A whole new world of tax digitalisation

Question.

I have read about the proposed changes the government are making to the way taxpayers file their accounts and tax computation. What is happening and when?

Answer.

Based on HMRC’s current proposals, by 2020 most businesses, self-employed people and landlords will be required to keep their records digitally and to provide regular updates to HMRC. The requirements are to be phased in so that income tax and National Insurance contributions (NICs) will be brought within the new regime from April 2018, VAT from April 2019 and corporation tax from April 2020. For some small unincorporated businesses and landlords, the start date will be delayed by 12 months and a few taxpayers will be exempted from the requirements altogether.

Instead of submitting an annual self-assessment tax return, unincorporated businesses will be required to submit:

regular updates (at least quarterly) of income and expenditure (including reliefs, allowances and accounting adjustments if the business wants to) within one month of the end of the update period;
an end-of-year activity within nine months of the end of the period of account (this will be the business’s profit or loss for the period and will be ascertained by reviewing the information provided in the regular updates for the year, making any accounting adjustments required and claiming any reliefs and allowances not already included in their regular updates); and
an end-of-year declaration within nine months from the end of their period of account to say that everything is complete and correct as regards their business (it will be this that crystallises the tax and NICs liability).
HMRC are proposing that they be able to check a person’s tax position and take action against non-compliance by adapting, rather than extending, their compliance powers so that they deliver the same outcomes as now. There is no proposal to enable HMRC to enquire in-year into regular updates, but HMRC will be able to check any of the information included in an end-of-year declaration used to calculate the tax, which may mean that a taxpayer’s digital records may form part of any enquiry.

Although HMRC will not be enquiring in-year into regular updates, as these updates can include reliefs, allowances and accounting adjustments and the digital records may form part of any enquiry, it is important that they are accurate and therefore many taxpayers will want their advisers to review their records prior to the data upload. In many instances, this will considerably increase the work of advisers and therefore cost to the taxpayer.

HMRC are planning to use ‘prompts’ and ‘nudge’ letters to ‘alert customers to common errors, inconsistencies or missing information, and so allow customers to correct them’. As these are not any part of the enquiry process, it is vital that HMRC make this clear and such tactics must not be used to bully taxpayers into making unnecessary changes to their tax submissions.

The introduction of Making Tax Digital is a huge change for all involved and the idea of individuals and businesses having to make submissions to HMRC every quarter, together with their other reporting requirements will be daunting for many taxpayers.

The advice in this column is specific to the facts surrounding the questions posed. Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.