Read our digest of the key points of HMRC’s consultation responses – and then let us know what you think.
On 31 January, as practitioners were finalising tax returns to meet the self assessment deadline, HMRC published consultation responses indicating the government’s conclusions on making tax digital (MTD) – together with the first batch of draft legislation.
Businesses, self-employed people and landlords will be required to start using the new digital service from:
April 2018: if they have profits chargeable to income tax and pay Class 4 national insurance contributions (NICs)
April 2019: if they are registered for and pay VAT
April 2020: if they pay corporation tax (CT).
HMRC has said that ‘individuals in employment and pensioners will not have to use the digital service unless they have secondary incomes of more than £10,000 per year from self-employment or property’ and that ‘it was considering exempting more of the smallest unincorporated businesses from the requirement to keep digital records and make regular updates to HMRC’.
It was also considering ‘deferring the mandatory start date of Making Tax Digital for Business (MTDfB) by one year for the next tier of small unincorporated businesses and landlords with annual incomes of above £10,000, but below a threshold to be determined.’
Unfortunately, a large number of businesses will be unclear if the timetable applies to them and the HMRC response states that ‘given the range of views expressed on this matter from respondents to the consultation the government will take more time to consider these issues alongside the fiscal impacts. Final decisions will be made before legislation is laid later this year.’
At the bottom of this summary we are asking you to highlight your opinion on the yet to be determined threshold.
Disappointment expressed Business organisations, professional bodies and a number of software suppliers, in the main, were disappointed with the documents published by HMRC. These concerns continue to be around:
the pace of change
the capability of the smallest businesses and those who struggle with digital technology to adapt
burdens on business
agents’ ability to access digital services to support their clients
data security when using third party software.
HMRC has summarised the key decisions as follows:
‘businesses will be able to continue to use spreadsheets for record keeping, but they must ensure that their spreadsheet meets the necessary requirements of Making Tax Digital for Business – this is likely to involve combining the spreadsheet with software
businesses eligible to use “three line accounts” will be able to submit a quarterly update with only three lines of data (income, expenses and profit)
free software will be available to businesses with the most straightforward affairs
the requirement to keep digital records does not mean that businesses have to make and store invoices and receipts digitally
activity at the end of the year must be concluded and sent either by ten months after the last day of the period of account or 31 January, whichever is sooner
charities (but not their trading subsidiaries) will not need to keep digital records
for partnerships with a turnover above £10m, Making Tax Digital for Business is deferred until 2020’.
In each of the consultation responses key points are highlighted. These include the following:
Simplified cash basis
the threshold for the cash basis is £150,000
there has been simplification of the rules on capital and revenue expenditure within the cash basis
the government is considering reforming basis period rules and measures to simplify period end reporting requirements.
responding to concerns over the proposal that voluntary payments would be allocated against tax liabilities as they arose by HMRC instead of by the customer, and whether HMRC systems would ensure this was carried out in the customer’s interest, the consultation response is that HMRC will proceed with its proposal on payment allocation. It ‘believes this will reduce the need for customers to have to access their digital tax account to tell HMRC where payments should go’. It is also noted that it will ‘ensure that robust allocation rules are in place and publicly available’.
it is proposed that HMRC’s existing compliance powers be replicated and legislation will be included in Finance Bill 2017
HMRC has stated that ‘customers will be given at least 12 months before they are charged any late submission penalties’ and ‘HMRC will consult further on specific proposals for late payment penalty interest and the alignment of interest rules in 2017’.
for the new tax year HMRC will ‘use PAYE information during the tax year to calculate whether the right tax is being paid’. It also states that for now ‘customers will still receive letters directing them to their digital tax account to check this, but in future, customers will be prompted digitally to check their tax account’.
quarterly updates will effectively replace the VAT return.
a) ‘scope – details of which businesses (including sole traders and landlords) will be in scope of the new requirements b) entity and activity-specific exemptions – details of exclusions and exemptions for specified businesses and business activities c) periodic updates: regulation-making power – powers for the government to lay regulations requiring specified persons to provide specified information about their income and expenditure to HMRC d) end of period statement: regulation-making power – powers for the government to lay regulations requiring specified persons to provide specified information in relation to specified periods relating to the calculation of profits or losses for those periods e) digital record-keeping: regulation-making power – powers for the government to lay regulations requiring specified persons to keep specified records relating to their business in electronic form f) electronic communications: supplementary powers – further details of the provision which regulations laid under these powers should be able to make in respect of electronic communications g) digitally excluded exemption – details of who will be able to opt out of the new requirements because they are unable to engage digitally.’
It has been stated that the Finance Bill 2017 will include the final versions of the draft primary legislation. It has also been stated that the Bill will contain ‘additional clauses covering the following areas:
a) compliance powers – HMRC has a range of powers which allow it to check and investigate a person’s tax position. Consequential amendments are required to make HMRC’s existing compliance powers fit with the new processes described in Bringing Business Tax into the Digital Age b) low income exemption – details of the initial exemption to the new requirements previously announced by the government for those with incomes below a defined level c) insolvent businesses exemption – details of an exemption for those businesses (including sole traders and landlords) which are subject to insolvency proceedings d) deferral for the largest partnerships – details of the deferral until 2020 for those partnerships which have a turnover above £10m e) consequential amendments – consequential amendments required to existing tax legislation in order to implement the policies set out in Bringing Business Tax into the Digital Age.’
