On 31 January, HM Revenue & Customs published the long awaited responses to the Making Tax Digital consultations. Calling this the “Digital tax revolution” speaks volumes. The consultation responses came on the busiest day of the tax year for practitioners and most disappointingly the responses confirm that Making Tax Digital for Business will commence, as planned, just over a year away on 1 April 2018.

In 2016, this Institute engaged with members on the consultation proposals and responded to the consultations on your behalf. A joint submission on Making Tax Digital was also made in conjunction with the Institute of Chartered Accountants of Scotland to the Financial Secretary to the Treasury.

We’ll be looking in more detail at the way forward over the next few weeks and will be discussing the consultation responses with the Northern Ireland Tax Committee. The Institute will continue to represent members as these proposals develop. If you’d like to share your views with us in the meantime, get in touch.

Let’s take a closer look at each of the consultation outcomes.

1. Bringing business tax into the digital age

Key decisions from the consultation process are:

• Businesses will be able to continue to use spreadsheets for record keeping, but they must ensure that their spreadsheet meets the necessary requirements of MTD for business (“MTDf B”). This is likely to involve combining the spreadsheet with software;
• Businesses eligible for three line accounts will be able to submit a quarterly update with only three lines of data (income, expenses and profit);
• Free software will be available to businesses with the most straightforward affairs – we await detail of who exactly will be entitled to this;
• The requirement to keep digital records does not mean that you have to make and store invoices and receipts digitally;
• Activity at the end of the year must be concluded and sent either by ten months after the last day of the period of account or 31 January, whichever of these is soonest;
• Charities (but not their trading subsidiaries) will not need to keep digital records; and
• For partnerships with a turnover above £10 million, MTDfB is deferred until 2020 due to the complexity of their tax affairs; and
• Large corporates will be impacted from 1 April 2020 when MTD for companies commences.

The proposed relaxations above are positive and welcomed – but do they go far enough?

The MTD consultations also specifically explored the appropriate level of the initial exemption and deferral for the self-employed, landlords and businesses who will be in scope.

Given the range of views expressed on this matter, the government has decided to take more time to consider these issues alongside the fiscal impacts. Final decisions will be made before legislation is laid later this year.

So what does this all mean? HMRC have basically announced that it is going ahead with MTD as planned, though there are some concessions. The majority of businesses will therefore be expected to switch to a fully operational digital system from 1 April 2018. But the proposals are founded on software being delivered in time and details are scant in relation to this area.

The fact that the government is reflecting carefully on the exemption threshold and potential for deferral for some businesses is welcome. But businesses need certainty and at the minute this particular decision looks to be some way off.

HMRC will be running a full year pilot starting on 1 April 2017 – will this be enough time to iron out any ‘teething problems’? Let’s not forget that when MTD become mandatory from 1 April 2018, the first full cycle of reporting under the pilot scheme, to include end of year activity, won’t have concluded.

There can be no doubt that many taxpayers affected by MTD will not yet have taken any action due to a lack of detail. Unfortunately, it is questionable whether the recent announcements give enough certainty for taxpayers to start planning now, particularly given the uncertainty over the threshold and potential deferral for some.

What is not in doubt however, is the scale of MTD. At its heart is the software – taxpayers and agents alike will soon need to start considering what software they will require, which suits them best not to mention its cost, installation and training.

The draft legislation allowing for regulations on MTD obligations to be introduced has been published. This currently states that regulations “may not impose requirements on a person or partnership –

1. in respect of any tax year before the tax year 2018–19, or
2. in respect of any period of account beginning before the tax year 2018–19.

This seems to suggest that MTDfB will apply first to accounting periods which commence on or after 6 April 2018. On that basis, businesses with a 31 March year end would not be within the scope of MTDfB until 1 April 2019.

