BUSINESS
SMALLER BUSINESS - THE NUCLEAR
EXPLOSION OF MTD FOR PROFIT AND LOSS
If you thought MTD for VAT was bad just wait for MTD for profit and loss.
Benjamin Dyer of Powered Now looks at what is coming next from HMRC.
The big picture
Before diving into what will be the next
stage of Making Tax Digital (MTD), it’s
worth looking at the overall picture of the
programme.
MTD is a massive years-long
programme to make all things related
to tax move into the digital age. This
should eventually result in many
improvements.
For instance, at the moment if you
do a personal tax return, you tell HMRC
how much interest you have received
on savings. But a lot of this information
is actually supplied direct to HMRC by
banks, building societies and other
financial institutions. Similarly, you have
to provide details of income despite the
fact that much of it is already known
under the PAYE scheme. This is crazy,
you have to dig out the information,
HMRC then check it against their records
and if there is a discrepancy HMRC need
to investigate.
It would be much better for HMRC to
put all of this into your tax return in the
first place. Then the individual only has
to add the information that HMRC don’t
know about. It’s an example of what MTD
is trying to achieve.
A variety of reasons have been given
by HMRC for the MTD project, but my
guess that these include:
• To collect tax that is currently being
dodged
• To reduce cost within HMRC
• To make life easier and more
efficient for businesses and
individual tax payers
So, unless you’re a tax dodger, there are
some laudable aims for MTD. But there is
a mountain range to be climbed before
this promised land can be attained.
Other countries
Since a number of countries have
similar programs to MTD, and several are
years ahead, the programme should be
possible.
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What areas of taxation
will MTD impact?
MTD is planned to address every
area of taxation for both individuals
and companies. MTD for VAT is already
rolling out, with the compulsory period
for returns starting on 1st April 2019. MTD
for profit and loss (covering corporation
tax and sole trader income tax) is the
next big business change.
Will MTD be abandoned?
The chances of MTD being abandoned
are extremely slim. During my lifetime,
the march of computers has seemed
inevitable. Slowly but surely, computers
have become a critical part of every
aspect of life. Few people want to
go back to the quill and pen, maybe
backed up by abacuses and hand
operated calculators. MTD is pushing
both businesses and individuals to
keep computer records but also to
communicate digitally with HMRC. It
seems unlikely that it will ever be rolled
back.
What is MTD for profit and loss?
MTD for profit and loss, also known as
MTD for corporation tax or income tax
(for sole traders), will require every single
business with sales of more than £10,000
per annum to submit quarterly profit and
loss returns electronically.
This means that everyone that is
actually making a living from their
business will fall under the new rules. It
embraces every little cottage industry.
While MTD for VAT hit over a million
businesses, MTD for profit and loss will
impact several million.
It is likely to lead to an explosion in
the use of computers and the need
for a vast amount of support. After
all, VAT registered businesses with
minimum sales over £85k can afford
an accountant. Most of these smaller
businesses impacted by MTD for profit
and loss can’t.
Unknown to most, there is already a
pilot program of MTD for profit and loss
even though it won’t become compulsory
for at least a couple of years.
Things may change, but the way the
pilot works is:
• For each quarter, software will be
used to send an expenses and
income summary to HMRC
• As a result, an estimate of the tax
due can be seen at any time
• After the end of the accounting
year, there is a final submission of
expenses and income, including any
adjustments
• Personal income or business
allowances or reliefs must be
submitted. This can happen at any
time during the tax year
• Finally, the tax calculation for the
year can be viewed
What is the impact likely to be?
The impact is likely to be a lot of
complaining, followed by the widespread
adoption of computer software to help
run businesses. Unfortunately, the reality
is that getting businesses to adopt new
approaches is hard.
The problem with MTD for VAT was
that only tens of thousands of companies
were involved in the pilot and nearly
a million are having to adopt MTD in
a three-month period. That is a recipe
for disaster. At the same time, the
communication program to tell people
about MTD was far too low key.
The way this should have been done
was to have an initial pilot, as was done.
But then to have heavily communicated
compulsory adoption on a rolling basis, for
instance by company name in alphabetic
order. HMRC could then have controlled
the speed of adoption over time.
In comparison with MTD for VAT, GDPR
had a huge amount of publicity and a
lot of resultant fear. You could say that
this was bad, but the good news was
that it got taken seriously. In contrast,
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