16 August 2016 Global Tax Alert UK Government opens consultations on Making Tax Digital EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: www.ey.com/taxalerts Executive summary On 15 August 2016, the United Kingdom (UK) Government published six different consultation documents 1 Making Tax Digital (MTD) reforms. The consultation period closes on 7 November 2016 and Her Majesty s Revenue & Customs (HMRC), the UK s tax authority, will publish a response to the consultations as soon as possible after that, followed by draft Detailed discussion In its 2015 Budget, 2 the UK Government set out its vision for a transformed tax system. In December 2015, the Government launched the Making Tax Digital Roadmap setting out how this would be achieved, with the objective of making HMRC into one of the most digitally-advanced tax administrations in the world by 2020. The consultations, released on 15 August, outline reforms that will apply to all businesses, self-employed people and landlords (unless expressly exempted), but focus primarily on the unincorporated sector. It is anticipated that a further discussion document, focusing on the incorporated sector and on the most complex businesses, will be published at a later date. While the scope or timings for the proposals for incorporated businesses have yet to be announced, it is expected some of the points raised in the 15 August consultations will feed into,
2 Global Tax Alert In addition, the consultation on Transforming the tax system through better use of information will be relevant for businesses as employers, as well as those businesses in societies and pension providers. A separate Alert addresses the issues likely to be faced by those third-party providers of information. The six documents are: Bringing business tax into the digital age which considers how digital record keeping and regular updates should operate. Simplifying tax for unincorporated businesses which considers changing how the self-employed map accounting periods onto the tax year (reform of basis period rules), extending cash basis accounting to larger businesses; reducing reporting requirements for businesses, and removing the need to distinguish between capital and revenue for businesses using cash basis accounting. businesses which considers the extension of cash basis accounting to landlords. Voluntary pay as you go which considers options for customers covered by the requirement for digital record keeping to make and manage their voluntary payments, considers how voluntary payments will be allocated across a customer s different taxes and explores potential ways of dealing with the repayment of voluntary payments. Making Tax Digital Tax administration which considers aspects of the tax administration framework that need to change to support Making Tax Digital. It also sets out proposals to align aspects of the tax administration Transforming the tax system through the better use of information which considers how HMRC will make better use of the information it currently receives from third parties to provide a more transparent service for customers that reduces end of year under- and over-payments. In addition, HMRC also published Making Tax Digital for Business An overview for small businesses, the self-employed and smaller landlords which includes a summary of the main issues and selected questions, with links to the full consultations at various points. The consultation documents note that all individuals and small businesses will have access to simple, secure and personalized Digital Tax Accounts and that, by 2020, HMRC will have abolished the annual tax return entirely. To achieve this objective, most businesses, self-employed people and landlords will need to keep records digitally and will update HMRC at least quarterly, through digital tax accounts. According to the consultation documents, unincorporated businesses and landlords with a turnover or gross income from property under 10,000 per annum will be exempt from the scope of MTD. A one year deferral of the requirements is proposed for those unincorporated businesses with a turnover or gross income from property above 10,000 but below a threshold that has yet to be determined. Taxpayers that are deemed as digitally excluded are to be completely exempt from the rules, while charities, community amateur sports clubs and other groups that have not yet been decided Businesses within scope will begin to fall within the requirement to keep digital records and make regular updates for income tax and national insurance contribution (NIC) purposes from April 2018, although one chapter of the consultation document discusses the possibility of deferring the start date by up to 12 months for the smallest unincorporated businesses within scope. Value Added Tax (VAT) only comes into the scope of MTD on 6 April 2019, the consultation VAT return would still be required. Important themes from the consultations HMRC s move in this direction is in common with many other countries tax authorities, who are using digital platforms to enable the real- or near-real time collection and assessment of taxpayer data, developing new tools and abilities to crossreference information, apply increasingly sophisticated data analytics algorithms, and sharing data among other authorities and agencies. Both the MTD consultations released on 15 August and the ones still to come focus on how HMRC plans to bring business tax into the digital age. As announced in the UK s 2015 Autumn Statement, most businesses, self-employed people and landlords will, by 2020, be required to use software or apps (digital tools) to keep their business records and to provide regular updates of information. There will be no requirement to draw up a set of accounts each quarter, and the notion of an annual tax return is removed.
