HMRC have confirmed that a formal consultation response and draft legislation for Making Tax Digital for Business will be available soon. Having received over 600 written responses to the full consultation, and over 1200 responses to the online survey, HMRC are looking to allow enough time for the consultation responses to be considered carefully and the findings fed into the proposals. They have also indicated an updated impact assessment will be published at the same time. The Government's response to the consultations will be published in January 2017, alongside the draft legislation for Making Tax Digital for Business. While we wait for the response from HMRC, here’s the top 4 key questions we asked of HMRC in our response to the consultation.
1) What is the definition of 'digital record keeping'?
HMRC have not explicitly defined what is meant by 'digital record keeping' in the consultation documents. It is unclear as to whether this means recording the transactions digitally (i.e. the bookkeeping information: date, amount, expense category, etc) or if this extends to also encompass digital copies of the invoices and receipts needing to be kept. The latter will cause a lot of extra work for taxpayers if they have to scan every single document – more so if they have software which does not include the ability to take and/or store photographs, or where a higher quality scanned copy (rather than a photo) would be wanted by the business.
2) How will the End of Year activity/submissions work if the taxpayer has multiple accounting periods ending in a year?
The consultation documents do not include any explanations or examples for how the End of Year activity would work if a taxpayer has multiple accounting periods for the same business ending within a tax year. Will the taxpayer be expected to complete multiple End of Year declarations? Or will the End of Year activity only be undertaken after the final accounting period ending in the year? The second option here would tie into the fact that tax adjustments are usually needed on an annual basis. However, if a single End of Year submission is made after the final accounting period ending in the year, it could lead to difficulty in determining when the due date is for the End of Year submission. For example, if a business has a usual end date of 30 April, the submission would be due by 31 December under proposed rules. But if the business decided to have another accounting period end on 31 January, the End of Year submission already made would be incorrect.
3) Will HMRC develop their estimated tax liability calculation so that the submitted data is extrapolated to a full year’s worth when providing an estimated tax liability?
One quarter's worth of data is unlikely to be representative of the remaining three quarters. However, if it is not extrapolated, then showing the tax liability based on the single quarter’s submission would be inadequate in helping the taxpayer to budget for the annual liability, which is a stated aim of HMRC. We believe that it would be most beneficial to show both a cumulative estimated liability based only on updates made and also an extrapolated full year's estimate.
4) What steps are involved in the agent verification process? How will the taxpayer receive notifications where an agent requests access to their records?
The agent verification process is currently under development by HMRC and so there is currently little detail about what it involves. Where an agent requests authorisation to act for a taxpayer, HMRC describe the process as the taxpayer receiving a notification and granting permission via their software. We have asked for confirmation of what would happen in cases where a taxpayer does not use any software themselves (for example, any case where an agent needs access to their clients DTA information and the client does not have to make quarterly updates), and have recommended the taxpayer should also get an email or some other form of communication to notify them.