Category: MTDfB

HMRC and the frustrating saga of MTD ITSA

On the 19th December 2022 HMRC changed their minds yet again!!

In a Gov.uk announcement they said..

Understanding that self-employed individuals and landlords are currently facing a challenging economic environment, and the transition to Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA) represents a significant change to taxpayers and HMRC for how self-employment and property income is reported, the government is giving a longer period to prepare for MTD. The mandatory use of software is therefore being phased in from April 2026, rather than April 2024.

From April 2026, self-employed individuals and landlords with an income of more than £50,000 will be required to keep digital records and provide quarterly updates on their income and expenditure to HMRC through MTD-compatible software. Those with an income of between £30,000 and £50,000 will need to do this from April 2027. Most customers will be able to join voluntarily beforehand meaning they can eliminate common errors and save time managing their tax affairs.

The government has also announced a review into the needs of smaller businesses, and particularly those under the £30,000 income threshold. The review will consider how MTD for ITSA can be shaped to meet the needs of these smaller businesses and the best way for them to fulfil their Income Tax obligations. It will also inform the approach for any further roll out of MTD for ITSA after April 2027.

Mandation of MTD for ITSA will not be extended to general partnerships in 2025 as previously announced. The government remains committed to introducing MTD for ITSA to partnerships in line with its vision set out in the government’s tax administration strategy.

Government announces phased mandation of Making Tax Digital for ITSA – GOV.UK (www.gov.uk)

On the one hand I am sure many Landlords and the Self Employed will have celebrated this news, as in general, they aren’t ready and hate the idea of MTD.

On the other hand software providers and accountants who have spend considerable time and resources planning and getting ready will be disappointed, 2024 was going to be the year they had looked forward to when clients would be mandated to use software, no more January panics and bags of receipts.

What makes this particularly frustrating for everyone is that HMRC have moved the goals and timescale, this has happened at every stage of MTD. HMRC insist it will happen on the dates they set and then as the date gets closer they changes their mind!!

steve@bicknell.net

Making Tax Digital ITSA Postponed !

Businesses will have an extra year to prepare for the digitalisation of Income Tax, HM Revenue and Customs (HMRC) has announced today.

Recognising the challenges faced by many UK businesses and their representatives as the country emerges from the pandemic, and having listened to stakeholder feedback, the government will introduce Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA) a year later than planned, in the tax year beginning in April 2024.

Businesses get more time to prepare for digital tax changes – GOV.UK (www.gov.uk)

MTD for Income Tax will now be mandated for businesses and landlords with a business income over £10,000 per annum in the tax year beginning in April 2024.

General partnerships will not be required to join MTD for ITSA until the tax year beginning in April 2025, while the date other types of partnerships will be required to join will be confirmed in the future.

steve@bicknells.net

New Multiple Penalties for MTD ITSA and VAT!

The new HMRC penalties cover late submission, late payment and interest harmonisation and unlike the old penalties you will now get points and penalties even if you owe no tax or are due a refund! there will be no soft landing period.

The new penalties take effect:

  • for VAT taxpayers for their first VAT return period starting on or after 1st April 2022
  • for ITSA (Income tax and self assessment) taxpayers within income over £10k subject to Making Tax Digital (MTD) for their first tax year or accounting period starting on or after 6th April 2023
  • for ITSA taxpayers with income below £10k starting 6th April 2024

In theory the penalties are fairer but they can work out more expensive than the current penalties.

The new system is based on points, each late return gets a penalty point which expire after 24 months.

The points only apply to VAT and ITSA (not to other taxes at the moment)

Once the penalty threshold is reached there is a fixed penalty of £200 for each missed return, there is an appeals process.

Submission FrequencyPenalty Theshold
Annual2 points
Quarterly 4 points
Monthly 5 points

Total points will only be reset to zero once when the following 2 conditions are met

  1. A period of compliance based on their submission frequency
  2. All submissions that were due within the preceding 24 months have been submitted
Submission FrequencyPeriod of Compliance
Annual24 months
Quarterly12 months
Monthly6 months

Late Payment Penalty

Late Payment could potentially mean you get two penalties depending on when you pay!

The first penalty will be levied 31 days after the payemnt due date and will be based on a set percentage of the balance outstanding.

The second penalty will be calculated on amounts outstanding from day 31 until the principle balance is paid in full or a payment plan agreed.

Time to Pay Payment plans suspend penalties.

HMRC will notify the penalties separately.

PenaltyDays after payment due datePenalty charge
First Penalty0 to 15No penalty payable
16 to 29Penalty calculated at 2% of what was outstanding at day 15
30Penalty calculated at 2% of what was outstanding at day 15

Plus 2% of what is still outstanding at day 30
Second PenaltyDay 31 plusPenalty calculated as a daily rate of 4% on APR for the duration of the outstanding balance

There will be a ‘period of familiarisation’ for the first year which is based on 30 days.