2. Tax administration

The main outcomes from this consultation were:

• The responses, including that of Chartered Accountants Ireland, were broadly supportive of the proposal to replicate existing powers and safeguards and the government intends to proceed on this basis
• Legislation will be included in Finance Bill 2017 that will adapt existing income tax compliance powers to fit with MTD processes in time for the introduction of MTD for business in April 2018
• The government is committed to getting the late submission penalties model right and recognises more work needs to be done on this. A further consultation document will be published in spring 2017 with a view to introducing legislation at the next appropriate opportunity
• The government also intends to consult further on specific proposals for late payment penalty interest and the alignment of interest rules in 2017
• The government does not intend HMRC to enquire in-year into regular updates. As a result of the new MTD obligations, where a taxpayer completes an End of Year declaration and has non-business income submitted in a Self-Assessment tax return, there will only be one enquiry window which will commence when all relevant information has been received and is confirmed to be complete and correct
• Instead of applying penalties to each failure where an MTD submission is late, it is proposed to introduce a more gradual model whereby each failure would attract penalty points. Only once the points reach a set level would a penalty be charged. There will be the usual right of appeal against penalty points as they are incurred.
• As recommended by the Northern Ireland Tax committee in its response to this consultation, the government has committed to reviewing the length of the 12-month ‘soft landing’ period for penalties.

3. Voluntary Pay as You Go

The main outcomes from this consultation were:-

• HMRC recognises the need to reinforce the voluntary nature of the payments throughout guidance and at all points where voluntary payments are referenced
• In determining how many payments can be made in a period, consideration will need to be given to the costs to the exchequer of the payment method used
• The detailed design for voluntary payments on the digital tax account will be informed by research
• In the area of repayments, HMRC state that they will ensure that the online facility to claim a repayment is simple and quick to follow, that there is clear messaging on the implications of claiming a repayment, and that subject to the necessary robust security procedures – repayment is made promptly after a request. Repayment will be made to the relevant bank account, or where appropriate, to the originating card
• The proposal to introduce a period of grace before applying payments to liabilities will not be taken forward, as it would add complexity
• Allocation and set-off rules will be further considered. In the initial stages, voluntary payments will be treated as payments of income tax and Class 4 NICs, as the systems to allocate across taxes will not yet be in place
• In a relaxation from the position in the consultation, repayments will be restricted in the seven days before a liability becomes due, but only if all the taxpayer’s liabilities within the previous 12 months have been paid within 7 days after the due date
• Repayment applications within 30 days will trigger a warning message
• For now, payments on account will not be adjusted on the basis of quarterly updates but there will be functionality to compare in-year updates with payments on account and to trigger messages if it appears there might be a shortfall.

HMRC is assuming that 10% of the self-assessment MTD population would take up voluntary PAYG but acknowledges that the responses to the consultation suggest a low take up.

4. Transforming the tax system through the use of better information

The main outcomes from this consultation were:-

• In 2017, HMRC will start to use PAYE information during the tax year to calculate whether the right tax is being paid by updating tax codes more regularly. In the short term taxpayers will still get paper outputs directing them to their account. In future taxpayers will be prompted to check their digital tax account. HMRC will provide a clear explanation of the steps taken to make sure that no under- or over-payments accrue;
• In the 2016/17 year HMRC has continued to develop and test the design for making better use of data from banks and building societies to update interest income figures. This work stream is being done in a ‘test and learn environment’;
• HMRC’s future ambition is to use other sources of third party information – a phased approach will be taken and will include engagement with third party providers and further consultation;
• HMRC is committed to transparency relating to third party information. Information will need to be clearly displayed in tax accounts and taxpayers should be able to easily identify the source of any third party information. It will be vital for taxpayers to see the detail of any third party information so that they can understand how it affects their tax position;
• HMRC will not alter information received from a third party information provider. The amounts shown on the digital tax account will be the same as the amounts submitted by, for example, the bank or building society. Where the taxpayer agrees with the source of the income, for example interest on a particular bank account, but is querying the amount of income, such as the exact amount of interest earned, the taxpayer will be advised to contact the third party provider directly to resolve the query. If the income figure(s) is incorrect, the third party provider will provide revised information to HMRC;
• However, there may be occasions where it will be appropriate for the taxpayer to contact HMRC to resolve the issue. Taxpayers will be able to approach HMRC through their digital tax account (or an alternative route where necessary) to help resolve queries where they are unable to deal directly with the third party information provider or are unable to resolve the query with them; and
• The principle of not allowing taxpayers to overwrite information provided by third parties is similar to the current principles for PAYE – if a taxpayer has a query over their pay, HMRC would not change the information but would advise the taxpayer to go back to their employer, the third party, to resolve the query and have the correct information resubmitted.

