Consultation outcome

Making Tax Digital for Business - an overview of the main design choices from the consultations

Updated 31 January 2017

Overview

The way you interact with the tax system is changing. From 2018 it will become increasingly digital and most businesses, the self-employed and landlords will need to use software or apps to keep their business records, and to update HMRC quarterly. The underlying tax rules will be simplified to support these changes.

We are consulting on how a more digital tax system will work. The 6 consultations published on 15 August 2016 contain a lot more detail about our proposals and a wider set of questions.

This document provides an easier way to respond to the Making Tax Digital consultations than the full formal consultations. We have included a summary of the main issues and some specific questions, aimed at small businesses and smaller landlords. There are links to the full consultations at various points if you would like more detail. This is your opportunity to have your say - please get involved.

How to respond

You can respond directly to the key questions set out here. There are also links to the full consultation documents at the beginning of each section so you can find out more and/or submit a fuller response.

If you want to respond to the questions in this document rather than to the individual consultation documents you can do so using this online form or in writing to:

HM Revenue and Customs
Making Tax Digital for Business consultation overview
Room 3C/12
100 Parliament Street
London
SW1A 2BQ

The deadline for responses is Monday 7 November 2016.

You can choose to answer some or all of the questions in this document when responding. If you want to refer to the full consultations for more information about any of the questions in this overview document, the relevant question number is included at the end of each one.

A: Bringing business tax into the digital age

The full consultation is available here:

Making Tax Digital: Bringing business tax into the digital age

Digital record keeping and regular updates to HMRC are central to Making Tax Digital. The information in this consultation is aimed at the self-employed, landlords and all businesses which are not limited companies. Companies will be covered by a separate consultation later this year.

Choosing record keeping software

This consultation considers the practicalities of making the transition to digital record keeping, how you can choose the right product and the guidance and support HMRC needs to provide. This includes the availability of free products for the smallest businesses with the most straightforward tax affairs.

Question 1:

What are the challenges for businesses that currently keep their records on paper or simple spreadsheets in moving to digital software or apps for record keeping, and what further measures or support would help businesses to meet these challenges? [question 1 in full consultation]

The government is considering what support might be provided to help with transition. This might be financial support, extra tax relief or practical help such as online training sessions.

Question 2:

What level of financial support might it be reasonable for the government to provide towards investing in new IT, software or training, who would benefit from such support, and what is the most appropriate form for delivering such support? [question 4 in full consultation]

Providing HMRC with updates

Businesses will record and categorise receipts and expenses in their record keeping software or app, reducing inadvertent errors. You will be prompted to send a summary update to HMRC when this is due, which you will be able to do directly from your software or app. Updating HMRC regularly will give you more certainty over your likely tax bill, allowing you to manage your cash flow more effectively throughout the year.

Updates to HMRC will contain summary data only - for example, this could be the totals of the categorised income and expenditure data recorded by your business software or app.

Question 3:

Do you have views on how detailed the summary data in the updates should be, and whether the level of summary data should be different depending on the size of the business? (question 20 in full consultation)

“End of Year” activity

The consultation explores how the figure of taxable profit will be finalised, including what activity you may need to undertake and how long you have to do so.

For businesses using the cash basis method of calculating their profit, this could be as simple as ensuring their updates are complete and then making a final declaration. However we recognise that more complex businesses will need to review the information they have previously provided, make any necessary accounting or tax adjustments (or make changes to figures entered previously) and claim any reliefs and allowances that they didn’t include in their regular updates.

HMRC’s preferred approach is that all businesses should have nine months from the end of their period of account to complete this “End of Year activity” and make a final declaration.

Question 4:

Do you agree that businesses should have nine months to complete any End of Year activity? (question 28 in full consultation)

Exemptions

We propose that all unincorporated businesses and landlords with gross income/ annual turnover below £10,000 are exempt from the new obligations. We also propose to defer implementation for a limited group of unincorporated businesses and landlords with annual turnover above that threshold. We are consulting on the appropriate income threshold for exemption and on how eligibility for deferral should be defined.

Question 5:

Do you agree that £10,000 annual gross income/turnover is an appropriate threshold for exempting businesses from Making Tax Digital? Do you have any comments on how the exemption should operate? (question 35 in full consultation)

Question 6:

Should the smallest unincorporated businesses that are not exempt have an extra year to prepare for Making Tax Digital? How should eligibility for this group be defined? (question 36 in full consultation)

Those who genuinely cannot use digital tools will not be forced to do so under Making Tax Digital and we have exempted them entirely from the new obligations. In addition, there is an opportunity for any other groups who feel they should be out of scope to make their case as part of the consultation.

How will the changes affect your business?

The consultation includes an initial assessment of the costs and benefits to business of Making Tax Digital based on our early engagement with stakeholders and our initial research and analysis, and asks for more information to help improve our understanding of how the changes will affect businesses.

Question 7:

What costs might you expect your business to incur in moving to the new regime? [question 41 in full consultation]

Please provide details of the costs for:

  • time spent in your business familiarising with the new processes and conversion to these new processes
  • software expenditure costs (new or upgrading software)
  • hardware expenditure costs (purchase of a computer, tablet device, etc)
  • any other costs which are not covered above

Question 8:

Do you expect that your business will incur additional on-going costs as a result of these changes? (question 42 in full consultation)

Please provide the details of the additional costs or time for:

  • additional support from your accountant or tax agent
  • additional time spent gathering, collating and inputting data
  • additional time reporting obligations through providing regular updates and any end of year activity
  • any other costs or time spent not covered above

B: Simplifying tax for unincorporated businesses

This consultation considers a number of tax simplifications reducing the amount of work businesses have to do to comply with their tax obligations. Some of these are set out below.

