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Will this major tax change happen in 2019?

Everything you need to know about the government’s Making Tax Digital plan

The government’s plan to enforce a new digital tax system just three days after Brexit has been slammed by an influential committee in the House of Lords, which says millions of small businesses are unprepared for such a radical change. 

A report issued by the House of Lords Economic Affairs Committee, published today, criticises the government for failing to properly gauge the impact of its Making Tax Digital scheme – a programme to digitise everyone’s tax records and collect more taxes – on small companies due to submit tax returns in this new way by 1 April 2019.

By April 2020, all businesses and taxpayers who use self-assessment will have adhere to the Making Tax Digital rules.

The House of Lords committee has called for the scheme to be deferred for at least a year, despite the fact that it has already seen several delays.

It’s also claimed that ‘as much as 40% of affected businesses have not heard of Making Tax Digital, let alone have started to prepare for a substantial change to their accounting processes’.

Here we explain how the Making Tax Digital plans could affect you, what the current rollout plan is and what could change if the report’s recommendations are taken on board.

What is Making Tax Digital?

The government’s Making Tax Digital initiative is described as being ‘part of the government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs’.

Eventually, the government plans to make all tax records and tax returns digital, so they’re stored and filed online using software that is compatible with HMRC’s systems.

It’s claimed that this will benefit both the taxpayers and HMRC by making tax returns more accurate and therefore cutting the ‘tax gap’ – the difference between the tax the Exchequer expected to be paid and what was actually paid – which was estimated to be £33bn in 2016-17.

Much of the mismatch is put down to mistakes and lack of care taken when people submit their tax returns – a problem digitisation is said to fix.

Under the new income tax rules, you’ll use software to send your income and expenses summary to HMRC every three months. Then, at the end of each accounting year, you can send a final report, in which you can add any allowances and reliefs.

What’s more, as VAT and tax returns will be stored online, it should be possible for people to check their spending and get tax estimates throughout the tax year, rather than waiting for a bill.

This should allow for better budgeting and should mean that businesses won’t overpay on tax, either.

Who will be affected by the Making Tax Digital plans?

Anyone who pays their income tax through self-assessment will have to keep digital records and submit their tax returns digitally once the scheme has been mandated for income tax.

This includes self-employed people, landlords, employers, those with an income from abroad, trustees of trusts or a registered pension scheme, and anyone else that files a tax return.

For next April, only businesses with a turnover of more than £85,000 a year will be affected, as that is the requirement for submitting VAT returns through the new system.

By April 2020, all people will need to comply with the new rules.

Find out more: Who should submit a tax return?

How will paying tax be affected?

The biggest changes will be felt by those who don’t currently keep track of their invoices digitally. If you currently use a paper filing system for your receipts, this will need to be updated.

You’ll also have to invest in Making Tax Digital compatible software in order to submit the returns. If you’re not familiar with how to use the software, you’ll either have to spend time learning or pay someone to do it for you.

If you run into any problems, there are a number of webinars and videos on the HMRC website to help, or you can contact HMRC online or call 0300 200 3701.

What’s the current rollout plan for Making Tax Digital?

The timeline below shows HMRC’s current plans for the rollout of Making Tax Digital.

  • October 2018: A pilot scheme for Making Tax Digital for VAT opened to sole traders and eligible companies that are up-to-date with their VAT to voluntarily join the scheme.
  • Late 2018: Testing begins with partnerships and customers that trade with the EU.
  • Late 2018/early 2019: The pilot opens to sole traders and companies who are not up-to-date with their VAT returns, as well as businesses that are newly registered for VAT.
  • Early 2019: Pilot opens to partnerships and customers that trade with the EU.
  • Spring 2019: Pilot opens to customers that have previously been deferred.
  • 1 April 2019: Making Tax Digital is mandated for all businesses earning £85,000 or more – apart from those that have been deferred.
  • October 2019: Making Tax Digital is mandated for those that have been deferred.

Under this plan, Making Tax Digital for VAT will be made compulsory to all businesses with a turnover of £85,000 or more – unless the business has already been deferred due to having more complex tax arrangements.

The kinds of businesses to be deferred include trusts, not for profit organisations that are not set up as a company, public sector entities that must give additional information on VAT returns (government departments come under this section), local authorities and public corporations.

All businesses, even those being deferred, will have to keep digital VAT records and submit VAT returns digitally by October 2019.

It was announced in July 2017 that plans to mandate the income tax part of Making Tax Digital were being pushed back until at least April 2020 – so, if you don’t file VAT returns there is still time to get ready.

There is already an income tax pilot scheme for self-employed businesses and landlords who want to sign up voluntarily, ahead of the wider rollout.

Beyond that, the government hasn’t yet released its long-term plans for how Making Tax Digital will look in the future – insight the report also recommended.

Perhaps if companies and individuals had more of an idea of what they were signing up to (or, soon, being forced to implement), they might be more proactive about getting ready for and embracing the changes.

What might change following the report’s recommendations?

One of the recommendations cited in the House of Lords report is to defer the mandatory rollout for VAT until at least April 2020, with a staged transition to help businesses leading up to that point.

In addition, it says the income tax mandate should be pushed back until April 2022 – giving time for the government to make changes to the system if any problems arise with the VAT implementation.

As to whether the report has any influence remains to be seen. The government ignored many recommendations the same committee issued in a similar report published last year.

In the meantime, the self-employed and a small business-owners should familiarise themselves with the forthcoming changes, taking the necessary steps to digitise their VAT returns should the changes go ahead next April.

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