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Making tax digital: the four foundations


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The four foundations

The Government's view of the transformed tax system for 2020 is based around these four foundations:


1. Tax simplified

The central premise is that taxpayers should not have to give HMRC information that they already have, or should be able to get from elsewhere. Taxpayers will see the information that HMRC hold through their digital tax accounts, and be able to check their details at any time. As a start from 2016, most taxpayers completing an online tax return should find information on their employment income already filled in. The same will also happen for a person's state retirement pension. As information on bank and building society interest starts to be included in tax codes, this will remove the need for many to report this income separately in a tax return. HMRC are shortly to consult on how information from more third parties, such as other investment income, might further reduce the reporting burden on taxpayers. HMRC will also use the information to tailor the service it provides, according to each taxpayer's individual circumstances, with taxpayers having difficulty going online or in need of extra support being identified and helped. The information will also be used by HMRC to spot people trying to ‘bend or break the rules’ earlier, which they hope will reduce their costs recovering underpaid tax.


Under this foundation also comes the introduction of a new system of online billing, so that anyone who owes tax can see what they owe without needing to complete a tax return.


2. Making tax digital for businesses

More than two million small businesses already had a digital tax account by December 2015 and by April 2016 HMRC have advised that all of the UK's five million small businesses will have access to their own digital account.


Between April 2018 and 2020, HMRC will phase in the requirement for most businesses, self-employed people and those letting out property, to update HMRC at least quarterly through their digital tax account. HMRC are to ensure that there are free apps and software products to enable businesses to keep records of their income and expenditure and compile their tax data ‘as part of their ordinary day-to-day activity’, but note that many businesses and their advisers will choose to use commercially-available software.


These measures are not to apply to individuals in employment or pensioners, unless they have secondary incomes of more than £10,000 per year from self-employment or property. The Government will also shortly consult on whether the measures should apply to charities, sports clubs and their trading subsidiaries.


The tax system is to operate much more closely to ‘real time’. Whilst at the moment the roadmap says that this will enable business to see, through their digital accounts, a real-time view of their tax and a calculation of the tax due making it easier for them to understand how much tax they owe and helping them to budget accordingly, given that the Government is consulting on whether to align payment dates for different taxes and bring them closer to the point when profits arise, it looks likely that payment dates for some taxes are likely to be brought forward with possibly smaller and more regular payments, therefore helping the Treasury's cash flow.


3. Making tax digital for individual taxpayers

Individual taxpayers will interact with HMRC digitally, and at any time to suit them. By April 2016, every individual will have access to a digital tax account. The digital accounts will present individual taxpayers with a personalised picture of their tax affairs, along with prompts, advice and support through webchat and secure messaging. HMRC are going to develop their use of real time information from both employers and other third parties to collect additional tax due through in-year adjustments to tax codes or online, rather than liabilities being paid up to ten months after the end of the tax year as is currently the case.


4. Tax in one place

At the moment, most taxpayers cannot see a single picture of their liabilities and entitlements in one place. HMRC are planning to change that and say that by 2020, taxpayers will be able to see their complete financial picture in their digital account. So businesses will be able to see their liabilities to income tax, VAT, National Insurance and corporation tax; and individuals will be able to see their liabilities to income tax, National Insurance contributions and student loan repayments and entitlement to Child Benefit all in one place. Taxpayers will be able to set an over-payment of one tax against the under-payment of another and there will be rules concerning when money can be reallocated between different liabilities.

Contact Ashored for help and support with Making Tax Digital.

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