The digital tax era and its impact on data

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The next pilot for Making Tax Digital Income Tax Self-Assessment (MTD ITSA), begins on 22 April 2024. MTD involves keeping digital records of accounts and sending summaries to HMRC every quarter, instead of filing one final return annually.

In the coming year or two, individuals — as well as businesses — will be forced to step into a new era of digital tax filing. HMRC wants to create a world-class taxation system and recoup billions of pounds a year in lost tax that results from inaccuracies in how tax is currently reported.

MTD aims to create a tax system that is more transparent, efficient and easier to manage for VAT-registered businesses and individuals generating over £30,000 annually from business or property income.

The scheme has been subject to high profile scrutiny. HMRC has repeatedly been criticized for delays and the poor design of MTD which has left many expecting, and hoping, it would be scrapped. But it won’t. Whilst there have been delays which have caused frustration, MTD is being done for the right reasons and HMRC are investing heavily on getting it right.

So, there’s no getting around it, taxpayers will have to comply on a quarterly basis, keep digital records, be able to evidence a digital journey (with no ‘manual’ changes) and use authorized software to submit the return figures to HMRC.

Data quality and the digitized tax system

Although there have been challenges, and there could be more ahead, MTD will improve efficiency and accuracy for businesses, reducing manual inputting and their associated errors. Digital interfaces will guide users more effectively, reducing the chance of mistakes frequently made due to the misinterpretation of complex tax laws.

For businesses, the shift toward digitization could also be a much-needed step towards clarity and control of their financial affairs. Improving data quality can save time and money. For instance, digital record keeping and real-time access to financial data helps improve much needed cashflow and prevents unwanted surprises that could impact liquidity. It gives businesses greater insights into their financial health and helps avoid the massive administrative headache of doing taxes at the end of each year.

How and what to prepare

Most businesses are somewhat digital in their approach to tax and accounts, but it’s important to check that the software being used is MTD compliant. The best way to do this is to talk to your provider to see how much of MTD’s compliance is covered. Some software applications will only cater to certain aspects of MTD, so make sure the bits applicable to your business are accounted for.

MTD-compatible software will include an Application Programming Interface (API), pushing data to HMRC and pulling information back with details of the likely tax liability. There are different processes required for VAT and ITSA, and it’s important to note that eventually MTD will also extend to corporation tax.

Some businesses use spreadsheets for business records, which are not API enabled. In this circumstance bridging software with API functionality can be used, but it is imperative that the data flows digitally from the spreadsheet to HMRC and is not re-keyed at any point along the journey.

Using a cloud accounting system has the added benefit of housing all financial data in one place and creating the necessary linking and audit trail with HMRC. This helps ease the compliance headache and standardize all financial information in one place, so it is easier to manipulate, for greater control.

If you use an accountant, ask their advice and what plans they have in place for MTD. They, too, may have some suggestions for how this should be set up better for your business.

Recent changes to MTD

HMRC recently unveiled five further alterations to MTD for ITSA. These changes might seem like mere administrative tweaks; however, they signify a pivotal shift in how businesses navigate the digital tax system. We’ve engaged extensively with industry experts to better understand the implications of these updates. The consensus is optimistic and shows that HMRC is listening to feedback and working hard to get this right:

1. Removing duplicate efforts The removal of ‘End of Period Statements’ eradicates a cumbersome step: requiring additional submissions post-quarters. Its removal underscores HMRC’s responsiveness to user feedback and commitment to moving toward greater simplification and efficiency.

2. Smoothing the joint landlord burden In real estate ventures involving collective ownership, the initial approach required each party to individually submit their share of property income and expenses. Not only laborious, but this method also presented logistical quandaries concerning the splitting of financials at year’s end. Responding to feedback, HMRC refined the approach, significantly reducing the detail joint landlords need to track quarterly, in an effort to reduce administrative chores.

3. Automatic exemptions for unique circumstances Individuals, particularly those acting as foster carers or lacking a National Insurance Number, previously encountered administrative hurdles due to the precondition of applying for exemptions. HMRC re-examined this policy and has now instated automatic exemptions, mitigating complexities for those in unique situations.

4. Enabling multiple agent interactions As our financial landscape grows in complexity, there are instances where multiple agents manage different aspects of one’s financial affairs. HMRC has recognized this challenge and broadened MTD engagement from a single agent to accommodate multiple agents. This is set to enhance flexibility and operational fluidity.

5. Streamlining submissions with cumulative reports Perhaps the most transformative change lies in the adoption of cumulative quarterly submissions. This shift from discrete to cumulative reporting liberates taxpayers and accountants from the sequential submission process and the need to resubmit previous quarters where corrections are required.

We can anticipate refinements on the horizon. While HMRC’s responsiveness is commendable, further clarification is still needed in some areas and this level of overarching change will require some trial and error.

There’s no question that MTD is here — it’s now about ensuring readiness for it. These new requirements should be seen as a catalyst for positive change in data management, promoting financial health and ultimately business survival.

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