Making Tax Digital

With effect from 6 April 2018, HMRC will require that income details are submitted by tax payers on a quarterly basis.

It will mean the end of the annual self-assessment taxation returns and the start of submitting information on a quarterly basis closer to real time. For many people this will not be a problem – everyone will have a “digital tax account” which will be pre-populated with some information for instance anyone who is in employment will have their salary details and tax deducted already showing and details of bank and building society interest will be notified directly by the financial institution to HMRC. It is also expected that the option will be available to list shareholdings in public companies and details of dividends will also be notified to HMRC. The benefit is that there should be fewer tax underpayments and overpayments arising and that tax coding notices can be changed more promptly so that everyone pays the correct amount of tax.

However, there are many sources of income which need to be entered manually. These will include share dividends where people operate through a limited company, property income details, details of any self-employed earnings and claims for allowances such as pension contributions and gift aid payments.

HMRC are proposing to publish detailed guidance in January 2017. At present, our opinion on the various figures to be input is as follows:-

Dividend Income

Strictly, the procedure for voting a dividend is quite a complex one. A company should first prepare interim accounts to ensure it has sufficient funds to make a dividend payment. That dividend payment should then be proposed to the shareholders in a general meeting and then a general meeting should be held to approve the dividend payment. The company should then  issue dividend vouchers and make the payments of dividend. In practice, this seldom happens. There has been a tendency to leave matters to the end of the company’s year and then to work out of monies drawn, how much is treated as salary, how much is treated as expenses and how much is to be shown as dividends. This will not be acceptable under Making Tax Digital and company directors will need to ensure that they draw separate payments for salary, for expenses and for dividends. What will definitely not be acceptable is for payments made to third parties to be treated as dividends. Only bank payments from the company account into the shareholders’ private account can be disclosed as dividends – anything else would have to be treated as a loan.

Income from property

This should not cause particular problems. Details of income and expenses in the quarter will need to be summarised and the information entered on the individual’s digital tax return.

Self-Employed income

This is where we see the major problems arising. HMRC’s guidance says that the new system is not about making self-employed people submit their accounts four times a year. With respect, we disagree. It will be necessary to submit accounts using accounting software on a quarterly basis (spreadsheets will not be acceptable). To us, it seems strange that sole traders, who generally operate smaller businesses, are being treated as the “guinea pigs” for the new system whereas limited companies will not face a similar filing obligation until 2020. We will be discussing individually with our sole trader clients their options – for the larger ones, one may be to incorporate since this will put off the filing requirement for another two years.

HMRC make the point that the new rules will not change the date on which tax is due. Again we suspect there is rather more to this than meets the eye. We have seen articles written in Taxation magazine where tax professionals close to the government have questioned why it should be the case that (for example) companies pay their tax nine months after the end of their year whereas sole traders have to make in-year payments. We do suspect that the new regime will be linked to paying all major taxes on a quarterly basis but we will have to await developments on this.