Making tax digital: Taxing transformations
Created: January 2018
Remember the plans for quarterly tax returns? Simon Whaley finds out what writers need to do now, in preparation.
If there’s one piece of writing most of us detest it’s completing our tax return. So when George Osborne announced in November 2015 the Making Tax Digital scheme, whereby self-employed people, such as writers, may need to complete quarterly tax returns, many feared the worst. How much of our future writing time would be gobbled up by the need to be creative with numbers?
However, plans for this were dropped from the Finance Bill that went through parliament just prior to last year’s general election. But this tax story hasn’t been buried like a murder writer’s latest victim. It’s simply sleeping, ready to reawaken in the near future. As writers, we need to start taking steps now.
Barry Kernon is a consultant at the top 25 accountants HW Fisher & Company. He and his team have been advising authors for many years, helping them manage their finances in the most efficient way possible. He says the digitisation of tax collection, and the completion of more frequent tax returns, is still on the cards.
‘The plan,’ says Barry, ‘is that quarterly digital reporting will apply to all businesses, and those with property lettings, with the exception of those whose income falls below a certain level. This level has yet to be decided upon. The only published figure is the £85,000 turnover which, if exceeded, means that those VAT registered traders with a turnover above this level will start digital submissions from April 2019.’
Many writers’ businesses do not have a high enough turnover to take them over this VAT threshold. Turnover is the amount of business, or income, we earn from our writing over a period of time, such as the tax year. But that doesn’t mean we can rest on our laurels.
‘Other businesses will not be asked to keep digital records, or to update HMRC quarterly, for other taxes until at least 2020,’ confirms Barry. ‘However, what started out as a system of quarterly returns has been expanded, and most people will have to complete five or six returns each year.’
Therefore, those of us with a writing business could still find ourselves in this new digital system within the next two to three years.
‘People who are filing quarterly information on freelance income and expenses,’ says Barry, ‘will also need to file an annual summary of these self-employed activities, including any adjustments that may be required at that stage. Those people with income from other sources, including salaries and pensions, bank interest and other investment income, will need to file a sixth submission to incorporate these items. These submissions will replace the need for a self assessment tax return.’
What many writers currently view as an annual chore, taking up several days of their time as they collect together all of their data, could eventually become a continuous process. It may be difficult to appreciate this now, but Making Tax Digital could make the whole process easier, because much of it will be automated.
Like any change, there is always uncertainty. However, eventually people come round to the new way of working, and Barry believes this is what will happen with the Making Tax Digital process. ‘For many years after the introduction of VAT, people did all they could to avoid it. However, over time, many people found that doing quarterly returns enabled them to keep on top of their record-keeping rather better than simply sitting down once a year to brainstorm a whole year’s worth of transactions. It may be that MTD will have this effect.’
There’s a lot of change currently taking place in the financial sector, which will pave the way for the easier sharing of financial data. Most banks and building societies are updating their terms and conditions to allow for third party providers to access your accounts, but only if you have granted them permission. This will allow software companies to develop programmes and applications that can digitally access all of our accounts at one time and collect the data needed for our next quarterly return.
‘The digital software currently being produced generally links with people’s bank accounts,’ explains Barry. ‘This means that all the transactions going in and out of the bank account are automatically on the digital software. Some people have a number of bank accounts and credit card accounts and, if information for the tax return is contained in all of these to some extent, it seems likely that, if all accounts are linked with the software, there will be a lot of personal information included that has no relevance to the tax position. It seems likely, therefore, that it will be best to have a business account into which as many transactions as possible go. There will always be sundry transactions that can be added separately if they are paid into and out of other accounts.’
So if you haven’t already done so, now would be a good time to set up a separate bank account for your writing income and expenditure. Having your business income going into your personal account could complicate matters.
Barry agrees. ‘I think for many people it would be a good idea to organise their affairs so that self-employed income and expenses go through one bank account. Anything not going through that account can be scheduled separately for inclusion later. It will then be an easy matter to link with the chosen software.’
Choosing the right software will no doubt be an interesting dilemma for many writers, especially if you don’t already use accounting software. But don’t rush into buying anything just yet. If you manage to keep track of everything with a simple spreadsheet, that will probably suffice until the Making Tax Digital system is implemented.
‘There are a number of software suppliers,’ Barry suggests, ‘for example Xero, Free Agent, Quickbooks, Sage, and Kashflow, and these are generally available on a monthly subscription. I believe HMRC intend to make a free version of some sort available in time for the change in the system. However, until all the HMRC requirements are known, it will be difficult to decide which software to choose.’
The way we bank is changing, and this is part of the reason why the tax system needs to change too. Rarely am I paid by cheque now. Most of my payments go direct into my bank account. I often receive foreign payments by Paypal. We’re doing more and more of our financial transactions electronically, and HMRC recognises this.
Barry says that HMRC has an eye on the future. ‘The use of apps is likely to grow exponentially. HMRC have this vision of people keeping all their financial information on their mobile phones. There is software available now which has a facility for photographing receipts and linking these to your digital software. I would recommend keeping an eye out for developments in these areas.’
Indeed, it is a habit worth developing now. There are many apps on smartphones and tablets that will digitise receipts simply by photographing them. All you have to do is hold your device above the receipt, and the app uses your device’s camera to identify the receipt, focus on it, before snapping it and then saving it in PDF format. It’s a brilliant way of capturing those receipts for small items, where you might still use cash. But these apps also allow you to tag the receipts so you can categorise them into spending categories, such as stationery, entrance fees, research costs, travel, etc.
What many writers fear with more frequent tax returns is the need for more frequent tax payments. Our income fluctuates, and can do so considerably. I receive royalty payments from my publishers in March and September, making them high-income months. Other one-off annual payments, such as those from the Authors Licensing and Collecting Society, the Design Artists Copyright Service and Public Lending Right can skew a quarterly accounting period income disproportionately.
Could I find myself paying lots of tax in one quarter and then nothing the following quarter? At the moment, Barry doesn’t think so, although he believes the long-term aim of HMRC is to collect tax on a more regular basis than at present.
‘Personally I think it is the aim of HMRC to have tax paid quarterly, or even more frequently. However, at the moment they have not said anything about this and the tax payable dates are due to remain as they are at present. This means that there will be payments due on 31st January and 31st July every year. HMRC has hinted that they are entirely happy for people to pay tax more regularly if they wish to do so. As far as we know, it will still be possible to apply to reduce payments on account if income is known to be declining.’
So there are changes coming to the way we report our financial affairs to the tax man. As with any new system, it will probably take time to bed in, but as freelance writers we won’t be involved in the first tranche of this transition, unless we’re really successful and earning enough to take us over the VAT threshold!
But change is coming, although it may make things easier, eventually. Modern technology will help with that. And perhaps taking a few steps now, by ensuring all of our writing income and expenditure goes through one dedicated bank account and getting into the habit of capturing digital copies of paper receipts, we’ll be better prepared for when this new system comes in.