The detail will be contained in yet to be issued regulations. As a guide some of the proposed content and areas to be covered are detailed within the information issued by HMRC. It states within this information that the primary legislation will be supplemented by draft regulations for ‘implementation of the Bringing Business Tax into the Digital Age requirements’. It goes on to state that the ‘regulations will apply to persons and partnerships who fall within scope of draft Schedule A1 of TMA 1970’.
The regulations will provide that these businesses (including sole traders and landlords) must use compatible software to meet the new requirements. The regulations will also allow ‘the Commissioners of HM Revenue and Customs to set out details of compatible software in a published notice. This will enable the definition of software to be updated from time to time, for example, to keep up with changes in technology’.
It is also highlighted that the ‘regulations will provide details of businesses’ obligations to keep and preserve records digitally. Businesses (including sole traders and landlords) will need to keep digital records in software compatible with HMRC’s systems. The regulations will also set out the period for which the records must be preserved’.
Regulations will also be issued that set out the information, including categories of income and expenditure, which will need to be kept and preserved digitally. For a non-property businesses, the following is an example of the required information:
turnover, takings, fees, sales or money earned
any other business incom
cost of goods bought for resale or goods used
construction industry – payments to subcontractors
wages, salaries and other staff costs
car, van and travel expenses
rent, rates, power and insurance costs
repairs and renewals of property and equipment
phone, fax, stationary and other office costs
advertising and business entertaining costs
interest on bank and other charges
bank, credit card and other financial charges
irrecoverable debts written off
accountancy, legal and other professional fees
depreciation and loss/profit on sale of assets
other business expenses
goods and services for your own use
income, receipts and other profits included in business income or expenses but not taxable as business profits
disallowable element for each category.
It has said that ‘these categories may differ depending on whether or not a business (including a sole trader or landlord) operates on the cash basis and depending on whether it is a property business or a partnership. Businesses which are retailers may record their daily gross takings instead of recording every transaction. The regulations will set out the process by which retailers may elect for these different record-keeping requirements to apply and how and when that election may be brought to an end’.
Quarterly reporting remains unchanged from the original consultation and it is stated that the ‘regulations will require businesses (including sole traders and landlords) to provide HMRC with periodic updates of specified information every three months. For most businesses there will be four updates for each relevant period’.
It goes on to state that ‘businesses (including sole traders and landlords) will also be required to provide corrected or updated information with their next update if the information submitted in a previous update has changed or is found by the business to be incorrect’.
An additional report to HMRC will be required in many cases. HMRC states that the ‘regulations will impose an obligation on businesses (including sole traders and landlords) to provide an end of period statement for a relevant period in order to finalise their taxable business profits or losses. The statement will need to be provided using compatible software by the earlier of:
10 months after the end of the period to which the statement relates, or
the 31 January following the tax year in which the relevant period ends.’
The information issued by HMRC indicated that the following would be required as part of the end of period statement:
Tax adjustments and elections:
adjustment required where the basis period is not the same as the accounting period under section 203 of the Income Tax (Trading and Other Income) Act (ITTOIA) 2005
averaging adjustment applied to taxable profits where an election has been made for averaging under section 222 or 222A of ITTOIA 2005
adjustment required as a result of a change in basis under Chapter 17 of Part 2 of ITTOIA 2005
total of any construction industry scheme deductions taken from payments made to subcontractors under section 61 of Finance Act 2004
any other tax deducted from trading income (excluding deductions made by contractors on account of tax)
sums due to be charged under sections 277 to 285 of ITTOIA 2005
adjustments required under Chapter 7 of Part 3 of ITTOIA 2005
claims for loss relief under Chapter 2 of Part 4 of the Income Tax Act 2007 (Chapter 4 for property businesses)
foreign tax deducted
any other tax adjustment
adjustment on change of basis
foreign tax deducted.
Capital allowances – claims and balancing charges:
annual investment allowance
capital allowances at 18%
capital allowances at 8%
restricted capital allowances on cars costing more than £12,000 where bought before 6 April 2009
business premises renovation allowance
enhanced capital allowances: energy-saving relief
enhanced capital allowances: environmentally-beneficial relief
enhanced capital allowanced: electric charge-points
enhanced capital allowances: gas refueling equipment
allowances on sale or cessation of businesses use (where an asset has been disposed of for less than its tax written down value)
total capital allowances
balancing charge on sale or cessation of business use (where business renovation allowance has been claimed)
balancing charge on sales of other assets or on the cessation of business use (where an asset has been disposed of for less than its tax written down value).
HMRC has revised the MTD impact assessment with the cost of MTDfB to each business being estimated at only £280 in the year of transition with benefits to follow.
Many of you have previously supplied information on costs which we have highlighted to HMRC. If you have time we would like to know your views on transitional costs – the one off costs to your business and also to clients businesses.
Share your feedback with ACCA Please send ACCA your comments on HMRC’s responses to the consultations, in particular focusing on the following:
What is your estimate of the transitional costs to your business (software, training, communications)?
What is your estimate of the transitional costs to your average clients business (software, training, fees)?
HMRC proposes to introduce a new business threshold which will have simplified reporting. It is for annual incomes of above £10,000, but below a threshold to be determined. What in your opinion should the threshold be?
The following are options that could be used, but there are others:
Vat limit: £150,000 – cash accounting limit Audit limit: MTD reporting should be voluntary and not mandatory. It should not be based on turnover but on businesses’ resources (employees).