Record-keeping in a digital age

Lets looks at taxpayers’ record-keeping responsibilities because of HMRC’s inexorable march to digital everything (almost).

Historically, HMRC has actually been rather kicked back regarding whether initial documents must be maintained or electronic facsimiles (scans, etc). For example, the 2013 ‘General Guide to Keeping Records for Your Tax Return’ states:

‘ You can keep most records on a computer or utilize any storage device such as CD-ROM, USB memory stick or a network drive. You might not require to keep the initial paper records as long as the method you use records all the info (front and back) on the file and permits you to present the information to us in an understandable format, if requested.’

NB You can inform this assistance is currently more than a years old, due to the fact that it makes no mention of keeping records ‘in the cloud’.

In terms of records called for to be kept for the functions of income tax return, the primary legislation states that the duty to preserve records may be discharged by protecting the documents ‘in any form and by any means’, or by merely ‘maintaining the info consisted of in them in any kind of form and by any means’ (focus included).

So, according to my understanding, the very first part of the regulation allows facsimile copies such as scans, microfiche or copies, while the 2nd component permits recording all relevant details in a data source or ledger, with exemptions consisting of the following (TMA 1970 s 12B; FA 1998 Sch 18 Para 21,22; see likewise HMRC’s Compliance Handbook Manual as below):.

• specific company distribution statements (extensively, dividend vouchers);.
• certificates of income and tax deducted from financial institutions, constructing cultures and trusts; and.
• certificates or vouchers of income and tax deducted, as offered to sub-contractors in the building sector plan (CIS).

To sum up, the law for direct tax obligations starts with the assumption that records are at first on paper, and mentions that, generally, they may be exchanged digital layout so long as all appropriate details is protected for feasible future analysis by HMRC.

It could be stated that making tax electronic (MTD) has broadly turned this on its head by stipulating that specified business documents need to be kept in ‘digital type’. The legislation (in F( No 2) A 2017, s 60) grants HMRC wide powers to introduce policies to need how business documents must be maintained for the objectives of making go back to HMRC.

Strictly speaking, however, this is an added requirement, meaning that it does not bypass or change any other record-keeping needs. To my analysis, the legislation does not state that the documents need to be maintained only as defined, which would seem incomparably reasonable, offered just how large and varied a particular business’s own strange monetary reporting needs may be.

In other words, businesses may broadly carry on as before, except that they now likewise should include these brand-new electronic record-keeping needs right into their systems, which in turn should drive the quarterly ‘updates’ and annual tax returns to HMRC. Certainly, oftentimes, and maybe for older businesses with more conventional ledger-based systems, this will require major changes to their core bookkeeping systems and routines. Yet bigger businesses, that might possibly place a higher top priority on interior management accounting, might yet locate the MTD requirements to be much more outer effectively.

For income tax purposes, the major regulations were provided in late 2021 (although they are still being modified and refined as we are dragged towards application of MTD for income tax self-assessment at the time of composing).

Boring down right into those guidelines, we locate that the ‘electronic records’ requirement includes only that there be a record of each transaction made throughout business, including:.

• the quantity of the transaction;.
• the day of the deal; and.
• the categorisation of the deal (e.g., sales, employment costs, and so on, as might be defined in an update notice provided by HMRC).

Draft update notifications were published in December 2023. The business expense categories are generally as one could get out of several years of filling in the typical accounts information graphes in the self-employed pages of a self-assessment return, except that:.

• advertising expenditure has been split from business amusement prices; and.
• depreciation and irrecoverable financial obligations crossed out have been disregarded.

Most likely, this is because HMRC wishes to isolate entertaining expense, a high percentage of which is generally disallowable, and intends that depreciation and uncollectable bills must be relegated since HMRC is championing the money basis by default.

Taxpayers will certainly focus on the regulations that use straight to them, see that the definition of ‘digital documents’ is actually very straightforward, and perhaps conclude that MTD has minimal impact. However that is to overlook that the regulation also requires ‘practical suitable software application’ to be used to keep electronic records. In practice, there is a quite separate discussion that HMRC is having with software application carriers concerning HMRC’s goals for MTD software capability, and all those software companies are keen to accomplish accreditation by HMRC.

The legislation permits specific taxpayers to do away with the rigours of electronic record-keeping and online quarterly or yearly updates under MTD, including:.

• trustees (NB the primary legislation omitted particular depend on categories, but this was extended to all trustees in 2021 (SI 2021/1076, reg 25));.

Lloyds underwriters (but only in regard to their underwriting business);.

• where yearly gross earnings across all a taxpayer’s businesses accumulations to ₤ 10,000 * or less; or.
• if the taxpayer pleases HMRC that they can not abide by the electronic needs because of (for example) age, handicap, area or religious beliefs.

* The regulation for the income exception currently states ₤ 10,000 but the threshold might be boosted to ₤ 30,000 — although bear in mind that this restriction applies to the grand overall of a taxpayer’s gross business earnings across all returnable sources (SI 2021/1076, reg 21).

If an individual is claiming exemption from the MTD electronic demands, after that relying on the rationale behind the exception, HMRC may anticipate to see documents kept in non-digital (paper) type. If the taxpayer’s area suggests that Internet connectivity is unreliable, they may still have the ability to make use of a scanner to convert documentation to electronic format by choice, however HMRC may wonder at a taxpayer who claims they are too old to use MTD software program but picks to scan documents, prepare and send their annual tax return online, etc.

Having stated that HMRC is normally liberal as to record-keeping, its Compliance Handbook Manual at CH13300 mentions that specific papers must be maintained in their initial kind, and taxpayers have to keep any written declaration revealing:.

• company distributions or dividend vouchers that information a tax credit score;.
• interest certificates showing tax deducted therefrom;.
• invoices of income paid under a building and construction contract (CIS, as noted over); and.
• paperwork in relation to overseas-sourced income and tax paid, and so on.
• Separately, VAT Notice 700/21 states that Import VAT Certificates C79 need to additionally be kept in their initial form.

The checklist of records that HMRC urges be continued paper is ever smaller sized. Readers might remember that VAT ‘DIY Housebuilder’ claims utilized to need to include initial billings together with the VAT431NB; because December 2023, original billings no more need be sent out; in fact, the updated insurance claim support states: ‘do not send original records as we will certainly not have the ability to return them to you’. Nevertheless, the brand-new support likewise states: ‘you must keep … the initial shipping or transit paper revealing … items imported from abroad’.

However, even if HMRC will certainly accept electronic records, it may not constantly be practical to depend on them for the very long term. Would certainly you be positive in getting an option to tax (VAT) property from the cloud up to 20 years for this reason?