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.
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.
A business commences on 1 October 2010. The first accounts are made up for the 12 months to 30 September 2011 and show a profit of £45,000.
The basis periods for the first three tax years are:
2010-2011
Year 1
1 October 2010 to 5 April 2011
2011-2012
Year 2
12 months to 30 September 2011
2012-2013
Year 3
12 months to 30 September 2012
The period from 1 October 2010 to 5 April 2011 (187 days) is an `overlap period’.
It is a complicated and confusing process and the overlap profit is effectively taxed twice and given back later as tax relief.
There are two ways to gain access to your overlap relief: cease trading or change your accounting date.
The Proposal
The HMRC proposal affects the self-employed, partnerships, trusts, and estates with trading income. The proposal affects unincorporated businesses that do not draw up annual accounts to 31 March or 5 April, and those that are in the early years of trade.
Having carried out a short informal consultation with a range of businesses and tax experts, the government intends to implement the proposed reform ahead of the mandation of Making Tax Digital for Income Tax in April 2023.
The consultation period end on 31st August 2021.
Example
A business draws up accounts to 30 June every year.
Currently, income tax for 2023 to 2024 would be based on the profits in the business’s accounts for the year ended 30 June 2023. Part of the accounts are outside of the tax year, and part of the tax year is not included in profits taxed.
The proposed reform would mean the income tax for 2023 to 2024 would be based on:
3/12 of the income for the year ended 30 June 2023, plus 9/12 of the income for the year ended 30 June 24.
Basis periods are straightforward for the estimated 93% of sole traders and 67% of trading partnerships that draw up their accounts to 5 April or 31 March every year. But if a different accounting date is chosen then the rules are more complex and can be confusing for businesses to understand and apply. The rules can be particularly challenging for new or unrepresented businesses, leading to errors and mistakes in tax returns.
Aligning the basis of assessment for trading income with other forms of income enables wider, simpler reforms to be considered in the future. In particular, transitioning to the tax year basis in the tax year 2022 to 2023 will simplify the introduction and experience of Making Tax Digital for Income Tax. For simplicity, the government proposes a one year transition period, with an option to spread any excess profit arising in that transition period over five years.
The transition tax year would introduce the equivalence rule. This means that businesses can treat the end of the tax year for their tax year basis as any date between 31 March and 5 April.
Alongside this transition, the proposals would mandate that all overlap relief must be claimed in the transition tax year, including any historic transitional overlap relief, or overlap relief generated during the new transition year. No overlap relief would be carried forwards into the new tax year basis, and no new overlap relief would be generated after the transition year.
The new rule, proposed by HM Revenue & Customs under the guise of simplification, could generate a badly needed windfall of more than £1bn for the Treasury next year.
Aligning the reporting date with the tax year would mean that profits that arise in each reporting year would be allocated to that tax year. Currently, profits are taxed for the year in which the business’s accounting period ends. Many partnerships thus end their accounting period on 30 April, allowing them 11 months’ grace.
In summary
The basis period reform will apply from 2023-24.
There will be a transition period in 2022-23.
Accounting periods that end between 31 March and 4 April inclusive will be treated as ending on 5 April.
In the 2022-23 transition year, business profits will be reported from the end of the previous period assessed in 2021-22 up to 5 April 2023.
Businesses with a 31 March 2023 accounting date will report business profits up to that date. This will be deemed to be 5 April 2023.
The subsequent accounting period will be deemed to start on 6 April 2023.
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
You will basically have 2 returns to file at the same time one for the previous year and new quarterly reporting
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
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
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
Firstly, I recommend that your Accountant signs you up, we will sign up our clients who are above the threshold to avoid potential problems.
Many businesses have found the process confusing because
• They were in the Pilot
• They didn’t realise they needed to register
• They thought the software would do the registration
The best time to register is after you have filed your last pre-MTD VAT return and made payment or had a refund and at least 7 days before the end of the next VAT period.
The reason why this is important is that HMRC need time to switch businesses from old gateway to the new MTD system.
We have had spoken to businesses who registered at the wrong time and found that they either can’t submit returns or Direct Debits or repayments have been delayed causing significant cash flow problems particularly for businesses expecting six figure refunds.
It is important to register for MTD and then register your software.
For businesses over the VAT registration threshold, Making Tax Digital starts in April 2019. This represents the first phase of the UK Government’s plan to become one of the world’s most digitally advanced tax administrations. However, many people are still not fully aware of the impact it will have on their business and the various software solutions which need to be considered.
It is vital that all businesses understand the imminent changes and what further developments we can expect in the future. This essential course will guide you through everything you need to know about Making Tax Digital and what procedural changes you need to put in place to ensure you are compliant with the new requirements.
It will cover the following key areas…
# What is Making Tax Digital for VAT?
# When does it start?
# VAT notice 700/22
# Exemptions
# Deferred reporting
# Software solutions
# New penalties
# The soft landing
# The next phase 2021: Income Tax and Corporation Tax
Last week it was announced that due to Brexit some of HMRC’s plans have had to be put on hold, so they have decided that Digital Services for Individuals would be put on hold.
HMRC’s email stated: ‘We have made the decision to delay plans to introduce further digital services for individuals, to release project capability to EU Exit work. This means halting progress on simple assessment and real time tax code changes.’
‘We will pause work to digitise services that impact fewer numbers of customers, such as those paying Inheritance Tax, or applying for Tax Advantaged Venture Capital Schemes and PAYE settlement agreements.’
But Making Tax Digital for Businesses will not be delayed, so from 2019 VAT will be the first stage then Business Tax potentially starting in 2020.
April 2018 – quarterly reporting for income tax purposes for unincorporated businesses with a turnover over £85,000
April 2019 – quarterly reporting for both incorporated and unincorporated businesses for income tax and VAT
April 2020 – quarterly reporting for corporation tax purposes
The new timetable will be
Only VAT registered businesses will need to keep digital records and only for VAT purposes.
They will only need to do so from April 2019.
Businesses will not be asked to keep digital records or update HMRC quarterly for other taxes until at least April 2020 (the original dates had implementation from April 2019).
If you are VAT registered then you will need to move to digital record keeping (i.e. use software to record all your VAT invoices and receipts).
This is massive change in timetable and one that many small businesses and landlords will welcome.
Whilst this now gives smaller businesses longer to prepare, MTDfB is still coming in 2020 and expected to require unincorporated businesses to report the information noted below, so its still worth starting preparations and using cloud based accounting systems.
The details below are an extract from gov.uk for Quarterly Reporting
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
To find out all the latest information why not come to one of my seminars
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.
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)