Interest Harmonisation

The VAT interest rules will change to be inline with ITSA

  • When an amount is not paid by the due date, late payment interest will be charged to the taxpayer from the date that the tax becomes overdue until the date payment is received
  • VAT Repayment Supplement will be replaced with Repayment Interest. Repayment Interest will be paid from the later of:
    • the due date of the return
    • the date the return is submitted

If HMRC owe you interest it will be paid at the Bank of England Base Rate -1% but if you owe HMRC interest its at the Bank of England base rate +2%.

Other things to note

  • The Gateway will tell you how many points you have
  • The Gateway will tell how penalties have been calculated
  • Agents will not be able to pay the penalties
  • When appealing you will need to say who was to blame for missing the deadline
  • When claiming the deadline was missed due to a health issue a declaration of honesty is required

steve@bicknells.net

Making Tax Digital (MTD ITSA) – what will you have to do?

Making Tax Digital (which some have dubbed ‘Making Tax Difficult’) is coming.

Self-employed businesses and landlords with annual business or property income above £10,000 will need to follow the rules for MTD for Income Tax from their next accounting period starting on or after 6th April 2023. However, its expected that HMRC will encourage businesses to start from 6th April 2022 to gain experience in the process before it becomes compulsory.

Its compulsory! failure to comply will result in penalties – you will have 30 days from the end of the quarter in which to file

When it starts the key issues will be

  1. You will basically have 2 returns to file at the same time one for the previous year and new quarterly reporting
  2. The basis periods are expected to be re-aligned so that all the self employed and landlords start at the same time – 6th April 2023
  3. A single annual self assessment will become at least 6 new filings – 4 quarters, end of period and a new self assessment return

The primary legislation for Making Tax Digital relating to VAT and Income Tax is contained in the Finance (No.2) Act 2017.

Business will have to use HMRC approved accounting software, for example

Xero

Sage

Freeagent – free if your business banks with NatWest/RBS

Quickbooks

When we refer to MTD-compatible software, we mean software that can integrate with HMRC systems to send updates to HMRC.

HMRC is not offering its own software products but has provided the Application Programming Interfaces (APIs) that commercial software developers are using to develop a range of applications that enable businesses to keep their records digitally and integrate with HMRC systems. An API is software that links 2 or more software programmes together, allowing them to exchange data.

So there won’t be a Government Gateway where you can enter the information, you have to use commercial software approved by HMRC.

You have to have all your self employed and property businesses in a single piece of software but be able to report the information separately for each business in the following formats

Furnished Holiday Lets

Income
Accounting Basis (Traditional or Cash)
Rent paid, repairs, insurance and costs of services provided
Loan Interest and other financial costs
Legal, management and other professional fees
Other allowable property expenses
Private use adjustment
Profit or Loss

Residential Property Income

Total Rents and other income from property
Accounting Basis (Traditional or Cash)
Rent, rates, insurance and ground rents
Property repairs and maintenance
Non-residential property finance costs
Legal, management and other professional fees
Costs of services provided, including wages
Other allowable property expenses
Profit or Loss
Private use adjustment
Residential property finance costs

Self Employed

If the turnover is below £85,000 only Turnover and Total Expenses need to be reported otherwise you will need

Turnover
Accounting Basis (Traditional or Cash)
Costs of goods bought for re-sale
Car, van and travel expenses
Wages, salaries and other staff costs
Rent, rates, power and insurance costs
Repairs and maintenance of property and equipment
Accountancy, legal and other professional fees
Interest and bank and credit card etc financial charges
Telephone, fax, stationery and other office costs
Other allowable business expenses
Profit or Loss

What is the process?

Stage One – Sign Up and Software

  • Business that fall within the scope of MTD ITSA (Income Tax Self Assessment ) will need to be signed up before April 2023
  • ‘Digital Records’ need to kept on approved HMRC software
  • The minimum amount of information will be Date, Amount and Tax Category
  • The information needs to be summarised in the format noted above
  • Each property and business activity will need its own reports

Stage Two – Quarterly Reporting

  • An electronic submission of summary totals for specified categories from digital records of each business on a quarterly basis (obligation period) from software to HMRC needs to be made
  • The first submission will include designatory data
  • Updates are due from 10 days before to one month after the quarter end date
  • The update does not need to include a statement that the data is complete and accurate
  • HMRC will return a calculation of the tax liability based on the information sent but payment will due on the current pre-MTD dates (or at least for now)

Stage Three – End of Period Statement

  • Process to finalise the taxable profit or allowable loss for any one source of business income
  • The process will pull together the quarterly submissions and allow you to claim allowances and reliefs
  • You will be able to exclude disallowable expenses
  • This submission does require a declaration that the information is complete and correct
  • HMRC will then calculate the tax due

Stage Four – Final Declaration (New Self Assessment Return)

  • Referred to as crystallisation
  • It will take into account all sources of income and gains not just those from Self Employment or Property
  • Its a replacement for the SA100 tax return
  • The deadline will be 31st January
  • HMRC will provide a Submission Interface

steve@bicknells.net

HMRC Making Tax Digital for Landlords – its easy isn’t it?

