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The known unknowns of Making Tax Digital

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    Francois Badenhorst

    Francois Badenhorst Deputy Editor Staff Member

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    If Making Tax Digital (MTD) were a cowboy film, HMRC would be the taciturn Texan sheriff sitting on the jailhouse porch, shotgun cracked open over its knee. We know they’ll be applying the law - but we’re just not sure how they will go about it.

    But this isn’t a cowboy movie, Clint Eastwood is nowhere to be seen and here in the real world we’re on the cusp of the biggest changes to UK taxation in a generation. Much like the sheriff, the taxman doesn’t seem to have much to say for itself.

    But, finally, on January 31 the taxman spoke. HMRC has now published its responses to its six MTD consultation documents (published in August 2016). The government has said it will legislate for the first part of the MTD reforms in Finance Bill 2017.

    Making Tax Digital is a government initiative that sets out a vision for a transformed, fully digital tax system. MTD will herald the end of the tax return by 2020 and usher in a new quarterly reporting regime. It is, by all accounts, the biggest change to taxation in a generation.

    To get things moving, HMRC has published three new sets of draft primary legislation for the Finance Bill to implement the central MTD reforms. Anyone can offer a response until 28 February 28, 2017.

    It’s not quite that simple, though: the draft legislation and HMRC consultation responses don’t paint a very cohesive picture. As Rebecca Cave, a tax expert and writer, says: “All we’ve got is an empty bookshelf. We know what direction it's pointing and we know how many shelves we’ve got. But it’s the books that are going to provide all the detail on dates, what, when, where and how.”

    There are still some burning issues that need to be resolved.  

    Exemption threshold

    At the moment the exemption threshold for MTD is any company with a turnover below £10,000. That’s very low and basically means that the vast majority of businesses in The UK will need to make the digital transition.

    If you speak to your accountant about this, you’ll notice they’re freaking out a little. Basically, this very low threshold will mean that accountants across the UK will need to walk all their clients through the very tricky digital transition. It could be a bureaucratic nightmare.

    Initially, HMRC was steadfast on this - but vociferous criticism from professional accounting bodies have led them to waver. A survey by the Association of Accounting Technicians (AAT) found that only 5% of its members agreed with the current threshold.

    Accountants are campaigning for the exemption threshold to be lifted to the current VAT threshold of £83,000. Then, the AAT suggests, this would fall to £11,000 over three years. This, says the AAT, would allow accountants to educate clients.

    But there have been no announcements. The government has indicated that no call will be made on the exemption limit until the final legislation is laid later this year. A frustrating wait for business to find out if they fall within MTD’s scope.

    Promises of vapourware

    “HMRC is basing a lot of MTD on vapourware,” says Cave. The term ‘vapourware’ was coined in the 80s to denote a product promised in the future but that doesn’t yet exist. Accounting software is a crucial element of all this because, after all, the ‘D’ in MTD stands for digital.

    Under a digital tax administration, HMRC will effectively mandate the use of accounting software. Not any old software, but a new breed of software that will connect to an HMRC API (Application programming interfaces). An API, in basic terms, lets one piece of software speak to another piece of software. So a third party accounting software can connect with HMRC’s systems.

    The problem is that this software doesn’t really exist yet. “HMRC has essentially promised that it’s all going to wonderful because this vapourware is going to work and some of it will be free. Free to whom? We don’t know,” says Cave. The different software stakeholders haven’t exactly leapt at the chance to make free software.  

    Complex businesses

    The MTD consultations we have seen so far have only touched on small, unincorporated businesses. But we know MTD will apply to all sizes of business from 2020.

    If you’re a company, then you’re just going to have to wait. The due date for consultation documents covering these businesses is due “sometime in the Spring”.

    It’s more important than ever that businesses maintain impeccable accounting records. The transition will be complex enough without shoddy records.

    Despite the uncertainty, though, Cave argues it’s worth considering incorporation as soon as possible to take advantage of the longer runway on offer to companies. “If I was advising a business that was actually going to be fairly substantial and was going to have valuable assets and was planning to employ people - I’d tell them to incorporate,” says Cave.

    That does come with some caveats, namely what the cash flow profile of your company is going to be. “If the company was going to be making losses for the first few years, those losses are pretty valuable,” explains Cave. “If the founder previously earned a high income and thinks the business will be making a loss for the first few years, they may want to start a partnership or sole trader so they can use those losses and carry them back against their high income.”

    Impeccable accounts

    Despite the uncertainty, it’s more important than ever that businesses maintain impeccable accounting records. The transition will be complex enough without shoddy records.

    It’s also important, advises Cave, “that you have the type of accounting system that suits the size of the business now and the size it thinks it will be.

    “It’s about the size you’re going to be in a few years, not just the size you are now.”

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