Making Tax Digital – three little words which have the potential to change the working lives of millions of self-employed and small business owners. Words that could also alter the relationship chartered accountants have with such clients.
HMRC’s plans to make tax digital mean that all qualifying firms will need to keep electronic accounting records. The government says its Making Tax Digital (MTD) plan is aimed at “reducing burdens for taxpayers”. But the proposals mean that firms that currently make one tax return per year to HMRC will, in future, have to update their digital tax accounts quarterly. And there are growing fears of an IT meltdown, which will make previous HMRC computing issues, such as those over tax credits and online filing, look like petty glitches.
What MTD means
On the face of it, HMRC’s plans for MTD could give Britain a world-class tax system where transactions are handled online and where reams of paper forms are banished. By 2020, according to the current HMRC timetable, most businesses, self-employed traders and landlords – those with qualifying income above £10,000 a year – will need to manage their tax affairs digitally. That means not on paper – and certainly not by stuffing records into a shoebox and handing it to an accountant at the year-end.
The five million or so businesses affected by this change will all have digital tax accounts at HMRC – more than two million already have them. And every business will be required to update its digital tax account quarterly with details of tax payable. It will have the option of paying the tax quarterly – but can wait for the year-end if it prefers.
So each business will need to keep accounting records electronically through a system that can connect seamlessly to its digital tax account held by HMRC. MTD, which will ultimately also cover individuals in employment or pensioners who have more than £10,000 a year from self-employment or property income, will enable every eligible taxpayer to view digital tax accounts, which are already populated with information held in other government systems – such as bank or building society interest included in tax codes.
HMRC emphasises that MTD removes the need to complete a self-assessment tax return each year – although many taxpayers will find the need to make end of year adjustments to their digital tax accounts on top of the quarterly returns.
HMRC says MTD will be “secure, light-touch and far less burdensome than the tax returns of today”. But Jamie Morrison, private client partner at chartered accountants HW Fisher & Company, says: “Businesses are under no illusion – the primary beneficiary of MTD will be the Revenue rather than them.” And Frank Haskew, head of the ICAEW Tax Faculty, says: “We remain concerned that MTD will still be compulsory for even very small businesses. Exempting firms below a £10,000 threshold is of little practical benefit,” he says. “Most with a turnover at or below that figure are unlikely to be paying tax anyway.”
Countdown to 2020
The issue that is most concerning the profession about MTD is the speed of implementation. If HMRC sticks to its current plan, MTD will be up and running – and five million businesses and individuals will be submitting quarterly returns – by 2020. In the March Budget the chancellor, Philip Hammond, announced the implementation timetable for the Making Tax Digital project. The self-employed and landlords will need to start filing data with HMRC on a quarterly basis from April 2018. However, there will be a one-year deferral to April 2019 for those with turnover below the VAT threshold, currently £85,000.
But Haskew warns that HMRC needs to be flexible. It should be willing to stretch the timetable if it needs more time to get the system right, he argues. That includes proper time for testing systems to resolve teething problems.
The scale of the challenge was highlighted in a survey by UK200Group, an association of independent accountants and lawyers. It found that 65% of firms still do not use accounting software. HMRC has conceded that firms may use spreadsheets for electronic record keeping, but have not explained how these will connect to digital tax records. “MTD represents the single most significant change to the UK’s system of taxation in recent times, and many of our smaller businesses are simply not ready for it,” says Richard McNeilly, who heads UK200Group’s digitalisation taskforce.
As the MTD deadline approaches, a top worry for self-employed and micro-businesses in particular will be the cost of conversion. HMRC claims the additional cost to firms will be £280, but this figure is ridiculed by business organisations such as the Federation of Small Businesses, which says the cost for some small firms could top £2,700.
Hazel Gough, an associate partner at accountants Chiene & Tait, notes that HMRC has said free MTD software will be available. But she adds: “There is little incentive for software companies to provide this and support services. It is likely most businesses will need to pay for a better product.”
Despite HMRC’s sunny optimism, MTD is likely to mean more work rather than less for smaller companies. For the large number of firms that don’t currently keep electronic records, an urgent early step is to decide how to move to digital.
“Smaller companies need to keep it simple,” advises Jonathan Riley, head of tax at Grant Thornton UK. “They should look at their current processes, and what they do on paper now, to help them properly identify how technology can be used to flag any possible issues. As with any change, it is better to get started sooner rather than later in order to become familiar with working digitally.”
Firms that successfully negotiated the auto-enrolment pension scheme will have learnt the importance of identifying critical dates and targets in order to make sure they are ready on time, says Paul McCooey, a partner at chartered accountants Duncan & Toplis. “The biggest challenge will be allowing enough time to get everything in place ahead of MTD going live,” he adds.
An early decision needs to be the choice of software. A company needs to decide what it wants to achieve, says Laura Clarkson, partner at Mazars. “For example, does the software have a bank feed, a facility to scan invoices, an integrated payroll application?” she says. Alternatively, some firms may choose to outsource bookkeeping – but this could prove a costly option.
Clarkson warns: “There will be cost associated with MTD so business owners should seek to maximise the benefits of the change.”
Accountants can help
The most urgent need is for chartered accountants to get the message out to clients that MTD is coming, says Haskew. Digitised accounting for all will create risks and opportunities.
“Many tax advisers and chartered accountants will need to adapt,” warns Tina Riches, national tax partner at Smith & Williamson, the accountancy, investment management and tax group. She sees demand for services evolving as the changes take root. “There will still be a role for tax compliance for many clients, some of whom will want their tax agent to do more than in the past,” she says.
But, adds Riches: “Many advisers will need to become accounting trainers and reviewers as opposed to doers. This requires different skills but can be very rewarding. Equally, where in the past advice has often been given after the event when records arrive, more work will be done in real-time, opening up possibilities for more proactive advice.”
Accountants are likely to find those businesses already using digital records easier to guide through the MTD process than those that are not. The issue goes even deeper, argues McCooey – to whether a firm is switched on to the importance of up-to-date financial information. But for those firms willing and able to adapt, there could be a profitable place in MTD’s brave new world.