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Making Tax Digital Time to make the switch to the cloud?

Cloud technology

UPDATE 15 March 2017

In his Spring Budget 2017, the Chancellor re-stated the Government’s commitment to the project which is scheduled to start in April 2018 with the first quarterly updates being submitted by the self-employed and property landlords in July 2018. Many (including myself) expressed concerns about the timescale for the introduction of MTD. He announced a one year deferral in the start date to 2019 for self-employed businesses and property landlords with gross income below the VAT registration limit (which is increasing from £83,000 to £85,000 per annum, effective 1 April 2017, whilst the deregistration threshold will increase from £81,000 to £83,000).

Original MTD article, published 31 January 2017

It may be that you have just filed your personal Tax Return (before the 31 January deadline of course) and you are trying to forget about tax for a while. Well, I’m afraid that is not going to be the case because if you haven’t heard about Making Tax Digital (MTD) yet, you are going to hear a lot more about it over the coming months.

The tax system as we know it is about to be completely transformed to fit the digital world that we now live and work in. By 2020, HMRC hope to have moved to a fully digital and online tax and VAT system for individuals, businesses and companies. The new system will look and feel very different as will the way you interact with it. HMRC itself states that “the government is committed to reducing burdens for taxpayers and building a transparent and accessible tax system fit for the digital age”.

The good news (or the bad news depending on your inclination) is that the changes are already underway and heading towards you very soon.

Authorised agents (your accountants and tax advisers) will be able to manage their clients’ digital tax accounts through the use of third party software and, by April 2018, we will see a new personalised digital service through which taxpayers will be able to send and receive information from/to HMRC at the click or tap of a button.

Please be aware that third party income data from banks, employers, other government departments, etc will be automatically provided into the digital tax account and any discrepancies will have to be challenged with the third party. It has been said that the role of your adviser may change from “preparer” to “reviewer” and, ultimately for some taxpayers, we will see the end of the annual Tax Return altogether. maco logo 2016 full

HMRC launched six consultation papers in August 2016 and we expect detailed proposals and draft legislation (followed by further consultation) on how MTD will work to be rolled out early in 2017. They received 1,800 responses to the initial consultation papers. HMRC’s own MTD impact assessment estimates savings to business of £250m and increased tax revenue of £650m by 2020/21.

Under the consultation proposals, unincorporated businesses and landlords will be required to digitally update HMRC on a quarterly basis in terms of their income tax and national insurance obligations. These taxpayers will have to ensure that their record-keeping and accounting/tax software (or that of their agents) can cope with this additional compliance requirement on a real-time basis and has the facility to transfer digital information directly to HMRC or via third party API software.

It remains to be seen how HMRC will use this additional information. In particular, how they will interpret seasonal income variations, landlord’s void rental periods (& significant repair expenditure in one calculator hm revenuequarter), tax-deductible/non tax-deductible expenditure and, very importantly, comparisons with other pharmacies – these will be easier for them to make and, perhaps, misinterpret. Such interpretation is initially provided by HMRC’s algorithms rather than individual inspectors.  

A big issue is that not many small businesses currently use accounting software to electronically maintain their Accounts and an even higher number of sole traders, partnerships and landlords say that they do not use accounting software at all. A recent survey by the Institute of Chartered Accountants found that over 80% of sole traders use spreadsheets at most to manage their business finances.

So there is a significant digital gap to be bridged by both HMRC and businesses before 2018. The “reduced burdens”, therefore, are primarily for the benefit of HMRC as it is clear that taxpayers will be expected to provide more information and more regularly, with an associated points-based system of fines and penalties to encourage compliance.

You may have noticed an increase in television and other advertising around “cloud accounting software” products that are available on the market for a relatively small monthly fee. These products, of which there are many, have been developed to provide businesses with a complete digital accounting solution. As they are cloud-based, subscribers have 24/7 real-time access from any internet connected device, harnessing the power of internet banking and allowing collaboration with their accountants with no fear of backups, version numbers and other barriers.

Invoicing, credit control and VAT Returns are paperless too so should result in an increase in efficiency at the same time. If you are interested to find out more get in touch with me and do have a look at the (there are also some videos to give you a taster).

So, whilst it may for many seem like another unnecessary compliance burden, a change to digital record keeping may actually allow you to feel that HMRC and MTD will be doing you a digital favour and it’s not very often that we can say that!

Mark Tenby Feb17Mark Tenby, Director


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