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 or ITSA (Income Tax Self Assessment). In this ...

If you thought MTD for VAT was bad just wait for MTD for profit and loss or ITSA (Income Tax Self Assessment). In this article Benjamin Dyer 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 dodgedTo reduce cost within HMRCTo 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 countriesSince a number of countries have similar programs to MTD, and several are years ahead, the programme should be possible.

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 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 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 HMRCAs a result, an estimate of the tax due can be seen at any timeAfter the end of the accounting year, there is a final submission of expenses and income, including any adjustmentsPersonal income or business allowances or reliefs must be submitted. This can happen at any time during the tax yearFinally, 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, HMRC has emphasised a light touch to enforcement of MTD which simply encourages procrastination. Since we will all have to comply eventually, it’s less work to do it once and to do it properly.

Given the approach being taken to MTD for VAT, it has to be said that full adoption of MTD is likely to go on over a period of several more years. But as the CEO of a software company that may well benefit from MTD, you should treat my words with a degree of cynicism. Unless MTD is abandoned, about the only thing that you can say for certain about MTD is that software companies are going to do well!

When will MTD for profit and loss arrive?

The Making Tax Digital program has already been delayed several times and the delays have already added up to years. At the time of writing, MTD for VAT is being implemented, but there are still hundreds of thousands of businesses to come onboard.

Because of the slowness of the MTD for VAT rollout, HMRC made a last-minute compromise by allowing “bridging software”. This allowed data to be put into MTD in a similar way to the current web form. HMRC will need to disallow this to get the full benefit of MTD for VAT but with many companies opting for this approach, there is actually still a major adoption curve to come. The truth is that MTD with bridging software is MINO – MTD in name only.

Because of delays with MTD for VAT, MTD for profit and loss has been delayed. This seems sensible and we will probably have a better idea whether there will be further delays once both MTD for VAT and Brexit have passed. MTD has already suffered from the diversion of resources to Brexit.

So, the answer to the question of dates is that MTD for profit and loss will arrive by 2021 “at the earliest”.

The attitude of the accounting professionI regularly read comments on accountant’s forums discussing Making Tax Digital. It has been amazing how negative many of them are. I guess that this illustrates how much resistance there is to change. Naysayers have dominated the discussions. But it was interesting to see the comments that came back when one accountant recently stated that they were thinking of non-complying. That is because so many people had said how difficult it was. Following this there was a flurry of accountants saying that they had got their clients up and running on MTD for VAT with no problems.

In summary

Computerising business records and tax returns has got to be good news if we want rising standards of living, which in turn depend on improving business efficiency.

However, there are a number of mountains to climb before everything is fully up and running. HMRC have not really distinguished themselves with the professionalism of the programme so far. Here’s to hoping that they will do better in the future and that we can all eventually prosper as a result.

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