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

What are Basis Periods and what will be the impact of Government Proposals to reset them? – Making Tax Digital (MTD ITSA)

Here is an example of how Basis periods work and how they create overlap periods taken from our blog What is Overlap Profit? – Steve J Bicknell Tel 01202 025252

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:

2010-2011Year 11 October 2010 to 5 April 2011
2011-2012Year 212 months to 30 September 2011
2012-2013Year 312 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.

According to an article in the Law Society Gazzette 13th August

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.

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

Making Tax Digital for Landlords and the Self Employed with income over £10k

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 will see the end of VAT Returns

Whilst we know that due to the election Making Tax Digital was dropped from the Finance Bill, we also know HMRC has said it will be back as soon as the elections are over!

The plan is that by 2019 VAT returns will be abolished for businesses including the Self Employed, Landlords and Partnerships.

But don’t start celebration too soon, they are being abolished because we will be providing more information each quarter online to HMRC.

Interestingly HMRC say they may be able to accept spreadsheets if they meet specific criteria, but realistically, surely everyone should now be using online accounting software. DIY spreadsheets are not the best way to keep your accounts and there is a high risk of error.

Why create your own spreadsheet when you can get software like Sage One Start for £6/mth or you might get an even better deal if you ask a Sage One Accountant.

So what is the expected timetable for Making Tax Digital

  • 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

2018 is just the beginning as Sage explain …

What Making Tax Digital really means

  • All self-employed individuals, landlords and incorporated entities with business income over £10,000 will be required to keep digital records of all their income and expenditure and submit these records electronically to HMRC. Those in employment who have secondary income of more than £10,000 per year through self-employment or property will also be affected.
  • HMRC will not provide you with the tools for digital record keeping and submission. These will be offered through commercial software providers.
  • Those affected have the option to make the electronic submission in collaboration with their accountant or bookkeeper or can do this on their own.
  • Updates to HMRC will need to be made at least quarterly, taxpayers will have an option to pay tax based on their quarterly submissions, if they wish.
  • Any activity at the end of the year must be concluded and sent either by ten months after the last day of the accounting period, or by 31st January, whichever is sooner.

http://www.sage.co.uk/business-advice/legislation/making-tax-digital

The truth is, we don’t know exactly what the rules will be until the bill is drafted which won’t be till after the election, but what we do know is that big changes are coming!

steve@bicknells.net

Making Tax Digital – Sanctions for Late Submission and Late Payment

Making Tax Digital is coming soon!

It will will eventually affect us all, businesses including property investors will have to initially file their accounts quarterly and then ultimately monthly.

For many this will be a huge shift from annual accounts and self assessment returns.

HMRC will be able to estimate your tax each time you submit a return.

The government have confirmed that taxpayers will be given a period of at least 12 months before they will be charged any late submission penalties in relation to their Making Tax Digital for Business obligations.

Making Tax Digital – sanctions for late submission and late payment is open for you to respond until 11 June. The consultation seeks views on three possible models for late submission penalties and provides an update on late payment penalty interest.

Model A – the Points Based System

Model B – Compliance Reviews with Penalties

Model C – Suspension with conditions

Read further details at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/601136/Making_Tax_Digital_-_sanctions_for_late_submission_and_late_payment.pdf

steve@bicknells.net

Making Tax Digital – the Pilot has started!

Whether you like it or not, Making Tax Digital is coming to us all!

HM Revenue and Customs’ (HMRC) ambition for most businesses to keep records digitally and send quarterly summary updates moves a step closer with the launch of the Making Tax Digital for Business (MTDfB) pilot.

In April, HMRC will invite some customers, both businesses and their agents to sign up for a new way to report income and expenses online. At different stages of the pilot customers will help HMRC develop and improve the new service by:

  • using accounting software to record their business income and expenses
  • sending summary reports of their income and expenses direct from their digital records quarterly or more often if they choose
  • signing up to go paperless

Based on the information they report, customers will get an estimated tax calculation.

As soon as the new service has been tested with the first group of businesses and agents, other customers will be able to join the pilot. These customers will be able to report their income and expenses for the quarter they join as well as any previous quarters.

Customers who aren’t invited to take part in the pilot at the beginning won’t be able to start sending quarterly reports to HMRC immediately, but they can:

  • start to use accounting software to keep their records if they don’t already

  • check with their software supplier, or agent, that any software they use is compatible with quarterly reporting

https://www.gov.uk/government/news/hmrc-launches-a-new-way-to-report-income-and-expenses-online

steve@bicknells.net

Will you be able to file your accounts every quarter? Making Tax Digital

Making Tax Digital is a key part of the government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs – meaning the end of the annual tax return for millions.

Can quarterly reporting be easier than annual reporting???

Digital tax accounts for all will mean the tax payer can see the information that HMRC holds and be able to check at any time that their details are complete and correct. HMRC will use this information to tailor the service it provides, according to each tax payers’ individual circumstances.

The top 5 common accounting problems accountants deal with are:
1. Not doing any accounts – the shoe box approach to business
This is the most common mistake, book keeping is best done as you go along, putting all the paperwork in a shoe box or carrier bag is a really bad idea as you have no idea how your business is performing.
2. Not keeping receipts. Often small business miss out on claiming all their expenses because they fail to keep receipts and lose track of their spending
3. Not reconciling. Reconciling your bank statements to your cash book is vital to make sure that all of your income and expenses have been recorded in your accounts.
4. Using the wrong accounting system. For some businesses a manual cash book and records are fine but for many accounting software such as Sage, Xero or Debitoor will be needed to keep track of debtors, creditors and VAT. Make sure you understand your accounting system and operate it correctly.
5. Mixing business and personal expenses. Some sole traders even mix up business and personal bank accounts and in extreme cases don’t even have a business bank account. This can cause errors and often means that a sole trader will either claim to many expenses or to few.

HMRC state:

We know that the majority of businesses, self-employed people and landlords want to get their tax right first time, but the latest tax gap figures show too many businesses are prone to making mistakes. The amount of tax not collected due to avoidable taxpayer errors and carelessness has risen to over £8bn a year. This not only costs the public purse – it also creates cost, uncertainty and worry when HMRC is forced to look into their affairs.

By 2020 most businesses, self-employed people and landlords will be required to keep track of their tax affairs digitally and update HMRC at least quarterly via their digital tax account.

These changes will be introduced for some businesses from April 2018, and will be phased in by 2020, giving businesses time to adapt.

One of the big areas of concern has been over the quarterly tax reporting requirements and concerns over data accuracy, as a result, the government has pushed back the start date for small business to April 2019.

Data accuracy is going to be critical, are most businesses up to providing data in real time? RTI has worked for payroll but could it really work for accounting information? many businesses rely on their accountants and book keepers to get the information correct.

It is expected that most modern accounting systems will be able to upload the quarterly results to HMRC or Agents could key the information directly into digital accounts. However, this will mean things like dividends will have to be declared in the correct period and not just at year end.

steve@bicknells.net