Making Tax Digital – how will HMRC’s plans affect you?
A major step in HMRC’s drive towards digitalisation of the tax system was made on 15 August 2016 with HMRC’s publication of six ‘Making Tax Digital’ consultation documents. Comments were invited by 7 November, yet awareness of HMRC’s grand plans for transforming the tax system remain low. Do you know what it means for you?
LITRG has been carefully studying HMRC’s detailed ‘Making Tax Digital’ plans, and you can find a link to our responses to each of these at the end of this article. As we are aware that many people do not understand the extent of HMRC’s plans, this article aims to make sense of them and say how we have responded.
First, we highlight the key proposals and our responses. Then, we illustrate of how they might affect even those earning relatively small amounts using an example – Julie, a self-employed cleaner.
HMRC’s proposals – in a nutshell
LITRG’s responses – in a nutshell
So how might these plans affect people in the real world?
Example – Julie, a self-employed cleaner
Julie is 47. She has two school-age children. She finds self-employment easier than an employed job as she can flex it around the children’s needs. She does her work during the day, evenings and weekends – either when the children are at school or her husband is at home to look after them. She has very little spare time as both she and her husband work full time hours, and money is tight. Her mobile phone is years old. She sees no need for a new ‘smartphone’. The children and her husband have smartphones and they have got a home laptop but Julie herself does not have the time to use it – she did not really grow up with computers and is not comfortable with them. She does not do internet shopping, instead she goes to the 24-hour supermarket late in the evening when she has finished work.
Julie charges £9 an hour to her various clients and averages 35 hours a week of work. In 2015/16, her income was £15,200. She incurs mileage expenses travelling between jobs. This worked out to 2,000 miles in 2015/16 @ 45p (a £900 tax deductible expense). Other sundry items of cleaning equipment and protective clothing added up to £400 in 2015/16. So her taxable profit was £13,900. She picks up most things she needs, such as protective gloves, at the supermarket or in town when doing the family’s shopping, so business expenses are jumbled in with personal items.
How Julie currently keeps records and deals with her tax
Julie keeps a paper diary of where she is working and how many miles she drives. She hand-writes ‘invoices’ on a duplicate pad – a simple timesheet of how many hours she has worked and the total due. One of her customers pays her in cash; the others all pay by internet banking direct transfer these days. Julie is glad about that as she does not have to take cheques to the bank all the time! She still gets paper bank statements so that she can tick off when her customers have paid her – she does that once a month when the statement comes in, then puts them in a file.
Currently, Julie puts her receipts in a shoebox. There are not that many of them and she circles business items on the supermarket receipts so that she can easily identify them later.
After the end of the tax year it takes her an afternoon to add up all of her invoices from her duplicate pad, add up how many miles she has driven for business purposes from her diary and add up her expenses from the receipts in her shoebox. Her husband helps her do her tax return online, filling in ‘three line’ accounts – income, expenses and profit.
How Julie will have to keep records and deal with her tax under Making Tax Digital
Making Tax Digital means Julie will be required to keep digital records of her income and expenses as close as possible to the point of the transaction. Essentially, HMRC want her to keep the records in ‘real time’. She could do this in various ways, for example by ‘taking pictures’ of her invoices and receipts and logging mileage on a smartphone App; or by recording the transactions in software on the home computer.
But Julie does not have a smartphone and cannot afford to upgrade to one – she currently has a pay-as-you-go simple mobile which she uses only for the occasional phone call and text message. Julie is also less-than-familiar with the household’s laptop and generally it is monopolised by the children doing their homework and so forth. As noted above, Julie does the shopping at a 24-hour supermarket on her way home from evening work so the last thing she wants to be doing is booting up the laptop at midnight to scan and log her timesheets and receipts!
Julie cannot see any benefit to her in keeping digital records. She is worried that it will take up time that she simply has not got and that she will make mistakes. She understands the simple system she uses now and it works very well for her.
The other aspect of Making Tax Digital – reporting quarterly figures of her income and expenses to HMRC online – might be of some benefit to Julie if it provides an estimate of her tax bill and helps her to budget for it. But this is only because her business is relatively straightforward and her income builds up evenly across the tax year. Anyone in a seasonal trade, for example, is unlikely to get an accurate estimate of their tax due from quarterly figures.
Julie is just one example of how some people would seem to be disproportionately burdened by the Making Tax Digital plans, as compared to the likely ‘benefit’ of the scheme.
LITRG’s responses to all of the consultations can be found below.
Bringing business tax into the digital age
Simplifying tax for unincorporated businesses
Simplified cash basis for unincorporated property businesses
Voluntary pay as you go (VPAYG)
Transforming the tax system through the better use of information