The end of the tax return as we know it? Changes on the horizon for the self-employed and landlords as HMRC forges ahead with the digitalisation of tax
Ian Bowden is partner in Tax Technology at accountants and business advisors BDO
Ian Bowden is partner in Tax Technology at accountants and business advisors BDO.
While the impact of Covid-19 has delayed the introduction of new tax legislation, HMRC’s main focus as we emerge from lockdown will be on replenishing the public coffers.
In recent years there has been a focus on initiatives aimed at closing the ‘tax gap’ – i.e. the difference between expected tax receipts, and that actually collected.
HMRC estimate (2018-2019) that they collect around 95.3 per cent of tax owed, which equates to a tax gap of circa £31billion.
While the underlying behaviours which give rise to the tax gap vary (from failing to take reasonable care right through to tax evasion), a significant proportion – £8.5billion or 27 per cent – is estimated to be attributable to avoidable mistakes.
Many will be familiar with HMRC’s Making Tax Digital (MTD) agenda, essentially the UK’s version of a global initiative by tax authorities to digitally connect records to tax submissions.
While some may argue that MTD Phase One (also known as MTD for VAT) has so far fallen short of HMRC’s aspiration of creating the groundwork for the most digitally advanced tax system in the world, future phases will undoubtedly accelerate its scope and interconnectivity.
Driven by advances in technology, MTD will give HMRC the ability to see tax submissions which are:
- connected to data from other sources
HMRC have seen internal headcount reductions, hence the focus on adopting more of a technology and risk-based approach. Their systems are increasingly designed with algorithms to identify submissions containing anomalies, discrepancies, or data which is ‘outside expected parameters’, allowing for more targeted enquiry.
This is all with the aim of reducing the tax gap by preventing or identifying errors, evasion, or instances where taxpayers fail to take reasonable care.
Making Tax Digital, the UK’s version of a global initiative by tax authorities to digitally connect records to tax submissions, is entering its second phase and more people will be affected
The next key dates are:
April 2021: For those already subject to MTD for VAT, business records will need to be digitally linked to VAT submissions.
April 2022: Mandatory roll out of MTD for VAT for all VAT-registered businesses including those below the £85,000 taxable turnover level.
April 2023: Introduction of MTD for Income tax for self-employed businesses and landlords with annual business or property income above £10,000.
Corporate tax is also on the agenda; the consultation document is out soon. We don’t expect much of a deviation from the approach taken on VAT, our sense is the corporate tax return as we know it, will be replaced by a more real time submission with the returns, looking more like a tax provision calculation required quarterly.
Clearly MTD is the future for all UK taxes and for all taxpayers in the UK, and this will inevitably impact how taxpayers handle their data and make their submissions.
HMRC won’t be maintaining their own software, a change for those of us who spend most of the 31st of January trying to remember our Government Gateway passwords. Expect to submit your information via a digital connection, using market standard software.
Making Tax Digital’s phase two will include self-employed, including landlords, with income of over £10,000
Those most affected
MTD requirements will continue to expand for VAT registered businesses. If it follows what we have seen elsewhere it is possible that this could include transaction level data submissions at some point.
MTD for income tax will be a significant expansion of the MTD customer base as it is rolled out for the self-employed and landlords with annual business or property income above £10,000 a year.
To date, these businesses have submitted their data via self-assessment returns, and this will eventually be retired in favour of MTD. The current pilot continues and we are seeing new software vendor entrants’ to the market.
MTD will inevitably impact how taxpayers handle their data and make their submissions
What do you need to be mindful of?
- More regular reporting. Submissions are likely to be quarterly with a final annual return.
- Better cash flow information. Quarterly tax submissions will drive better visibility of tax liabilities as they accrue.
- One source of the truth. Business records will capture and classify income for tax purposes. Business and tax records to become increasingly linked.
- More choice. Software providers will continue to enter this new market. A careful assessment of the benefits and their ability to capture more detailed or complex transaction items will be key.
- Advisors input will be targeted. Some taxpayers may outsource the problem to their advisors. For those that don’t, advisor input may be required more often, but will no longer involve shoeboxes of receipts or disparate spreadsheets.
In the short term businesses who are registered for VAT cannot afford to wait; HMRC will not be providing any further soft landings. They need to consider the upcoming changes and plan accordingly.
The bigger challenge will be for those self-employed businesses who are not registered for VAT and landlords who will impacted by the introduction of MTD for income tax.
Taking time now to think about how you record, retain and report your business records will be key to staying on top of the MTD agenda as it develops. Good luck everyone.