Making Tax Digital is a step towards government tax collection in real time. That may sound fanciful, but we’ve heard ministers and commentators talk about taxing internet transactions as they happen – maybe just wishful thinking.
In 2010 the Treasury put forward the idea that employers might pay gross salaries to a government agency, which would calculate and deduct the tax and national insurance, and which would then pay the net amount onwards to the employees. This idea went no further for reasons that might be obvious, but it does show the direction of thinking.
Getting the money in
The government has to collect taxes to pay for roads, hospitals etc – just as any business must watch its cashflow, so must a government collect its tax revenue diligently.
Every government which is able will want to follow this path of getting incomes reported digitally, and getting more frequent tax collections. The way forward will be to collect tax quarterly, and after some years (although this is not being suggested at present) it is logical that the frequency of returns would become monthly, followed by monthly payments of tax.
HMRC says it will mean fewer tax returns – is this a joke?
HMRC’s introductory publication even shows a graph showing the number of tax returns falling as Making Tax Digital takes effect.
In fact, Making Tax Digital will require businesses and individuals to make quarterly returns of their income. Instead of one statutory return each year, there will be five (four quarters plus one to finalise).
This all starts in April 2018. There are different start times for individuals, businesses, large companies, but we are not trying to cover all the detail here.
An illustration of how profound this change will be …
HMRC has suggested that the threshold for Making Tax Digital will be £10,000, although this is not yet confirmed. Suppose that an individual has self employment income of £8,000, and a rental property income of £5,000. This individual will have to file four quarterly returns for each income.
These returns must be made digitally. Paper returns are so yesterday… HMRC really does not want to receive information on paper because of the cost of having to employ people to deal with paper.
At present the Making Tax Digital returns will not be combined with other returns like VAT returns (although we might expect that to change in time), so a sole trader with two sources of income, employees, and registered for VAT will have many frequent returns to make online, with penalties for missing the deadline.
We might not be surprised if HMRC delays implementation, or changes the thresholds. There is certain to be adverse publicity when things don’t go smoothly, but this is the way forward, so we might as well get on board.
For individuals and businesses, the place to start is to get your information into digital format. HMRC will enable reporting online using their software, but so far almost any commercial software has been easier and quicker to use than HMRC’s facilities. The trend is towards cloud-accounting software which will interact with HMRC automatically, taking advantage of bank feeds and automating the accounting process as much as possible.
Which software should you use? You might need to have this up-and-running by April 2018. Now is the time to do the research….