Making Tax Digital: Choose Your Punishment

Making Tax Digital is the Government’s plan to digitise the tax return process for millions of small businesses and unincorporated landlords.

The Government announced in the 8th March Budget that it will provide an extra year, until April 2019, before Making Tax Digital is mandated for unincorporated businesses and landlords with turnover below the VAT threshold (currently at £83,000 but rising to £85,000 from April 1st). This will provide them with more time to prepare for digital record keeping and quarterly updates.

This decision follows on from the Government’s response to the Making Tax Digital consultation, which gave us the following decisions:

  • Businesses will be able to continue to use spreadsheets for record keeping
  • The government will consider further issues such as the initial exemption threshold
  • The government has chosen to extend cash-basis accounting to unincorporated landlords so that thousands more will be able to pay tax based simply on the difference between money they have taken in and what they have paid out. For small landlords this will mean paying tax on rent received rather than rent due.
  • The government has decided to include a maximum rental income threshold of £150,000 per property business. This excludes only 0.5% of businesses, leaving approximately 2.36 million eligible businesses with up to 1.8 million expected to benefit from the administrative savings of using cash basis.
  • HMRC will begin piloting digital record keeping and quarterly updates for a full year from April 2017, building up to working with hundreds of thousands of businesses and landlords before rolling the services out more widely.

The NLA welcomes the deferment for unincorporated businesses with a turnover below the VAT threshold (currently £83,000). However, our view that we put across in the consultation is that the £10,000 turnover threshold for mandating the digital record keeping was too low and this has not changed yet.

The Treasury Select Committee also found that such a low threshold was universally considered to be unacceptable, and agreed with our recommendation that it be permanently raised to the VAT threshold (currently at £83,000 but rising to £85,000 from April 1st).

And just last week the House of Lords Economic Affairs Committee concluded the plans should be delayed until 2020 and also agreed that businesses with turnover below the VAT threshold should be exempt. That latest report can be found here.

Alas, the Government seems eager to proceed as planned (albeit with a year’s delay).

Your Choice of Punishment

The Government is now consulting on the design of late submission penalty system, and it is your chance to have your say. The consultation can be found here, and is open until 11th June.

The Government states they do “not want to penalise isolated failures”, and the three possible models they describe seek to achieve this in different ways:

  1. Points-based penalty – The customer would incur a point each time they failed to provide a submission on time. When the points reach a certain threshold a penalty would be charged. The points would reset after a period of good compliance.
  2. Regular review of compliance – HMRC would carry out an automated regular review of the customer’s compliance with submission obligations over a set period. There would be no penalty for the first failure during the set period. This model allows for several failures to be subsumed into a single penalty charge.
  3. Suspension – A penalty would not be charged for the first failure. Instead it would be suspended on the condition that the customer provides the outstanding submission within a specified time. This could be applied on more than one occasion, and gives the customer an opportunity to avoid a charge by putting right what has already gone wrong.

In whatever model they choose for the late submission penalty system, the NLA will be urging the Government to ensure there is sufficient leeway for honest mistakes. If they won’t exempt the smallest landlords, like we and others have repeatedly recommended (those with under £83,000 turnover), then many small landlords will face a whole new tax system and could be caught out unknowingly.

Read the full details of the proposals and let them know your thoughts by responding to the consultation by the 11th June.

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