Released as part of a package of six Making Tax Digital consultations, the 78-page Bringing business tax into the digital age document sets out the government’s plan to transition unicorporated businesses to the online system by 2020.

A further consultation on how Making Tax Digital will work for incorporated companies will be released separately in the autumn.

Requirements

The Making Tax Digital policy will see businesses to keep digital records of trading and transactions, providing HMRC with updates at least quarterly, with their tax position finalised at the end of the year. It is hoped the more frequent updates to HMRC will translate into an in-year estimate of the tax due.

HMRC notes in the consultation that no additional records will be required of businesses beyond the current records for tax purposes.

In-keeping with current practice, HMRC outlined ‘more stringent’ requirements for VAT registered businesses, ‘reflecting the greater need to be able to trace individual transactions and determine the VAT liability’.

These requirements include, among others, the need for a VAT account, a Bad Debt account, documentation relating to imports or exports, or to acquisitions or supplies from or to other EU states.

The flexibility to record reliefs and allowances is to be incorporated into the system, HMRC confirmed in the consultation. It added the information to be provided in updates to HMRC is summary totals of the digital record of income and expenditure and not transaction records.

Transition

The practical issue of shifting businesses which still rely on paper-based systems and retaining receipts and invoices in order to make a reconciliation at the end of the year onto effective software is covered extensively.

HMRC recommends the use of ‘digital tools’ such as software or apps, and will provide free software for ‘the smallest businesses with the simplest tax affairs’.

Alongside that provision, guidance will be made available on what a business should look for in commercially available products; a list of available products that can interact with HMRC systems; and regular performance metrics relating to the software packages and apps.

Carve outs

Under the proposals, unincorporated businesses and landlords under £10,000 will be exempt from the requirements, while there will be a year’s deferral for those above £10,000 but below a threshold yet to be determined.

‘Digitally excluded’ businesses are to be completely exempted, while charities, community amateur sports clubs and other groups yet to be decided will also benefit from exemptions.

Financial support for businesses transitioning to the system is under consideration, although what form that support takes is again yet to be determined.

As far as penalties are concerned, a ‘soft landing’ is proposed for the first year of a business’s Making Tax Digital obligations. Thereafter, a new points-based penalty system that applies financial penalties only after several failures, relaxing the treatment of one-off errors is proposed.

The Making Tax Digital: Bringing business into the digital age consultation is here. 

The full collection of Making Tax Digital consultations is here.