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September 9, 2016

Making Tax Digital: Bringing business tax into the digital age

By 2020, businesses, sole traders, and landlords will be required to keep digital financial records and provide HMRC with quarterly tax updates, thereby eventually eliminating the annual tax return.

From April 2018, businesses paying income tax and NICs will be required to comply with the new reporting requirements. This will be extended to VAT from April 2019, and then finally to corporation tax by April 2020.

With this in mind, the first HM Revenue & Customs consultation document is focused on how the proposals will affect unincorporated businesses; a consultation document on MTD for companies is expected later this year.

Summary of Proposals

It is envisaged that throughout each quarter, businesses will be required to record the details of their business income and expenses on apps or third party software, with an update sent to HMRC each quarter. This will enable businesses to have an in-year estimate of their tax positions.

At the end of each year, the taxpayer will be required to make the necessary adjustments and finalise their tax position (referred to as the End of Year activity). It is thought that the taxpayer will have 9 months from the end of their period of account to complete and submit the End of Year activity, however HMRC are seeking opinions on this matter.

Unincorporated businesses and landlords with annual turnover not exceeding £10,000 will not be required to maintain digital records nor provide regular updated to HMRC. Furthermore, some smaller businesses who HMRC anticipate may struggle to transition fully by 2018 will be provided with assistance and support, and may have the date by which they must comply with the proposals deferred.

New Penalty System

Under the current system, a tax return filed late will attract an automatic penalty of £100. Under the new rules, a late submission of an update or the End of Year activity will not immediately attract a penalty. Instead HMRC will issue penalty points that will only apply financial penalties after several failures.

The Consultation Document

The Government’s ambitions to create one of the most digitally advanced tax administrations in the world are not without criticism, with many professionals and business owners feeling that not enough information regarding the proposals have been released, and that quarterly reporting will create an administrative and financial burden.

In light of this, HMRC are asking for comments regarding their proposals. If you are going to be affected by these proposals and would like HMRC to hear your thoughts, the full consultation document can be found here. The closing date for comments is 7 November 2016.


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