Global Tax Alert 3 Via their Digital Tax Account, a taxpayer would be able to view an up to date picture of their tax affairs, which, the consultation document states, would provide greater certainty about tax due and entitlements. Targeted guidance and tailored Alerts will make taxpayers aware of relevant obligations, entitlements and reliefs. Digital record keeping tools will help businesses to manage their affairs effectively and to understand their tax position more easily. Details affecting business Many of the proposals affecting business are contained in the document Bringing business tax into the digital age. Among the proposals are a number which could provide some guidance as to what to expect for larger more complex businesses and these are set out below. In the chapter Acquiring digital tools, the practical changes requirements to mandatory digital record keeping and updating of information to HMRC using digital tools (in combination with a Taxpayers Digital Account) are considered. Here, the consultation document notes that the core of the MTD strategy relies upon data being transmitted to HMRC via Application Programming Interfaces (API), in HMRC s systems, with which other systems can interact and exchange data. This focus on API provides future insight for large business, where it is highly likely that similar technologies either encapsulated within third party tools or products or siting directly between a business and HMRC s platform will be leveraged. HMRC will ensure, the consultation states, that MTDcompatible software products are available to suit the budgets and needs of all businesses, including some free products. Here, HMRC is working with around 600 software developers on the provision of new and/or updated products that will meet the requirements of MTD. In the chapter, the document considers how the process of a taxpayer making more frequent updates to HMRC will translate into an in-year estimate of the tax due. In particular, it explores when businesses should record accounting and tax adjustments for that businesses will continue to calculate their VAT liability quarterly. The introduction of MTD will not change the current approach to calculating a business s VAT liability. In the chapter titled Providing HMRC with updates, the consultation considers that periodic updates of summary data to HMRC will be made quarterly, but could be made more frequently, if businesses choose to do so. So that businesses have a simple and easily understood obligation, HMRC expects that most businesses will want a straightforward cycle of submitting updates every three calendar months. VAT registered businesses currently required to submit monthly returns would continue on a monthly basis. The updates to HMRC, provided quarterly or more often if the business prefers, will include the changes since the previous update. The business will also be able to change any indicators. As a business will have recorded and categorized transactions once only in the software, the application will be purposes as well as any VAT position (if VAT registered) and easily update HMRC for both purposes. Under this approach, update up to four months after the date that the business the document says, be a simple data upload to HMRC and, because the work of categorizing transactions has already been done, it should be no more work to upload detailed updates than it will be to provide updates with only a small number of changes since the last upload. A standard time limit for uploading updates across all taxes would be straightforward and easily understood, the consultation document says. At present the VAT return requirement for VAT registered business making returns quarterly is one month and seven days after the quarter end. HMRC proposes to standardize the time limit for businesses to upload their updates at one month following the end of each update cycle. It does not follow that the due date for payment of VAT will necessarily change as a result, as consideration of VAT payment dates is outside the scope of the consultation. The chapter titled End of year activity explores the potential position at the end of the year or other relevant period. Here, the consultation notes that, because businesses will have provided HMRC with regular updates throughout the year, they will not need to spend time and effort at the end of each year gathering details of expenditure and income, trying to recall events from a year earlier. For businesses using the are complete, then making a declaration that everything is complete and correct to the best of their knowledge.
4 Global Tax Alert That declaration assuming the individual liable to tax on the business income has no other income to declare will then crystallize their income tax liability for the year. HMRC does recognize, however, that some businesses will still need the opportunity to review the information they have previously provided, make any necessary accounting adjustments or claim any reliefs and allowances that they have not included in their regular updates. Where businesses have previously included accounting adjustments, they will need to consider whether these are still correct or whether further and made claims to reliefs or allowances to arrive at a also make a declaration that everything is complete and correct as regards their business. While the chapter titled Providing HMRC with updates proposes that a business should provide their regular updates no later than one month after the end of an update cycle, HMRC states that it does not believe it is appropriate to ask businesses to carry out their End of Year activity at within one month of their accounting date. Instead, HMRC s preferred approach is that all businesses should have nine months, from the end of their period of account, to complete their End of Year activity. Penalties The consultation document titled Making Tax Digital: Tax administration sets out proposals for a graduated model whereby each failure would attract penalty points and only once the points reach a set level would a penalty be charged. The new model also includes a proposal that customers within scope of the new submission obligations introduced by MTD should have a period to gain familiarity with the new submission obligations before the new penalty regime is introduced The consultation proposes a graduated model with each nondeliberate failure to submit information on time attracting penalty points. Only once the points reach a set level (four is outlined for those who are deliberately non-compliant. In addition, the consultation proposes two potential models relating to late payment sanctions. Finally, the consultation document states that there will also be what is described as MTD obligations. Implications Although not focused on large (i.e., multinational) businesses, the consultations released on 15 August are in line with a wider, global trend towards the digitization of tax administration. In order to address budgetary constraints, increasing demands to close revenue gaps and the increasing availability of powerful new technologies, many tax authorities are digitizing their end to end processes, collecting more data closer to the point in time such data were created, and then using complex data matching and data analytics techniques to improve tax evasion detection rates, tax collection and debt management. While these techniques are being adopted within the areas of personal income taxes, VAT and corporate taxes for micro/ small businesses, the extension of such techniques into other business taxpayer segments is to be expected as a natural progression. Businesses operating in multiple jurisdictions should therefore: Ensure that they are aware of the extent to which governments have implemented digital tax administration in the countries where they operate Understand such governments strategic priorities and direction Put in place, as needed, consistent processes in multiple countries to comply effectively with developing rules, particularly as governments require more data electronically Ensure that the information they are sending on a routine basis is both correct and consistent with what the tax authority requires Endnotes 1. https://www.gov.uk/government/collections/making-tax-digital-consultations. 2. https://www.gov.uk/government/topical-events/budget-july-2015.
Global Tax Alert 5 For additional information with respect to this Alert, please contact the following: Ernst & Young LLP (United Kingdom), London Chris Sanger +44 20 7951 0150 csanger@uk.ey.com Rob Thomas +44 20 7760 5538 rthomas5@uk.ey.com Ernst & Young LLP, Houston Carolyn Bailey +1 713 750 8652 carolyn.bailey@ey.com Ernst & Young LLP, UK Tax Desk Leader, New York James A. Taylor +1 212 773 5256 james.taylor1@ey.com
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