The government is now expecting all businesses to start keeping their accounting records in a digital format. This does not mean an Excel spreadsheet, but each business and landlord must use some form of accounting software that has the capability to communicate with the HMRC’s systems. This underpins the Making Tax Digital (MTD), which was communicated at the MTD for business event that was held on 3 March.
Further details released soon
Further details on this software requirement are expected to be included in one of the five consultation documents that will be released shortly after the budget. The government has promised that software will be provided free at the point of use to businesses, but it is likely that the free packages on offer will not be sufficient for some companies to replicate the paper-based accounting they currently use, therefore they will be forced to buy a bespoke package. This move will affect small businesses but also self-assessment taxpayers, very importantly those whose tax affairs are more straightforward.
Bespoke software problem
This mandatory move to a commercial software package is however problematic as it means additional costs and data transfer issues for many companies that have created their own bespoke accounting software, or for those that rely on Excel spreadsheets. At the same time without the use of internet-connected accounting software businesses will not experience any cost savings under the MTD project.
ICAEW supports the MTD policy
The ICAEW supports the HMRC’s digital transformation and considers a ‘digital first’ approach to be the right way for a 21st century tax system. They have also been reassured that the MTD policy will not be quarterly tax returns but will involve submitting income/expenditure information ‘at least’ quarterly. There is no information yet on what form the submissions will take but they will be summaries rather than transactional. The ICAEW is however concerned that this quarterly digital reporting should not be made compulsory as they are not convinced it will reduce the administrative burden particularly for small businesses. An overall simplification of tax policy is also necessary to be done in parallel.
Quarterly tax updates
End of paper-based work may be welcomed by many accountants but it will be difficult to educate clients to use the accounting software. Smaller businesses are being required to move to MTD before larger businesses. It currently seems that the first quarterly updates will be required by non-VAT registered self-employed businesses and landlords with an accounting period starting after April 2018. All VAT-registered businesses will be brought in from April 2019 and companies from April 2020.
