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19/04/17Will you soon have to complete five tax returns a year?

Millions will soon have to file five tax returns a year as part of an upcoming digital overhaul.

The paperless ‘Making Tax Digital’ scheme plans to completely replace the current system of filing paper returns by 2020, with a pilot running throughout the 2017/18 tax year.

Making Tax Digital?

The ‘Making Tax Digital’ initiative was announced in the 2015 Budget, and aims to recoup some of the estimated £8 billion a year that is lost from uncollected tax. Whilst the digital system is designed to save the Government money, H M Revenue & Customs (HMRC) has insisted that it will have benefits for businesses and the self-employed such as:

  • Saving time by not sending information that HMRC already has
  • Saving money by fixing any errors in real-time
  • Simplifying the tax return process

These benefits are being eyed suspiciously by many industry spokespeople. Claims are being made that the new system will in fact increase the time it takes to fill in a return, and this may cost them money due to filing incorrect information accidentally. The Professor of International Political Economy at City University, London, Richard Murphy, suggests “A greater number of deadlines would lead to more rushing and more mistakes as people put in any old figure to meet the deadline.”

In the ‘Making Tax Digital’ Policy Paper, HMRC suggest a timetable that will see a minimum of five returns being filed. These consist of four quarterly returns, with an additional ‘finalising’ annual return being made at the end of the tax year. Those with turnover above the VAT threshold of £85,000 will have nine, as an additional four VAT returns will be required.

Who will it affect?

‘Making Tax Digital’ will affect the following groups:

  • Self-employed people
  • Landlords
  • Employees who have investments that provide an income over £10,000

Taxpayers are being drawn into the digital system over two years, with any business or individual who has a turnover of over £85,000 going digital in the 2018/19 tax year. Those with an income below the VAT threshold will have an additional 12 months to prepare, as per the announcements made in the 2017 Budget.

The £10,000 limit for being drawn in to the digital system doesn’t match the tax-free personal allowance of £11,500, meaning that those earning close to this from investments may wish to make sure that they don’t unintentionally fail to declare their earnings. This is another point being raised by those unhappy with the overhaul, claiming that the £1,500 difference is designed to catch people out in an already complicated system. Whether this is an oversight or a not, keeping an eye on your earnings as they reach the £10,000 limit can prevent any fines or sanctions that the Government may impose.

Will it be expensive?

HMRC predicts that the overall cost to small businesses will be £330 million. This comes mainly in the form of new IT systems and infrastructure, as computers, tablets and smartphones will be needed to run the tax returns system. This may seem like a huge outlay, but HMRC estimates that it equates to around £280 per business.

Many industry representatives have disputed this, with Tina Riches, a partner at accounting group Smith & Williamson suggesting that the average cost will be closer to £2,000. This figure accounts for:

  • IT
  • Administration
  • Training staff to use the system

 Does everybody have to go digital?

Yes. Well, everybody who can go digital has to, meaning that those genuinely unable to use the new system will be given assistance. The Government state in the Equalities Impacts section of the Policy Paper: “there is no question of forcing those who cannot go digital to do so. HMRC will ensure that there are alternatives for those who genuinely need them, and help will continue to be available for businesses who want digital support.”

The ‘Making Tax Digital’ incentive claims to benefit both the Government and businesses, but many are nervous. Until the new system is put in place, it won’t be apparent whether it was fear of the unknown, or whether five tax returns a year will have a dramatic effect on businesses large and small. With the pilot currently underway, and the first wave of businesses set to pay their tax digitally in 12 months, we don’t have long to wait to find out.