HM Revenue & Customs has an ambitious plan to make filing tax returns digital — we’ve broken down what this means for you and how to prepare for the changes.
By Molly Long
The UK government has been planning a digital reform for the tax return process since 2015 and last week, it announced the timeline for the next phase of roll out.
Making Tax Digital (MTD), as the scheme has been titled, has three main aims for transforming tax administration. These are: to make it more effective; more efficient; and easier for tax payers to get right.
As the name suggests, the plan is for all tax activities to go paperless and have companies and self-employed workers instead keeping digital records and making returns online. While it has the ultimate aim of making the tax process easier and simpler, there are a number of points that designers will need to consider before it is rolled out.
When do the changes come into effect?
There are three main phases to these reforms, and they will affect design businesses and individuals (the self-employed or freelance) differently. The first phase, concerning VAT, has been in effect since last year. The second and third phases are scheduled for the coming years.
- Making Tax Digital for VAT – Since 2019, VAT-registered businesses with a taxable turnover above £85,000 (the current VAT registration threshold) have had to keep digital tax records and perform digital tax returns. Many design businesses will be over this VAT threshold, and so will already be familiar with the MTD regime.
- Making Tax Digital for individuals – From 2023, self-employed people with an annual business income of more than £10,000 will need to follow the MTD regime for their Income Tax. Some people that fall into this category are already following these rules as part of a government pilot scheme.
- Making Tax Digital for corporations – There is so far little word on how this part of the scheme will roll out, or when. HMRC is supposedly waiting to see how the roll out of the previous two phases goes before making any decisions.
What are the changes and what designers will be affected?
As mentioned, design businesses that turn over more than £85,000 will already be familiar with the scheme. For this reason, Moore Kingston Smith accountancy firm partner Mike Hayes says impact on this area of the design industry will be “minimal”.
For those design businesses that that turn over less than £85,000 – including limited company contractors – the MTD system is currently optional. But it will become mandatory from April 2022, at which time firms will need to follow the new procedure of using appropriate software and singing up for MTD VAT.
Perhaps the biggest impact will be felt by self-employed and freelance designers whom have so far not engaged with the MTD system. From April 2023, individuals will need to use compatible MTD software, and will be required to send an income and expenses update to HMRC every three months (quarterly). At the end of the accounting period, a declaration will need to be sent, finalising and confirming the updates sent throughout the year.
What is MTD software and will it cost me to use?
Hayes tells Design Week that HMRC maintains that the cost of transitioning to MTD for VAT would be around £109 per taxpayer. However, he adds, that surveys of the real costs incurred have indicated that it is much higher than that – with smaller businesses likely to be paying out the most in comparison to their turnover.
This is echoed by Jack Tindale, design and innovation policy manager at think tank Policy Connect, who says that smaller businesses “may not have the resources necessary”, like a dedicated in-house accountant or finance team to cost-effectively implement these new measures.
In all cases, the government emphasises the need to use MTD “software” in order to be compliant with the new rules. This may seem an ambiguous and somewhat intimidating term, but to help in the process, HMRC has compiled a list of recognised software that can help different businesses in different ways. Some are free, and others require payment.
There are two types of software that HMRC details:
- Record keeping software – This software updates and stores your records digitally and works directly with HMRC systems allowing you to file a VAT return.
- Bridging software – This software works with non-MTD-compatible software like spreadsheets, accounting systems and other digital bookkeeping products, and lets you send the required information digitally to HMRC in the correct format.
How far in advance should I prepare?
With the changes to the tax system scheduled for some time in the future, there is temptation to put off preparations. Especially, as Hayes points out, when “most businesses are trying to cope with the current financial climate” brought on by the ongoing coronavirus pandemic.
But while 2022 and 2023 may seem far off now for smaller design businesses and self-employed and freelance designers respectively, he recommends “not leaving this to the last moment”.
“Unless the government is forced to delay this, smaller businesses will need to invest in what is needed to make them MTD-compliant,” Hayes says. And the chance of these measures being delayed is relatively small, says Tindale.
“I haven’t seen anything to suggest there’s any doubt about these changes coming into effect —our government currently has a pretty significant majority so its unlikely they will be opposed enough to halt progress,” Tindale says. “So designers should act now in the belief that they are coming.”
Will these changes actually make paying tax easier?
The whole point of MTD is to make things easier and more efficient, for both HMRC and the taxpayer. But how effective the scheme will be in this mission is up for debate.
For one thing, as Tindale points out, taxpayers are currently dealing with a “double-whammy” of uncertainty in the face of the coronavirus pandemic and the upcoming end of the UK’s Brexit transition period with the EU. Indeed, for freelancers and the self-employed, this becomes a “triple-whammy” when you add the postponed IR35 legislation into the mix too, which is coming into effect next year.
It’s understandable then that designers would feel anxious about these changes among the other circ*mstances they’re currently dealing with, however far in the future they may appear. That said, there is perhaps some cause for optimism according to Tindale.
“I will say that HMRC itself has a reasonable track record in terms of digital technologies, especially when compared to other areas of government,” he says. “To their credit, the fact that HMRC was able to introduce immediately all of the government’s emergency financial support is impressive — I would certainly hope that some of the lessons from coronavirus show that there is the capacity to make these changes quickly.”
The changes themselves — moving to an online bookkeeping system and submitting quarterly returns — shouldn’t in theory pose too many problems, but the quality of the HMRC system will undoubtedly affect how successful, and easy, the process is.
“There is still a large onus being placed on taxpayers, no matter how simple the system purports to be,” Tindale says. “My thoughts are that if the government really wants to provide some reassurance, it should be providing businesses with as much information as it can now.
“It can’t be a demand from government on one side, without any offering to the other.”
Design Week will continue to update readers on developments relating to Making Tax Digital as they arrive. For the latest from the government, head here.
