In 2015 the government announced major plans to modernise the tax administration system by introducing digital services for tax. There are three main strands to these proposals, as follows:
Digital tax accounts
Digital tax accounts for individuals have already been created by HMRC. These accounts have been linked to HMRC internal systems so that they will be pre-populated with income and tax details that HMRC already hold. This includes employment income, PAYE and NIC and any state retirement pension. From April 2018, it is intended that interest paid by banks and building societies will be included in digital tax accounts. In order for this to happen, banks and building societies will be required to provide information to HMRC earlier, and more frequently, than currently. Taxpayers will also be able to report any additional sources of income through their digital tax accounts in 2018.
HMRC expect that with pre-populated information and taxpayers able to add in other sources of income, the digital tax account will mean that a significant number of taxpayers, with relatively straightforward tax affairs, will not need to complete a tax return.
Digital tax accounts are also being established for businesses and these will show an overview of the income tax or corporation tax, VAT and NIC details of the business. In order to show details of the income subject to income tax or corporation tax, details of the business’s income and expenses will be provided by new quarterly tax updates.
By 2020, most businesses, self-employed people and landlords will be required to keep track of their tax affairs digitally and update HMRC at least quarterly through their digital tax account. These changes will be phased in from 2018. These measures will not apply to unincorporated businesses or landlords where their turnover or gross income from property is under £10,000. Some businesses and landlords with income above £10,000 will also benefit from a deferral of the new rules by one year. The upper threshold and eligibility for this deferral have not been detailed in the consultations.
To meet these quarterly reporting requirements, taxpayers will be expected to use software or apps which record day-to-day transactions, categorise them into different types of income or expenses and then feed the summary data directly into HMRC systems.
The periodic updates of data to HMRC will be made quarterly but could be done more frequently if a business or landlord chooses. When an update is due, businesses and landlords will have one month to compile the information and declare that the period’s data is complete to the best of their knowledge.
The ‘End of Year’ return
Throughout the year, businesses will have provided HMRC updates of their business income and expenditure. After the end of the year, having made any adjustments to arrive at their taxable profit or loss, businesses will make an ‘End of Year’ declaration that everything is correct and complete. This declaration will be made within nine months of the end of a period of account (normally a period consisting of four consecutive quarterly returns).
Tax payment changes
For employees, HMRC has already started using real-time PAYE data to reduce under and overpayments by changing tax codes in-year. They are proposing to extend this principle through individuals’ digital tax accounts to include common income types in the in-year tax calculations. In principle, tax arising on additional income which is small or regular will be collected through PAYE tax code changes. On larger amounts of income, individuals will be advised through their digital tax accounts how much tax will become due after the end of the tax year and will be given options on how and when to pay what is owed. Businesses, self-employed people and landlords, who are keeping their records digitally, will be able to adopt pay-as-you-go tax payments on a voluntary basis.
How we can help you
Please note that, at the moment, you do not have to do anything in respect of these developments. If you do want to access your digital tax account you may need to verify your identity. You can find details at: www.gov.uk/personal-tax-account. If we are your tax agents, we cannot access the account on your behalf.
Please be assured though that we will continue to assist you with your tax affairs and we will keep you informed of developments in the Making Tax Digital project.
Please speak to us if you have any questions regarding Making Tax Digital.