HMRC “Making Tax Digital” – How Will it Affect the UK Contractor?

The government has a vision of a transformed tax system for the UK by 2020 that will see the tax return as we know it become a thing of the past.   For the majority, the disappearance of this much-loathed document will occur as early as 2018, but what does this vision mean for our contractors?

How does the Government plan to achieve this vision?

Making Tax Digital (MTD) is the HMRC initiative through which the government envisage the tax system transformation.  The idea is that the utilisation of a fully digital system will make tax administration more effective, efficient and straight forward for tax payers.  All information will be held online, allowing contractors to view their tax liabilities and ensure that payments are made on time.  According to HMRC, the plan is all about “building a transparent and accessible tax system that is fit for the digital age”.

What is the planned time frame for the introduction of MTD?

Following a consultation period, HMRC has confirmed central dates for the introduction of MTD as follows:

• April 2018 for Income Tax
• April 2019 for VAT
• April 2020 for Corporation Tax
• 2020 for partnerships with a turnover exceeding £10m due to the complexity of their tax affairs.

Currently there is no final decision relating to a possible deferred start, by one year, for small businesses and landlords with income exceeding £10,000 a year.

Will MTD affect everybody eventually or are there some exemptions?

HMRC have confirmed that there will be some exemptions from MTD, these exemptions are set out below:

• MTD will not be compulsory for any self-employed business or landlord with a turnover under £10,000 a year. However, MTD is available to them if they wish
• Individuals in employment and pensioners will be exempt, unless they have secondary incomes of more than £10,000 a year from self-employment or property
• Businesses who genuinely cannot get online because of their individual circumstances, such as disability or remote geographical location for example, will be exempted from MTD.

What does this mean for contractors on a practical level?

On a practical level, this change will affect almost every contractor in the UK from 2018.  The system will require everything to be in “real time”, in other words contractors’ books will need to be kept sufficiently up to date to allow for quarterly reporting.  This reporting will be done via accounting software which integrates with HMRC and therefore will require all contractors and their accountants to use such software, forcing those still using paper systems into the digital age. 

However, following strong representation from small businesses and the Treasury Committee during the consultation period, HMRC have agreed to the continued use of spreadsheets for the recording of receipts and expenditure.  These spreadsheets must then be linked to compatible software, to automatically generate and send updates to HMRC.

Businesses eligible for three line accounts will be able to submit a quarterly update with only three lines of data i.e. income, expenses and profit.

At a glance, what are the benefits of a digital tax system to the contractor?

• It will reduce the administrative burden relating to tax. “Real time” record keeping will mean that HMRC already holds everything that it needs, removing the need for the taxpayer to provide it
• It will bring your tax experience into the 21st Century to be more like that of your online banking
• Time delays will be minimised
• The likelihood of missing the deadline to pay your tax liability will be much reduced and under/overpayments avoided
• As an authorised agent, your accountant will be able to manage your tax affairs digitally on your behalf
• Your National Insurance Contributions and how they affect your state pension will be visible online
• Cashflow management will be made easier for contractors with the option to “pay as you go”
• HMRC online help will be available via webchats to help with personal tax affairs.

And what are the possible downsides?

• Reporting to HMRC four times a year (quarterly) rather than once could mean more time spent on the administration of your business which means less time spent earning
• Increased accountancy fees for the increased frequency of reporting
• The compulsory shift to a digital book keeping system for those contractors and small businesses still operating a paper one.

So how can Freestyle help contractors to make a smooth transition to a digital tax system?

As a client of Freestyle Accountants, our “Everything Done For You” service covers all reporting to HMRC and includes a data entry service for a sensible monthly fee.  Therefore, if you would rather not spend time logging your receipts onto your digital portal, simply send your paper receipts to us and we will do it for you!