Extensive changes to how taxpayers record and report income to HMRC are being introduced under a project entitled Making Tax Digital. Unincorporated businesses, including landlords, will be the first to see significant changes in the recording and submission of business transactions and the government has introduced a new acronym - MTDfB - which stands for Making Tax Digital for Business.
The government has decided how the general principles of MTDfB will operate after receiving responses to its original ideas first published in August 2016. Some legislation was published in Finance Bill 2017 but this has been removed due to the General Election. It is expected that the legislation will be inserted into another finance bill after the election. Much of the detail will be set by Regulations and these are expected to appear in the summer.
Under MTDfB, businesses will be required to:
- maintain their records digitally, through software or apps
- report summary information to HMRC quarterly through their 'digital tax accounts' (DTAs)
- submit an 'End of Year' statement through their DTAs.
DTAs are like online bank accounts - areas where a business can see all of its tax details in one place and interact with HMRC digitally.
When will this start?
The current proposals are that unincorporated businesses and unincorporated landlords with annual turnover:
- above the VAT threshold (which has been set at £85,000 from 1 April 2017) will need to comply with the requirements of MTDfB from the start of accounting periods which begin after 5 April 2018
- at or below the VAT threshold but above £10,000 will need to comply from the start of accounting periods which begin after 5 April 2019.
Businesses and landlords with turnovers under £10,000 are exempt from the requirements. Companies (and partnerships with a turnover above £10 million) will not come within MTDfB until April 2020.
What will quarterly accounting mean?
This is the big question to which there are no definitive answers at present. The government has made some concessions from its original proposals including:
- if businesses are using spreadsheet to record data, they will be able to continue to use these for record keeping, but they must ensure that their spreadsheet meets the necessary requirements of MTDfB - this is likely to involve combining the spreadsheet with software
- the requirement to keep digital records will not include an obligation to store images of invoices and receipts digitally. Under the original proposals, HMRC envisaged that a digital record would include not only a record of each item of income and expense but also evidence of each transaction such as copies of invoices and receipts.
Once all the relevant data for a quarter has been compiled into the software, the business will then feed this data directly into HMRC systems. The information that will be sent to HMRC will be summary data for the quarter, not all income and expense items. Businesses will have one month from the end of the quarter to submit the update to HMRC.
What is the 'End of Year' statement?
The End of Year statement will be similar to the online submission of a self-assessment tax return but may be required to be submitted earlier than a tax return. Businesses will have 10 months from the end of their period of account (or 31 January following the tax year - the due date for a self-assessment tax return - if sooner).
In respect of partnerships, the government is proposing to stay with the concept of a nominated partner who will be responsible for the requirements of MTDfB for the partnership but then partnerships will be obliged to 'push' each partner's share of any profits (or losses) through to their DTAs as part of the end of year activity.
The cash basis means a business accounts for income and expenses when the income is received and expenses are paid. The accruals basis means accounting for income over the period to which it relates and accounting for expenses in the period for which the liability is incurred.
For tax years prior to 2017/18 only traders with relatively low turnover could opt into the cash basis. For tax years from 2017/18 traders will have the option for moving to the cash basis if cash receipts are less than £150,000 (approximately double the old limit).
Proposals to extend the cash basis accounting to unincorporated property businesses are expected to be included in a post-election finance bill. These changes are proposed to take effect from April 2017 which means that the accounting information prepared by a landlord for the year to 5 April 2018 are potentially affected. For relevant landlords their default basis will be the cash basis but they can elect to stay on the accruals basis.
Not all property businesses will move to the cash basis:
- property businesses will remain on the accruals basis if their cash basis receipts are more than £150,000
- the cash basis does not apply to property businesses carried out by a company, an LLP, a corporate firm (ie a partner in the firm is not an individual), the trustees of a trust or the personal representatives of a person.
Record keeping for landlords
Record keeping for landlords has been made slightly easier than the original proposals with the confirmation that the only requirement as regards multiple properties within one property business will be to maintain property address details of each property in the digital record. Income and expenditure data therefore only needs to be maintained in the software at the level of the property business as a whole rather than at the level of individual properties.
How much is MTDfB going to cost businesses?
The consultations outcome noted that the cost of moving to the new arrangements would be £280 per business but did not provide details of how they arrived at this figure. This seems to contradict information from a survey of the Federation of Small Businesses which showed that the costs might be in the order of £2,700 per business.