Cash basis threshold extension

The cash basis provides a simplified way for businesses with trading income to calculate their profits, taking account only of amounts actually paid and received within a period. Currently, businesses may only enter the cash basis if they have a turnover below the VAT threshold (currently £83,000).

We are consulting on whether to raise this threshold. There are a number of options, ranging from £100,000 to £166,000 (double the VAT threshold). A higher threshold would allow more businesses to benefit, but the cash basis is typically less suitable as business turnover increases.

Question 9:

What do you consider to be an appropriate turnover threshold? (question 1a in full consultation)

Reforming the distinction between capital and revenue expenditure within cash basis

Businesses need to adjust their profits for tax purposes, including distinguishing between capital expenditure (usually one-off expenditure, producing a lasting asset for the business) and revenue expenditure (day-to-day expenditure, often recurring and producing no lasting asset). Generally, revenue expenditure may be deducted in calculating profits and capital allowances are then given on certain types of capital expenditure.

Although the cash basis simplifies this, businesses are still required to distinguish between capital and revenue and to consider the capital allowances rules. The proposed changes would allow upfront relief for all types of expenditure (other than excluded assets such as property), making it easier for businesses to determine which costs can be deducted in calculating their taxable profits.

Question 10:

Do you believe that simplifying the capital/revenue distinction as proposed would simplify reporting for businesses within the cash basis? (question 8 in full consultation)

C: Simplified Cash Basis for unincorporated property businesses

This consultation considers the extension of the cash basis to some types of landlords, giving them the choice to use the cash basis rather than the accruals basis. This will include most individual landlords and some partnerships where all the partners are individuals (unincorporated property businesses). Its introduction will simplify the tax rules for Making Tax Digital landlords.

Unlike the cash basis for trading income, we are not proposing a turnover limit for landlords as their business complexity does not necessarily increase with increased turnover, so if you are a landlord your turnover will not affect your eligibility to use the cash basis.

Question 11:

Do you feel there should be a maximum turnover imposed for eligibility for the cash basis for unincorporated property businesses? If so, what should this be and why? (question 1 in full consultation)

D: Voluntary Pay As You Go

The full consultation is available here:

Making Tax Digital: Voluntary pay as you go

Once businesses are keeping digital records and updating HMRC regularly with summary data, this provides an opportunity for those who wish to to make voluntary payments throughout the year towards their tax liabilities. We will not be altering the current payment dates, but some businesses may prefer to pay a more regular amount towards their tax liabilities.

This consultation considers how you might make or manage those voluntary payments. It considers how voluntary payments will be allocated across your different taxes and explores the best way of dealing with repayments of them. Voluntary payments will allow you to better manage your cashflow and will be allocated against tax liabilities as they become due. You will be in control of how often and the amounts of the payments to make.

Question 12:

Do you see any challenges with the voluntary payments process described? (question 1 in full consultation)

E: Tax administration

The full consultation is available here:

Making Tax Digital: Tax administration

This consultation covers aspects of the tax administration framework (compliance, penalties and interest) that need to change to support Making Tax Digital. It sets out proposals to align aspects of tax administration across taxes, including the simplification of late filing and late payment sanctions.

Penalties

The new sanctions proposed are intended to be easy for customers to understand, and give people the chance to get things right before they are charged monetary penalties. They will replace a variety of different sanctions for late filing and late payment that currently operate across different taxes and are designed to be fair, proportionate, consistent and customer focused.

Late submission penalties:

The consultation proposes a graduated model with each non-deliberate failure to submit information on time attracting penalty points. Only once the points reach a set level would a penalty be charged. A stronger sanction is outlined for those who are deliberately non-compliant. To give customers time to get used to the new Making Tax Digital obligations, the consultation also proposes a period of time before sanctions are introduced.

Question 13:

We invite views on the design principles outlined for the points-based penalty (question 3.3 in full consultation)

Late payment penalties:

The consultation proposes new sanctions that provide a fair and proportionate response to late payment of tax and give adequate opportunity for those who have accidentally underpaid or overlooked a liability to correct this before sanctions apply. It invites comments on the merits of a new penalty interest regime and two models for aligning existing late payment penalties.

Question 14:

Do you think that charging penalty interest is the right sanction for non-compliance with payment obligations? (question 4.2 in full consultation)

Interest

Currently there are different interest rules across the taxes covered by Making Tax Digital. The government plans to take a phased approach to align the interest regimes, making it clearer for customers. More information on this is set out in the full consultation.

F: Transforming the tax system through the better use of information

This consultation sets out how we will use information which we already receive from third parties, such as employers, banks and building societies, more effectively and in-year. Better use of information will reduce the number of customers who build up under- or over- payments. Customers will see a complete and up-to-date picture of all their tax liabilities in their digital tax account and will be able to use their digital tax account to give information on any additional income to HMRC.

We are designing the digital tax accounts to answer customer questions about their tax codes, which could be updated more frequently in future. We recognise that employers could get more frequent amendments to some employees’ tax codes.

Question 15:

Where events during the year result in a change to a customer’s tax code, what is the appropriate format and regularity of notification that HMRC should send to employers? (question 1 in full consultation)

We will begin with third party information HMRC already holds and start by making much better use of it by connecting it with the relevant customer. When this capability is established and working well we will look at new classes of information to open up.

This consultation explores potential new sources of third party information which could reduce the reporting burden for our customers, including other investment income such as dividends on shares, income from peer-to-peer lending, and income from property. For each potential new class of third party information identified, we will consult on how we will obtain and use this new type of information.

Question 16:

What new sources of third party information would most enhance the customer experience and best contribute to the aim of ending the tax return for all? (question 13 in full consultation)