Quarterly Reporting – More Pain For Landlords?

Sarah Bradford explores HMRC’s ‘making tax digital’ strategy and the requirement for landlords to report figures at least quarterly to HMRC.

HMRC are investing in a digital tax future and, as announced at the time of the Autumn Statement 2015, they are planning to spend £1.3 billon to transform HMRC into ’one of the most digitally advanced administrations in the world’. Further details of their plans were revealed in the ‘making tax digital’ roadmap which was published in December 2015. A sneak preview into the future for business taxpayers was set out in the ‘business tax roadmap’, which revealed that a pay-as-you-go option will be introduced from 2018 for landlords (and self-employed individuals) who are keeping digital records.

Making tax digital

HMRC’s digital tax strategy is built on four foundations:

The aim of tax ’simplified’ is to remove the need for taxpayers to provide HMRC with information that they already hold, such as details of bank and building society interest and earnings from employment. At present, this information is not linked together on HMRC systems and the taxpayer has to provide information that HMRC may already have when completing their tax return. However, HMRC are to ‘join the dots’. For the taxpayer, this will mean that they start to see that some of their tax return information has already been filled in. A consultation is to be held to see how information could be obtained from third parties.

HMRC are also to introduce an online billing system where taxpayers will be given a bill of what they owe without the need to complete a return. It will be advisable, however, for taxpayers to check that the figures are correct.

This is arguably the area of the ‘making tax digital’ strategy that is of most interest to landlords. Under the terms of the strategy, most landlords, together with most businesses and most self-employed people, will be required to keep track of their tax affairs digitally and to update HMRC at least quarterly via their digital tax accounts. The starting point in the move to quarterly reporting is the introduction of digital tax accounts and most businesses will already have a digital tax account. 

The requirement to report digitally at least quarterly is to be phased in from April 2018, and from 2020 it will apply generally. This move will mean that rather than filing a tax return once a year, landlords will need to provide information to HMRC at least four times a year. The ‘making tax digital’ roadmap revealed that HMRC will require businesses to use digital tools, such as software and apps, to keep records of their income and expenditure. HMRC will make free software available, but businesses and advisers will also have the option to use commercial software packages. The intention is that the software used to compile the tax data will become part of the day-to-day activities of the business. Once the data has been compiled, it will be fed into HMRC’s systems without the need to complete a tax return.

Not surprisingly, this sounds like a lot more work for landlords (and their agents to the extent that agents continue to be involved), and the planned move to quarterly reporting was not well received. An E-petition calling for the Government to ’scrap plans forcing self-employed and small business to do four tax returns yearly’ received over 108,000 signatures and was debated by the House of Commons. The Government published a response to the petition in which they stated that: `Making tax digital will not mean ’four tax returns a year’. Quarterly updates will largely be a matter of checking data generated from record keeping software or apps and clicking ’send’.

The response also made it clear that the vision was one in which annual tax returns were removed but landlords, businesses and the self-employed would be asked to keep track of their tax affairs digitally and update HMRC at least quarterly. HMRC also drew attention to the benefits of greater certainty as regards the final tax bill, noting that many taxpayers had said that they did not want to wait until after the end of the tax year to know where they stood in relation to how much tax they owed. HMRC also hope that the move to quarterly digital reporting will improve tax collection, revealing their estimate that £65 billion in tax goes unpaid as a result of mistakes in the tax return.

The response to the E-petition clarified that quarterly updates as envisioned as part of the making tax digital strategy would differ from filling out an annual tax return in the following crucial aspects:

HMRC have committed to providing free software and apps to enable businesses to comply with quarterly reporting. The intention is that the Gov.uk website will signpost landlords and other taxpayers to the right product and HMRC guidance will be available to help users choose the best product for their needs. 

These reforms are to be phased in gradually and further consultations are planned. HMRC plans to ’road test’ products and obtain feedback from volunteers. It is hoped that HMRC will actually listen to the feedback provided, as many landlords will need convincing that this will not be a costly administrative headache. 

Running alongside quarterly reporting is the introduction of voluntary pay-as-you-go-tax payments from 2018 for landlords and businesses that provide regular digital updates to HMRC. The pay-as-you-go option will allow businesses to adopt a payment pattern that suits their cashflow and remove the stress from having to put money aside to make large tax payments. A pay-as-you-go system will also mean HMRC receive tax payments earlier. 

The digital tax strategy for individuals will be built on the same principles as that for businesses. Each individual will have his or her personal tax account by April 2016, and will be interacting with HMRC digitally by 2020.

Tax in one place will bring all of a business’ and an individual’s tax affairs together, and taxpayers will be able to see a single personalised view of their overall liabilities. However, HMRC need to reconfigure their systems significantly before this can become a reality.

It’s fairly easy to set out a vision of what HMRC regard as a Utopian digital tax administration. However, it will much more difficult to make that vision a reality. It is likely that the road ahead will be a bumpy one with U-turns and steep learning curves, but only time will tell whether come 2020 landlords will be happily updating HMRC on their tax affairs every quarter. The ‘making tax digital’ roadmap is available on the Gov.uk website.