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Making Tax Digital for Business

The government has announced a revised timetable for the introduction of Making Tax Digital for Business (MTDfB).

Unincorporated businesses, including landlords, were expected to be the first to see significant changes in the recording and submission of business transactions but the government has announced a delay to the implementation of the new rules and some exceptions for smaller businesses.

The new timetable is being introduced following concerns raised by the Treasury Select Committee, businesses and professional bodies about the implementation of the new rules and to hopefully ensure a smooth transition to a digital tax system.

The government have confirmed that under the new timetable:

  • Businesses will not now be mandated to use the Making Tax Digital for Business system until April 2019 and then only to meet their VAT obligations. This will apply to businesses who have a turnover above the VAT threshold.
  • These businesses will be able to provide quarterly updates for other taxes too, but there will be no mandatory requirement to do so. Similarly, businesses that are not VAT registered and those below the VAT threshold who have voluntarily registered for VAT can opt to use the system.
  • The government will not widen the scope of Making Tax Digital for Business beyond VAT before the system has been shown to work well, and not before April 2020 at the earliest. This will ensure that there is time to test the system fully and for digital record keeping to become more widespread.

What is MTDfB?

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.

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 spreadsheets 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 effect on VAT quarterly returns?

The government has stated - 'as VAT already requires quarterly returns, no businesses will need to provide information to HMRC more regularly during this initial phase than they do now'. What this statement does not highlight is the fact that currently many businesses do not submit VAT returns direct from software but use spreadsheets. HMRC has previously stated that under quarterly accounting, spreadsheets will need to meet all the necessary requirements of MTDfB (ie not just keep a record of each transaction but also provide quarterly summary information).

The government has stated:

'HMRC will start to pilot Making Tax Digital for VAT by the end of this year, starting with small-scale, private testing, followed by a wider, live pilot starting in Spring 2018. This will allow for well over a year of testing before any businesses are mandated to use the system.'

What is the 'End of Year' statement?

The End of Year statement will be focussed on the reporting of income tax and capital gains tax and will be similar to the online submission of a self-assessment tax return for these taxes, 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).

Cash basis

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 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 will be included in a finance bill which will be published in Autumn 2017. The finance bill has been delayed due to the General Election. Despite the delay, these changes will take effect from April 2017 which means that the accounting information prepared by a landlord for the year to 5 April 2018 is 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.

If we are your tax agents, we shall, of course, help you to make the decision as to whether to opt out of the cash basis and remain on the accruals basis. We would expect to help you make the decision before submission of your self-assessment tax return. Your tax return for the 2017/18 tax year is due by 31 January 2019.

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.