Amateur Sports Clubs are also likely to be exempted from these new rules.
To meet these quarterly reporting requirements, taxpayers will be expected to use specially designed software or apps which record day-to-day transactions, categorise them into different types of income or expenses and then feed the summary data directly into HMRC systems. HMRC has no plans to offer free software but expects developers to provide free software for businesses with the most straightforward affairs. Obviously, Rayner Essex will have in place commercial bespoke software to meet our client’s obligations under these proposals if this is required.
The periodic updates of data to HMRC will be made quarterly but could be done more frequently if a business or landlord chooses. When an update is due, businesses (both corporate and sole-traders) and landlords will have one month to compile the information and declare that the respective quarter’s data is correct and complete to the best of their knowledge.
The ‘End of Year’ return
After the end of the year, final adjustments will be made to arrive at the business’ taxable profit or loss and the ‘End of Year’ declaration will be filed. This declaration must be made within nine months of the end of a period of account (normally a period consisting of four consecutive quarterly returns).
Tax payment changes
For employees, HMRC has already started using real-time PAYE data to reduce under and overpayments by changing tax codes in-year. It is proposed to extend this principle through to the individuals’ digital tax accounts to include common income sources in the in-year tax calculations. In principle, tax arising on additional income which is small or regular will be collected through PAYE tax code changes. For larger amounts of income, individuals will be notified through their digital tax accounts how much tax will become due after the end of the tax year and will be given options on how and when to pay what is owed. Businesses, self-employed people and landlords, who keep their records digitally, will be able to adopt pay-as-you-go tax payments on a voluntary basis.
Timeline – key dates
|Consultation on Making Tax Digital Closed||7 November 2016|
|Accounting periods starting after:|
|Quarterly updates for unincorporated businesses and landlords||April 2018|
|VAT reporting starts under Making Tax Digital||April 2019|
|Quarterly reporting for companies||April 2020|
What about partnerships?
The consultation also proposes that a partnership, through a nominated partner, would fulfil the obligations of record keeping on behalf of the partners. The partnership’s updates would then feed directly into each partner’s digital tax account as pre-populated income based on the profit allocation of the partnership. Therefore individual partners would not have to maintain their own digital records, unless they have other income sources.
How we can help you?
Please be reassured that currently you are not required to take any action in respect of these proposals.
We are taking an active role in responding to the six consultations and we will keep you informed of every step in the process.
Please be assured that were we act for you we will continue to assist you with your tax affairs and we will keep you informed of the developments on the Making Tax Digital project as they become known to us.
Regular updates on the subject will be available on our website.
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