Making Tax Digital: UK update
The process of moving to electronic tax returns will bring fundamental changes to the way businesses process tax as well as cutting costs for HMRC. Latest tax gap figures show that avoidable mistakes cost the Exchequer over £9 billion a year. Digital records will improve accuracy and many of the software products will come with built-in help. Further, sending HMRC information directly from digital records will avoid transposition errors and reduce the amount of tax lost to these avoidable errors.
UK businesses still unprepared for Making Tax Digital (MTD).
1.2m UK companies are mandated for the scheme, however the uptake has been slow forcing the government to push back the deadline for compliance by six months. Whilst the Government is aware of the mandated numbers it has no accurate way of identifying which businesses fall under the £85,000 threshold – leaving businesses a degree of discretion. The government appointed 72,000 agents to sign businesses up – yet, only 1,679 have been successful, leaving a significant shortfall from the targets. The rate of uptake will become clearer in August when quarterly tax returns are released.
According to research, it has been approximated that 346,000 small businesses are in danger of being caught out by MTD after mistakenly believing they are MTD compliant. It also found that 89% of businesses had heard of MTD, two-thirds believed they were compliant, but 46% wrongly believed they were compliant (source Quickbooks).
A 2017 survey from the UK200Group found 16% of small businesses still use the “shoebox method” of bookkeeping, with 23% using paper-based manual records, 27% using spreadsheets, with only 35% using software. Similar research by the Institute of Chartered Accountants in England and Wales (ICAEW) revealed that 75% of businesses across the UK do not currently maintain their accounts electronically using accounting software.
While the ICAEW supports the digital ambition of HMRC, it argues that businesses should not be forced to move to the new scheme as transition costs could be significant. Additionally, many businesses will be forced to purchase new digital accounting applications that comply with the HMRC API. Others may need to also access one of the many cloud-based accounting services available.
The initial slow uptake among businesses and accusations that the transition process had been mishandled, led to the extension of the deadline. HMRC had initially promised to offer free software to connect spreadsheets used for businesses with a turnover of £10,000 or less. However, this help has failed to transpire, leading to fears about UK firms’ ability to comply with the new guidelines.
As well as an extension of the initial deadline, the government has promised a 'soft landing' period, giving more time to set up accounting systems. However, the government's API systems need to be up and running within the first year - i.e. no later than 1 April 2020 – with financial sanctions and penalties for those failing to comply.
Increased opportunities for tax professionals
Despite the teething problems, HMRC will push on with its plans to digitise the system. The benefits are not merely limited to systemic efficiency within tax authorities - as well as the environmental benefits of using less paper for accounting purposes - there are significant economic benefits too. It has been estimated that the transition could close the treasury’s tax-gap by 1.2bn in 2024. Moreover, given that companies may also face additional expenses from their accountancy provider to set-up and maintain the electronic links needed to comply with MTD, opportunities and earning potential for the tech-savvy tax specialist could increase exponentially. Tax experts will take on greater significance as they advise and convince sceptical companies that the long-term benefits will offset the short-term upheaval.
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