Tax expert Des Desai explains what Making Tax Digital is all about and how it might affect you if you are self employed.
Des Desai is a tax expert and runs Taxbuddy Services Ltd and Mr Tax Software. He spoke to Workingwise.co.uk about Making Tax Digital, the Government’s new approach to tax reporting for the self employed.
Des Desai: MTD is the generic name for a number of new services from HMRC. The first one in operation is MTD for VAT which commenced for VAT-registered businesses with a turnover exceeding £85,000 per annum for return periods commencing after April 2019.
The fundamental aim of MTD is to increase the efficiency and accuracy of Business Tax & VAT Returns by the adoption of accounting systems. One of the main concerns for HMRC is that as many as three million small businesses have no accounting system.
Initially, there were claims that some software providers would provide free tools, but, understandably, whilst some companies offer free trial periods none are completely free! This persuaded HMRC to concede that spreadsheets would be permitted provided that Bridging Software is used to transform the data when it is being submitted to HMRC . A number of these Bridging Products exist for Making Tax Digital for VAT – usually at a cost. Some online companies offer this as a service, once again at a price.
Des Desai: Good question! MTD for Tax Returns was due to be implemented from April 2020, but due to the huge demands put on HMRC resources by Brexit it has been recently been announced that this will not now start before 2021.
Des Desai: Self-employed individuals are businesses, even though many consider themselves as just a way of earning a living! One of the great iniquities of the tax system is that the (complex) rules that apply to larger businesses also operate for a humble labourer, hairdresser or driving instructor.
The Office for Tax Simplification published new rules for Cash Accounting and Simplified Expenses to ease the burden for very small businesses and HMRC applied these for Tax Returns from April 2013, but by and large these have not been promoted well, especially by the accountancy trade who prefer conventional accounting rules even though these can be difficult to adapt to the self employed.
Under MTD, instead of completing a single tax return each year, there will be four quarterly submissions of income and expenses. HMRC are stressing that this will be considerably “simplified” as HMRC will pre-populate submissions with data and information that they already know about the taxpayer such as employment (if applicable) and pension payments.
Des Desai: Once again, this is assumed to be based on the way HMRC have implemented MTD for VAT. Income and Expenses will be collated electronically and then submitted from the software or an approved “bridge” supplier to HMRC.
At the moment, if your turnover is less than the VAT threshold (£85,000 per annum) you are required to only complete a “three-line return” (total income and expenses ). The future of this concession is uncertain and it is not known whether the threshold will remain at the VAT Threshold.
Primarily, MTD for Tax provides more detail to HMRC at increased intervals. The suspicion must be that HMRC will then require tax to be paid on a quarterly basis which improves the government cash flow, but would be a rude shock to those geared up to pay their tax annually.
Des Desai: Our software called Monzia breaks new ground as it follows all the recommendations of Cash Accounting and Simplified Expenses and has been enthusiastically received by our users. However, the full benefits will only be felt when MTD for Tax gets fully implemented and if/when it is also implemented for Universal Credit.
Some 750,000 self-employed families are eligible for Universal Credit or the former Working Tax and Child Tax Credit benefits. Once again the old systems require annual reporting of income whereas Universal Credit requires MONTHLY reporting! Within Monzia, we have the unique ability to provide this information.
Des Desai: Many small businesses will struggle unless either they improve their book-keeping or pay for an accountant to attend to their affairs. Four visits per year, compared to one previously, is inevitably going to cost money. The official sales pitch is that there are many Apps and tools that can be used, some supposedly free, but personally, I believe sweeping assumptions are made when it comes to the self employed – they are not all budding Alan Sugars!
Des Desai: The positive aspect is that it may persuade many to completely take charge of their tax affairs in the same way they handle other aspects of their lives. Having worked in an accountants, some clients prepared excellent records and, if they only realised that the tax submission is an easy process that they could do themselves, they would have saved a lot of money.
Many of us treat dealing with HMRC with fear and I would like to see a more encouraging and enabling tone. In the last few years the HMRC service has gone downhill rapidly and their inability to answer phones and communicate with clarity to “customers” does not help.
Des Desai: As you can see from the above, I believe that a lot more should be done, but unless funding is made available to increase information MTD is likely to have a messy introduction. One of the key messages should be ease and simplicity.
Des Desai: Common complaints about the current system concern the fundamentals – difficulty in registering and gaining online access. Also, I believe that HMRC have profile information on each of us which could drastically reduce the number of the questions that have to be answered. For example, HMRC release a much simplified four-page tax form to selected tax payers with simple affairs, but you cannot request this nor opt for a simplified form online. Also the huge question that bothers a lot of people is what happens if HMRC-held information is wrong and how easy will it be to correct it?