Making Tax Digital for the self employed and landlords with gross income over £10,000 will be compulsory from April 2023, but lets look at some the potential requirements and issues

Reporting

MTD means reporting to HMRC 4 times a year plus a 5th year end return. The records have to be digitally linked using HMRC approved software Find software that’s compatible with Making Tax Digital for VAT – GOV.UK (www.gov.uk)

The information will probably be the same as Self Assessment Returns, we won’t know exactly what is needed till September 2021 when HMRC release the API requirements.

Landlord report in quarters start from 6th April (some are suggesting this should be moved to whole months – as having 6th to 5th each period doesn’t seem logical)

Many landlords have other businesses so they may have a separate quarter for VAT and possibly yet another one based on their Sole Trader or Partnership reporting period (year end).

So you could be reporting 3 separate quarters or more where as previously they were just doing an annual self assessment. That’s a lot of extra returns to file!

Software/Accounting

Accounting is the next problem area, here are the issues

Properties

Its likely that you will use Tracking Codes or Projects to account for each property within you software. This will mean you can report by property.

Cash Accounting or Traditional

Landlords can choose to use either cash accounting or traditional accounting, Cash Accounting is the default.

Most software is not set up for cash accounting (except in the case of VAT, but thats not applicable to landlords as Residential Rent is Exempt from VAT)

Furnished Holiday Lets or Residential

Many Landlords now have a mixture and they are reported in separate sections of the Self Assessment Return.

Potentially you could EU or other Property income too, how will HMRC handle that?

These need separating within the accounting system to produce the information needed.

Jointly Owned Property

Its unlikely that a Landlord with jointly owned property would maintain two sets of accounts with 50% in each (or whatever the split needs to be), so software will need to be able to deal with this. Some Landlords may have a mixture of jointly owned and sole owned.

Rent a Room

Rent a Room can be used even by those exceeding the £7,500 limit, the balance above this level is then taxed Rent a Room – What if Rent exceeds £7,500? « Steve J Bicknell Tel 01202 025252

Lots to consider and the clock is ticking.

Steve@bicknells.net

Making Tax Digital – When will the next stage start?

The dates for MTD for Business seem to change constantly, the Government and HMRC seem unable to create a plan and stick to it.

Yesterday we had a new announcement

From April 2022, the programme will be extended to all VAT registered businesses with turnover below the VAT threshold (£85,000), and from April 2023, it will apply to taxpayers who file income tax self-assessment tax returns for business or property income over £10,000 annually. https://www.gov.uk/government/news/government-sets-out-draft-agenda-for-a-21st-century-tax-system

The income tax pilot has been running for sometime now and it was expected to go live in April 2021 so basically its been pushed back 2 years.

But in the meantime all VAT registered business need to adopt digital ways to prepare and file VAT as a priority and it will become enforceable by 2022.

What is MTD for Income Tax?

  • Digital business records
  • Quarterly summary of income and expenditure sent to HMRC via software
  • Add personal income at the end of the year
  • Finalise affairs using software – replaces existing Self Assessment Return
  • For sole traders, landlords and partnerships
  • Affecting around 1million tax payers
  • Will include bank interest, dividends, charitable giving

steve@bicknells.net

 

The Seminar Tour starts this week!

The government may have postponed Making Tax Digital but the Seminars continue.

The first one is this Friday (1st September) in Bristol, its an epic production.

6 Hours of CPD

110 PowerPoint Slides

229 pages of handouts

The seminar has 7 sections

  • HMRC MTD route map
  • The Requirements of MTD
  • Client transition planning and client communications
  • How will MTD change the way clients work with accountants
  • Case Studies
  • Software
  • Sanctions & Penalties

With contributions from Xero, Sage, MyFirmsApp, Free Agent, BTC, Practice Track and Clear Books

This is probably one of the most comprehensive seminars ever given on Making Tax Digital

Click here to find out about the seminars in Cambridge, Manchester and London.

