HMRC’s “Making Tax Digital”

MTD is an acronym for Making Tax Digital, HMRC’s proposed way forward.

It makes perfect sense – if HMRC could get taxpayers to report their income sooner, let’s say monthly, it leads to the possibility of collecting tax monthly.  This would be a huge improvement over the current system of collecting tax some 9-10 months after the end of the tax period.  It’s a good business move for any government.

To appreciate the effect of this, look at it the other way around – suppose a person has her salary paid up to 18 months later in a lump sum – life could be difficult.  She would much rather have it paid monthly.  So would any government.  We can understand why any government wants to go this way, and digital technology makes it possible.

Holy grail

The Holy Grail of tax collection is to have every individual and business report their income in real-time, and to be able to collect tax in real time.  But that’s just fantasy, isn’t it?

In a consultation published in July 2010, HMRC suggested that “the employer would send the gross payment [...] to a central calculator where the deductions calculated by HMRC would be made automatically. The resulting net payment would then be sent to the individual’s bank account…”

The proposal is so daft, in the context of HMRC’s poor record on IT systems, that it’s hard to believe they went public with the idea.  Well, they did, and here’s the link:

http://webarchive.nationalarchives.gov.uk/20101007191203/http://customs.hmrc.gov.uk/channelsPortalWebApp/downloadFile?contentID=HMCE_PROD1_030623

So real-time tax collection, or as near as they can get to it, is on HMRC’s agenda.

Making Tax Digital – Quarterly returns

Under the MTD system which HMRC is working towards now, “most businesses will be required to use software or apps to keep their business records and to provide regular updates of information”.  In other words, more frequent than once per year.  This could be six-monthly, but most commentators take it to mean quarterly.

Burden on businesses

There are many businesses that still do not use accounts software.  Others that do are not necessarily VAT-registered and don’t make quarterly returns at present.  Only the larger businesses which have up-to-date monthly accounting software are in a position to make quarterly returns easily.  Then there are individuals who do not run a “business”, but who still might be required to make such returns.

For all however, it’s another official return with a set of penalties for being late or inaccurate.  The consultation “Making Tax Digital” published in August 2016 seems mostly concerned with penalties.

Some accountants see this as a sale opportunity.  We think it detracts from the more important aspects of a business, which are about making things happen in future.

Whatever our opinion, sending data to HMRC and paying tax “as we go” is likely to happen eventually, so we need to get our businesses ready.

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