Reporting to the HM Revenue & Customs (HMRC) is changing significantly under the Making Tax Digital (MTD) regulations. John Davidson explains why it is essential that your business prepares for this. MTD affects most businesses, including over three million self-employed (including buy-to-let landlords), 1.6 million companies and 400,000 partnerships.

Quarterly reporting

Quarterly reporting and year-end reconciliation starts from April 2018. The key dates are:

  • April 2018 if profits are chargeable to Income Tax and Class 4 National Insurance contributions (NICs) are paid

  • April 2019 if registered for and pay VAT

  • April 2020 for Corporation Taxpayers.

Individuals in employment and pensioners will be exempt from digital tax reporting unless they have secondary incomes of more than £10,000 per year from self-employment or property. The smallest unincorporated businesses may yet be excluded and a one-year exemption may be given to some businesses. The Finance Bill 2017 will determine exemptions and thresholds, and:

  • determine how to keep records and categorise expenses

  • establish how taxable profit is calculated, including accounting and tax adjustments and procedures for reliefs and allowances

  • detail the process for quarterly updates, including the replacement for VAT returns and the accumulation of data for Corporation and Income Tax.

In addition to the quarterly returns, there will be a fifth end-of-year return to finalise profit figures and provide additional information such as any annual reliefs or allowances not included in quarterly returns. This has to be submitted 10 months after the fourth quarter return.

The HMRC policy paper, Making Tax Digital for Business is available here and the seven pages of draft legislation on quarterly reporting requirements is available at www.gov.uk. Comments are to be submitted by 28 February 2017.

Buy-to-let landlords’ cash limit

The cash limit is to be increased from £83,000 to £150,000 for the 2017/18 and subsequent tax years. This will allow landlords to pay tax on the difference between money received and money paid out. The consultation outcome, Business Income Tax: Simplified Cash Basis for Unincorporated Property Businesses is available here.

Unincorporated businesses

The entry threshold for the cash basis for unincorporated businesses increases to £150,000 and the rules on capital and revenue expenditure within the cash basis are simplified to make it easier for businesses to work out whether expenditure is deductible. The consultation outcome, Business Income Tax: Simplifying Tax for Unincorporated Businesses is available here.

Voluntary PAYG repayments

Voluntary payments will become available to businesses that want to make payments towards an expected tax liability. Voluntary pay as you go (PAYG) will apply to unincorporated businesses, sole traders and landlords, in respect of their Income Tax/NICs/Capital Gains Tax, from 1 April 2018, to VAT from April 2019 and to incorporated businesses, in respect of their Corporation Tax affairs, from 2020. Voluntary payments will usually be refundable on request, but HMRC will not pay any interest on payments made in advance. The consultation outcome, Making Tax Digital: Voluntary Pay as You Go is available here.

Spreadsheets incorporated into Making Tax Digital

HMRC has stated that businesses will be able to use spreadsheets for record keeping but must comply with HMRC requirements; consequently they will need to combine spreadsheets with other software. It is expected, however, that businesses will incur costs for dedicated tax reporting software as well as training costs; software developers have not indicated a willingness to provide free software. It is expected that the cost will be £280 for each business on average.

HMRC will require even the smallest companies to use specialist software. HMRC expects free software will be provided to allow micro businesses to keep digital records and send quarterly updates to HMRC including arithmetical error correction, some basic level of built-in prompts and nudges plus basic help functions.

Partnerships

Partnerships will report their tax positions and obligations through a nominated partner. Individual partners will no longer have to separately provide HMRC with details of their share of the profits or losses from the partnership, but will need to notify HMRC of other business interests. The nominated partner will maintain the digital records and providing regular updates on behalf of all partners. MTD is deferred for partnerships with a turnover above £10 million until 2020. Trustees of charitable trusts and trustees of “exempt unauthorised unit trusts” are exempt, as are the underwriting businesses of members of Lloyd’s, shares held in real estate investment trusts and partnerships participating in open-ended investment companies.

Information to be reported includes income, calculation of profit/loss, information about receipts and expenses plus any information relevant to establishing, in relation to each partner, the amount the partner is chargeable for Income Tax for the tax year or the amount of Income Tax payable by the partner. Also required is information in relation to any disposal of partnership property and any particulars concerning amounts liable to tax on a chargeable gain.

VAT

The quarterly reporting under MTD will replace the VAT return for certain businesses from 2019, including for the self-employed and landlords. The details are currently vague and will be clarified during 2017.

Last reviewed 8 February 2017