I look forward to seeing you there

steve@bicknells.net

Making Tax Digital – HMRC Case Studies

HMRC have 4 fictional case studies, they are on the are on the Overview of Making Tax Digital page of the HMRC website and this was last updated on 13th July 2017

Click to access Making_tax_digital_-_case_studies.pdf

  • Geeta – the teacher who also does some tuition
  • Richard – the landscape gardener who has just become VAT registered
  • Helen – retired
  • Dave and his Wife – who are directors of a small plumbing company

Basically

Geeta uses a App on her smartphone for record keeping

Richard was using an agent but then moves to a digital tax account

Helen uses a Personal Tax Account

Dave uses an App to provide information to his accountant

So Apps are very popular!

HMRC seem to assume that most people want to do their own record keeping and that small businesses like Geeta and Richard will no longer use accountants or book keepers.

We have an extremely complicated tax system, so how realistic is that, even HMRC struggle to calculate your tax correctly!

The way that allowances are applied for dividends, allowances, savings and other items all impact on each other.

Many tax payers will be working on their 2016/17 returns (to 5th April 2017 due by 31st January 2018) over the coming months and find that they can’t use the HMRC software because it doesn’t work properly.

As reported by Accounting Web

Rob Ellis, CEO of BTCSoftware, can’t remember a year when there have been so many exclusions from filing SA tax returns online. For the 2016/17 tax returns 16 new examples have been added to the online filing exclusions list, which is now in version 4;  there is a version 5 of this list under construction.

You can read the full list of exclusion on this link https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/622426/2017-exc-indi.pdf

There were 62 exclusions! HMRC have fixed some but aren’t intending to fix them all

 

steve@bicknells.net

What information will you need to report under Making Tax Digital (MTDfB)?

Once the election is over, Making Tax Digital will be pushed forward again, ready for its launch in April 2018.

If you aren’t using any software or apps to prepare your accounts, now is the time to start. Under MTDfB – Making Tax Digital for Business – Sole Trader, Partnerships, Landlords and ultimately Companies will need to file returns every quarter and submit a final year end return.

This what you will need to report

The categories of information listed below are being reviewed and have not yet been finalised. They have been included mainly for indicative purposes.

https://www.gov.uk/government/publications/bringing-business-tax-into-the-digital-age-legislation-overview/bringing-business-tax-into-the-digital-age-legislation-overview#schedule

Non-property businesses

Income:

  • turnover, takings, fees, sales or money earned
  • any other business income

Expenses:

  • 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

Property businesses

Income – furnished holiday lettings:

  • rental income and any income for services provided to tenants

Expenses – furnished holiday lettings:

  • tax taken off income
  • rent paid, repairs, insurance and cost of services provided
  • loan interest and other financial costs
  • legal, management and other professional fees
  • other allowable property expenses
  • private use adjustment
  • premiums for the grant of a lease
  • reverse premiums and inducements
  • property repairs and maintenance
  • costs of services provided, including wages

Income – property:

  • rental income and other income from property

Expenses – property:

  • tax taken off any income from total rents
  • premiums for the grant of a lease
  • reverse premiums and inducements
  • rent, rates, insurance, ground rents etc.
  • property repairs and maintenance
  • loan interest for residential properties and other related financial costs
  • other loan interest and financial costs
  • legal, management and other professional fees
  • costs of services provided, including wages
  • other allowable property expenses
  • private use adjustment

Partnerships

Interest and alternative finance receipts without UK tax deducted:

  • interest and alternative finance receipts from UK banks and building societies paid without tax deducted
  • interest distributions from UK authorised unit trusts and UK open-ended investment companies and investment trusts
  • income from National Savings and Investments
  • other untaxed income from UK savings and investments (except dividends)

Interest and alternative finance receipts with UK tax deducted:

  • other taxed income from UK savings and investments (except dividends) (amount net of tax deducted)
  • tax deducted

Dividends:

  • dividends and other qualifying distributions from UK companies
  • tax credits attached to such dividends etc
  • dividend distributions from UK authorised unit trusts and open-ended investment companies
  • tax credits attached to such distributions
  • stock dividends from UK companies
  • tax credits attached to such stock dividends
  • non-qualifying distributions and loans written off
  • tax credits attached to such distributions etc

Other income received without UK tax deducted:

  • other income – profit
  • other income – loss

Other income received with UK tax deducted:

  • other income (amount net of tax deducted)
  • tax deducted

Partnerships – end of year information

Disposal of capital assets – partnerships:

  • description of assets
  • whether listed or unlisted shares or securities (if applicable)
  • name of partners who benefited from the disposal proceeds
  • total proceeds from disposal

End of year information

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)
  • disallowable expenditure
  • 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 refuelling 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)

 

steve@bicknells.net