Making Tax Digital
The end of the tax return?
The HMRC paper called "Making Tax Digital" is now out. We review the main points for you
Early in 2016 HMRC published a paper called "Making Tax Digital". In it, the strategy from now until 2020 is set out, highlighting the fact that all tax is going online, is going to more frequent reporting, and heralding the end of the tax return as we know it.
There are 4 main principles in the strategy (called the "four foundations" by HMRC);
- Tax simplified Taxpayers should not have to give HMRC information that it already has, or should be able to get from elsewhere - for instance, from employers, banks, building societies and other government departments. Taxpayers will see the information that HMRC holds through their digital tax accounts, and be able to check at any time that their details are complete and correct. HMRC will use this information to tailor the service it provides, according to each taxpayer’s individual circumstances. In 2016, HMRC will consult on how information from more third parties might reduce the reporting burden on taxpayers.
- Making tax digital for businesses Businesses should not have to wait until the end of the tax year or even longer before knowing how much tax they should pay. HMRC will collect and process information affecting tax in as close to real time as possible, to stop tax due or repayments owed from building-up. From April 2018, businesses, including everyone who is self-employed and those letting out property, will update HMRC at least quarterly where it is their main source of income (or a secondary source of income above £10,000 and their main income is from employment or a pension).
- Tax in one place At the moment, most taxpayers cannot see a single picture of their liabilities and entitlements in one place. HMRC is changing that. By 2020, taxpayers will be able to see their complete financial picture in their digital account, just like they do in their online banking. And they will be able to set an over-payment of one tax against the under-payment of another: it will feel like paying a single tax.
- Making tax digital for individual taxpayers Individual taxpayers will interact with HMRC digitally, and at any time to suit them. By April 2016, every individual and small business will have access to a digital tax account. The digital accounts will present individual taxpayers with a personalised picture of their tax affairs, along with prompts, advice and support through webchat and secure messaging.
What does it all mean? In the words of HMRC “By 2020, businesses and individual taxpayers will be able to register, file, pay and update their information at any time of the day or night, and at any point in the year, to suit them. For the vast majority, there will be no need to fill in an annual tax return.”. In other words, you'll have to either use the internet yourself or pay someone else to do it....
Digital Tax Accounts
One feature of the new system is digital tax accounts. There are Personal Tax Accounts and Business Tax Accounts. If you have income taxed under PAYE and are also self-employed or have rental income, and the total of your self-employment and rental income is under £10,000 then you will no-longer need to complete a tax return.
Instead, you will update your digital tax account. HMRC intends that usually any tax due will be collected through your tax code. Digital Tax Accounts will be generally available from April 2016.
There is a short HMRC video about personal tax accounts here.
Timescale for going digital
There is a detailed timeline in the Making Tax Digital roadmap. Key events are:
- On the current schedule, the self-employed and those with rental income as their main source of income (or, where it is a secondary source, it is £10,000 or more), will be expected to update HMRC with business information for tax purposes at least quarterly from April 2018, with SME companies following by 2020
- Paying tax and reporting information is to be brought closer to real-time
First we had online tax returns, then real time posting requirements for payroll, so this is the logical next step. It's worth mentioning that these are very significant changes and there are many details yet to be decided. Consultation on these issues is on-going. HMRC will be using an Agile approach to development. This means that changes can be introduced, as the result of feedback from users, on an ongoing basis during the development phase.