Whilst MTD for individuals is on a slower track than MTD for business, agent access to information in Personal and Business Tax Accounts for all categories of taxpayer remains a key issue.

How quarterly updates and data from third parties will fit together and be combined with the other pieces of information that are required to calculate the tax liability for a year still remains unclear – the concept of “the end of the tax return”.

The process for crystallising and finalising liabilities for individual taxpayers (including those who are not in self-assessment) and how HMRC intends to use its power to make simple assessments are also not clear.

The detailed design of how information is presented in digital tax accounts and the information and security standards will need input from a range of interested parties.

5. Simplified cash basis for unincorporated property businesses

The main outcomes from this consultation were as below. These changes will apply from 6 April 2017, one year earlier than the other MTD changes.

• The cash basis will be the default method for calculating rental profits and losses for individuals unless the landlord opts out, or the gross annual rents exceed £150,000, in which case the accruals basis must be used;
• If the cash basis is going to be used, it must be used for the rental business as a whole, it is not an election on a property by property basis;
• Joint owners of a rental property will be able to take an independent decision as to whether or not to use the cash basis, except where the joint owners are a married couple or civil partners;
• Overseas and UK property businesses will be treated as separate businesses and the decision over whether or not the cash basis is used can be made separately for each business;
• If the landlord also has a trading business, a separate decision can be taken for the trading and property business;
• The cash basis is not available to trustees, personal representatives, companies, limited liability partnerships and corporate firms (one where one of the partners is not an individual);
• Lease premiums, or work done by the tenant in lieu of a premium will not fall within the cash basis;
• Refundable security deposits will not have to be accounted for under the cash basis until they become rightfully the landlords;
• The timing for receipts and expenditure where the property is managed by an agent, will be the date the cash is received or paid by the agent and not the date that the agent accounts for it to the landlord; and
• Landlords using the cash basis will be able to make deductions for interest on loans taken out for their property business on a similar basis as landlords who are using an accruals basis. This will include a restriction for interest where the value of underlying loans exceed the value of properties in the property business and will be subject to existing restrictions on loan interest for residential properties; recreating the rules under the accruals basis but without the need to prepare accounts.

This new regime will apply from 6 April 2017, a year ahead of MTD. Draft legislation has been published for inclusion in Finance Bill 2017.

6. Simplifying tax for unincorporated businesses

The government is pressing ahead with some of the proposals for simplifying tax for unincorporated businesses. Others are to be given further consideration. The original consultation covered four topics, increasing the threshold for the cash basis, changing the basis period rules, simplifying reporting requirements and considering the capital/revenue rules for the cash basis.

The main outcomes from this consultation were:

• The entry threshold for the cash basis will be increased from 6 April 2017 to £150,000 with the exit threshold set at double the entry limit.
• Basis period rules – the government will give more consideration to these proposals.
• The consultation looked at four areas of simplification; period end adjustments would not be required for closing stock, long term contracts, bad debt provisions and prepayments and accruals. The conclusion from the consultation is that these proposals need more consideration, and in particular, the interaction between the change of basis periods and simplified reporting.
• Revenue v capital in the cash basis – the consultation proposed prescribing a list of disallowed capital items. This change will proceed and draft legislation has been published to take effect from April 2017.