Freelancers, what if digital tax accounts aren’t delayed?
It feels like no matter how much Making Tax Digital for VAT is discussed, there is always a big question mark hanging over it.
Even with HMRC’s recent awareness campaign, the House of Lords last month recommended for the transition to MTD from April 2019 to be postponed.
Leading tax bodies like the Association of Taxation Technicians (ATT) are backing the Lords, believing that many small businesses simply are unable to be prepared because of the knowledge gaps that exist.
While a delay is not out of the question, there will certainly come a day when businesses will be required to submit their tax digitally. And so freelancers, clueing up on MTD is pressingly required too, writes Mike Parkes, technical director of self-assessment tool and tax return software firm Go Simple Software.
Firstly, those who complete Self-Assessment need to know what is legally required of them. So if MTD for VAT does go ahead in April 2019, then VAT-registered limited company freelancers who have a taxable turnover above the threshold (currently £85,000) will need to keep digital records. The same is true for self-employed sole traders. Your VAT return as a limited company consultant or a freelance sole trader can also only be submitted via third-party software to HMRC.
However, there are exceptions to this -- meaning some taxpayers are going to be exempt from these mandatory obligations if they meet certain criteria. For example, if it is impractical for you to maintain electronic records (due to reasons such as age, disability and remoteness of location), then you can apply for an exemption.
Those that are rejected, or don’t meet the criteria, will need to ensure they are fully aware of the changes and have the appropriate support. In our view, HMRC is -- to an extent -- providing assistance on this, but it’s also important for you to know independently exactly what you will have to contend with.
There are plenty of cloud software packages and systems available that allow for digital record-keeping. However, under MTD, they must follow HMRC’s specific regulations
One of HMRC’s key rules is that the information must be shared with them via their Application Programming Interface (API) platform. The software you choose therefore needs to be harmonious with this. Fortunately, HMRC has a list of approved suppliers who have compatible software.
Although most VAT-related information is going to be required in a digital format, there are exceptions to this too. Records that don’t need to be used for your VAT return are exempt, as are those that don’t necessarily need to be retained in software.
MTD for Business
So-called ‘MTD for Business’ will only apply for those who are a sole trader or landlord.
However, this is not expected to be released until after April 2020 -- or possibly as late as 2022, if the House of Lords get their way. This means that, when it is rolled out, those impacted will have a slightly larger administrative burden as they will move from an annual submissions process under Self-Assessment to quarterly MTD submissions.
The impact of the pilot programme
Although our calculations indicate that MTD will ultimately make businesses more efficient and save them money in the long run, we see why there is a concern that many self-employed individuals aren’t yet adequately prepared.
On top of this, as a software provider, we feel the pilot programme has missed opportunities. One of them is that it has not been tested to its full extent. Although it began its implementation in the summer of 2018, this was only rolled out to a very limited number of businesses.
Early 2019 will see the remaining (almost 600,000) businesses invited to join the pilot. But there’s a further disappointment because these will not have been given the chance to trial even a single VAT quarterly return via software, prior to this process being made mandatory! This, of course, means they may not be adequately prepared.
The end of the pilot is currently scheduled for March 31st 2019: the very day before MTD for VAT is rolled out. Therefore, any issues with the pilot cannot be fully evaluated, and there could be potential reliability and performance issues with the software.
Despite there being issues with the pilot, it was welcome news to hear from HMRC recently that businesses are getting a helping hand, given that spreadsheets will now be able to be used in MTD. These spreadsheets will need to be digitally linked, however, and so require ‘bridging’ software to connect the information to be submitted to HMRC.
With the lack of preparation time, small businesses are significantly impacted as they do not have the resources to deal with the administration required for MTD. This means there could be potential jeopardy in ensuring their compliance.
They can be helped along by selecting software that is recognised as compliant by HMRC, although this does pose an issue for those who are already using software that is not on the HMRC-approved list. For these taxpayers, they will be required to switch or use bridging software.
Compliance is of key importance, even if Making Tax Digital is in any way postponed. In light of our experience of both HMRC and online accounting software, we wouldn't be at all surprised if the public beta was extended, effectively postponing the compulsory element of MTD for VAT. But it's definitely coming -- it’s just a matter of when.
Don’t delay, act today
In the current climate, it would be a political ‘win’ for businesses to secure the Lords-recommended delay, mainly due to uncertainty around Brexit and the fact that it’s hard to find anybody who really wants MTD for VAT in a few months’ time.
All you can do is wait for HMRC’s response to the House of Lords’ recommendation. But if its response via a spokesman to peers on the divisive issue of the 2019 Loan Charge is anything to go by, you may be disappointed, so we recommend you make moves now to ensure you’re as well prepared for the digitalisation of tax as possible.
9th December 2018