By now, you may well have read about Making Tax Digital (MTD) and the demise of the tax return in the media, and I expect you will hear a lot more about this in future. MTD will significantly change the way in which both you, and we, deal with HMRC.
There are two main areas to Making Tax Digital; MTD for businesses, and MTD for individuals. Of these, it is the former which will affect clients more in the short term, as businesses move towards making quarterly online reports of business profits to HMRC (and in this context “business” includes a rental property business). Most business clients will need to take some action to enable them to comply.
Although MTD has been under discussion for a couple of years, it was only in the recent Budget that the Government announced what we understand to be the final implementation timetable.
MTD for Businesses (including Landlords)
What is Making Tax Digital for businesses?
Under MTD, all businesses (apart from those very smallest businesses turning over less than £10,000 per annum) will in future need to keep their records “digitally”, and complete an upload of some basic income and expenses information to HMRC online, quarterly – or more often if they choose.
These quarterly uploads will be based solely on the information which is contained within your accounting system, although HMRC do say that the transaction entries must be based on the existing Self Assessment categories. If these records don’t make adjustments for items such as stock, accruals and prepayments, tax add-backs, capital allowances etc, then that does not matter.
The deadline for the quarterly upload will be one month after the end of each quarter.
What happens at year end?
At your year end, the normal quarterly upload must be made within one month as usual.
There will then usually be ten months to complete a further, more detailed, upload; this must contain all of the year end accounting and tax adjustments which are currently included in your accounts and tax returns. Our expectation is that we would normally complete the full year end upload using our own systems, as part of your accounts preparation and tax return service.
Will this mean paying tax on a quarterly basis?
You will be able to voluntarily pay tax early in conjunction with the quarterly uploads. However, HMRC say there are no plans to make this compulsory.
When will I have to join MTD for businesses?
Your entry date depends on your turnover, and your type of business. The entry dates are now expected to be:
– Businesses within the charge to income tax (including landlords) with turnover over the VAT threshold (£85,000 in 2017/18) – but excluding partnerships and LLPs with turnover over £10m;
– Businesses within the charge to income tax (including landlords) with turnover below the VAT threshold;
– Businesses within the charge to corporation tax
– Partnerships and LLPs with turnover over £10m.
For these purposes, turnover is the aggregate of any turnover from self-employment, together with rental income (so someone with £6,000 of rental income and self-employed turnover of £8,000 would have total turnover of £14,000). When looking at whether you meet the criteria as an individual, you can ignore turnover of a partnership of which you are a member.
You will enter MTD for the next accounting period which commences after your entry date. So, for instance, if you are a sole trader with a turnover of £100,000, then if you have:
a 5 April year end – your first quarter will start on 6 April 2018
a 30 April year end – your first quarter will start on 1 May 2018
a 31 December year end – your first quarter will start on 1 January 2019
a 31 March year end – your first quarter will start on 1 April 2019
The first quarter must end no more than three months after these dates, and there will then be one month to complete the upload.
When you enter MTD could therefore vary by almost a year, depending on what your year end is. In some cases, we may discuss with you whether it may be appropriate to change your accounting year end to give more time to prepare. This will particularly apply to 5 April year ends, which could be changed to 31 March quite easily. Other year ends (for example 30 April) might be more difficult to change, as there could be tax implications of such a change.
For rental businesses, the year end will always be 5 April, so depending on their turnover, landlords will be some of the earliest businesses to enter MTD.
What about partnerships?
Partnerships and LLPs will have to nominate a partner to complete their quarterly uploads, which will include an apportionment of profits to individual partners. This data will then be automatically transferred to each individual partner’s digital tax account.
What sort of accounting system am I going to need?
Media articles have often placed the modern breed of cloud based accounting systems hand-in-hand with MTD. These systems have the advantage of being able to be accessed from anywhere, and will be the right solution for many businesses. We are working with many clients on such systems and can advise you accordingly.
However, they are not the only solution. The expectation is that the latest versions of most desktop based accounting packages will be upgraded to allow MTD uploads. Equally, it has been confirmed that spreadsheet based records will be accepted as being “digital”, although it will be necessary to “map” spreadsheets into particular conversion software.
It is also possible that free “apps” may be released, especially for the simplest businesses such as landlords.
We will be happy to discuss the right software for your business, but not all software suppliers have
yet announced their plans.
What other changes are connected with MTD?
All VAT registered businesses will be required to report VAT through MTD from April 2019, even if they are a company or large partnership who will not otherwise come within MTD until 2020. This is likely to mean that all VAT registered businesses will need to be operating compatible software by 2019, irrespective of their entry date.
On the other hand, to help smaller businesses and landlords comply, the cash basis is being extended from April 2017, allowing businesses with turnover up to £150,000 to join the scheme and account on a cash rather than accruals basis. Businesses will only have to leave the scheme once turnover exceeds £300,000. The cash basis will not suit all small businesses though, particularly those with a large interest expense, and entry should be considered carefully, especially if full accounts are required for the bank.
For the first time, the cash basis will also be extended to include rental businesses.
MTD for Individuals
At the individual level, HMRC’s aim is that MTD will see the end of the personal tax return. Instead, each of us will have our own “digital tax account”, which will be pre-populated with all of the information that HMRC receives from different sources. This is likely to include data from MTD for businesses, salary, pensions, bank interest, dividends etc.
Once a year, it will be necessary to check the contents of the digital tax account, add any missing information (for example, overseas income and capital gains), and make a declaration that everything is correct.
Is this a tax return in all but name? Possibly, and we still expect that the vast majority of our clients will rely on our help to complete the data entry process and ensure everything is right.
There are some big differences in the current proposals though.
Firstly, whereas tax returns only need to be completed by those who meet self-assessment criteria, it is possible that everybody will be expected to check their digital tax account and declare that it is correct. This could massively increase the number of individuals who have to take an active role in their tax affairs.
Secondly, the current proposal is that, should any of the third party information in the return be wrong, it would be necessary to approach the relevant third party and ask them to correct the information, rather than being able to overwrite it in the digital tax account. These mistakes could happen very easily; for example, a bank account for a trust held in the names of the trustees could easily appear on the trustees’ own digital tax accounts. We hope that this will be changed before these proposals are finalised; otherwise I suspect that we will be spending a lot of time in future contacting banks and other third parties to get information corrected.
Fortunately, we still have a couple of years before the traditional tax return is replaced. In the meantime, we should start to see more information flowing into the digital tax account, and on to the tax return. This should give time for any teething troubles to be ironed out!
MTD will represent a big change in how we deal with HMRC. There is much to prepare for, and still much that could change, so we will keep you posted with further developments.
How can Ensors help me?
We can help you as much as you need.
We expect that some clients will already be using MTD compatible software, will make their own quarterly uploads, and will continue to use us for the year end procedures, including the new MTD year end upload.
At the other end of the spectrum, some clients will want us to do all of their record keeping each quarter, and complete the quarterly uploads on their behalf.
There will be a range of possibilities in between, including situations where we help you to choose the right software for you to run yourself, and where we provide you with assistance with record keeping and uploads when you need it. We will be happy to help you as much or as little as you need.
In September, we will be running a series of free workshops across the region to give you more information on MTD, the dates and locations of these are as follows:.
Ufford Park, Woodbridge – Tuesday 19 September – 16:00 – 18:00
Ravenwood Hall Hotel, Rougham – Thursday 21 September – 08:00 – 10:00
Imperial War Museum, Duxford – Tuesday 26 September – 16:00 – 18:00