Making Tax Digital for Business: An Overview
In July 2017, the government announced a delay to the timetable for its Making Tax Digital (MTD) for business (MTDfB) programme. It has now (October 2018) announced a further delay to digital VAT reporting for more complex business. What does this latest delay mean for the overall MTDfB landscape?
According to HM Revenue & Customs’ (HMRC’s) figures, the vast majority (some 96.5%) of VAT-registered businesses with turnovers over the VAT threshold will still be required to report digitally from next April. The remaining 3.5% will now be required to report digitally from 1 October 2019. Whilst this will be a welcome extension to many affected businesses, it is a relatively small delay when viewed absolutely. We do not yet know, however, what impact it might have on the wider timetable for MTDfB. The timetable as we currently understand it is set out in the table, and the remainder of this briefing looks at the different elements in a little more detail.
Making VAT Digital
From April 2019, most businesses over the VAT threshold (£85,000) will be required to keep digital records, and to make VAT returns using MTD-enabled software. The following types of business, with more complex VAT affairs, will not be required to report digitally until 1 October 2019:
- Not-for-profit organisations not set up as a company
- VAT divisions
- VAT groups
- Public sector entities required to provide additional information on their VAT return (government departments and NHS trusts)
- Local authorities
- Public corporations
- Businesses (including VAT-registered landlords) that are based overseas
- Businesses required to make payments on account
- Businesses on the annual accounting scheme
- VAT-registered businesses under the threshold will be able to opt in, but will not have to report under MTD.
HMRC launched a limited trial of digital VAT reporting earlier this year and have now begun to widen this to more participants. Those businesses eligible for deferred reporting will be the last to join the pilot in spring 2019.
Making Tax Digital for Business Timetable
Trial of quarterly reporting for income tax
Cash basis for unincorporated business extended and cash basis for unincorporated property business introduced
Draft income tax legislation published for comment
Initial trial of MVD
October 2018 – Spring 2019
MVD trial gradually widened to cover all affected businesses
MVD compulsory for businesses over the VAT threshold unless eligible for deferral
MVD compulsory for businesses subject to deferral
Earliest start date for MTDfB quarterly reporting
MTD for corporation tax
Quarterly Reporting for Income Tax
The government has previously said that there will be no other mandatory digital reporting for business until April 2020, and only then if Making VAT Digital (MVD) has been “shown to be successful”. It is currently unclear what effect the decision to delay mandatory VAT reporting for more complex businesses will have on this element of the MTD timetable: we may well see digital reporting for income and corporation tax pushed back to give more time for the VAT changes to bed in, although this is by no means guaranteed.
The draft legislation on MTDfB for income tax shows that HMRC’s ultimate intention is to introduce quarterly reporting for unincorporated businesses in a format largely unchanged from the initial MTD proposals. In brief, businesses will have to keep records digitally and submit a quarterly update to HMRC, summarising their income and expenses for the quarter. There will be no requirement to include accounting or tax adjustments in these quarterly figures. Businesses will have one month from the end of each quarter to submit their quarterly update. Significantly, the draft legislation confirms that where a business has more than one trade or property business (or a combination of trading and property income), it will need to keep records and return quarterly information separately for each.
Following the year end, the business will have to submit an end of period statement which will incorporate relevant accounting and tax adjustments and will finalise the business’ position for the year (again, with separate figures for each trade/property business). Businesses will have until the normal self-assessment deadline (ie 31 January following the tax year) to submit this statement, meaning that it will be possible to combine making it with the submission of a full self-assessment return.
Businesses will be able to keep underlying records (receipts and invoices etc) in paper format if this best suits them. However, the draft legislation makes it clear that there will need to be a digital record for each transaction, with amounts allocated to the relevant income or expense category (broadly aligned to the current income and expense categories on the self-assessment tax return). The totals from these categories (but not the underlying transactional data) are then reported on a quarterly basis.
There is a limited exception from this transactional record-keeping requirement for retail businesses with a high volume of low-value transactions: these businesses will be able to elect to maintain a single digital record of each day’s gross retail sales instead of recording each sale separately.
HMRC’s aim is for businesses to record transactions in as near to real time as possible, to help increase record-keeping accuracy (and ultimately, to increase tax receipts). However, the only timing requirement in the draft legislation is that the digital records for each quarter are created before that quarter’s submission is made (or, where it is made late, by the time at which it should have been made). This will give businesses some degree of flexibility – it will, for instance, be possible to outsource the digitisation process if a business does not have the capacity to handle it in-house.
Finalising the Position
Some tax adjustments – for example disallowable business entertainment – will effectively be made as amounts are allocated to the correct accounts category. Most, however, will only need to be included in the year end statement. In practice, therefore, unless they choose to make these adjustments quarterly, businesses may not notice a significant change in their year end tax compliance process as a result of the changes.
Consultation to date has focused on quarterly reporting for business income tax and digital VAT reporting. A separate consultation on how MTDfB might work for companies was expected to be published earlier this year but, at the time of writing, has not been forthcoming. Ultimately, however, we would expect some form of digital quarterly reporting to become mandatory for companies as well as unincorporated businesses. We will continue to keep you updated as more detail emerges.
Partnerships will be required to keep digital records, and make quarterly reports in the same way as sole trader businesses. The end of period statement will, however, be replaced by a Schedule A1 Partnership Return. This will need to include all partnership income (not just trade or rental income) which falls to be taxed in the relevant year and will also need to show the allocation of income and expenses to the partners. There will be no requirement for the quarterly returns to include an allocation of amounts to individual partners.
The largest partnerships – those with turnovers over £10 million – are excluded from the MTDfB reporting requirements as currently drafted. These are, instead, being considered as part of HMRC’s ongoing work on MTD for corporation tax.
Whilst ensuring that systems and processes are in place for MVD is a priority, we are keeping in mind how these systems will also help businesses with quarterly reporting for income tax. Is the required information already recorded, and, if so, what changes might need making to ensure that amounts are allocated to the correct categories? If systems and software are being updated to prepare for the VAT changes, will these also support quarterly reporting in the future?
Example: proposed income and expense categorisations for a trading business
- Other business income
- Cost of goods bought for resale/used
- Wages, salaries and other staff costs
- Car, van and travel expenses
- Rent, rates and insurance
- Repairs and maintenance
- Phone, fax, stationery and other office costs
- Business entertainment
- Interest on bank and other loans
- Bank, credit card and other financial charges
- Accountancy, legal and other professional fees
- Goods and services for own use
- Construction industry – payments to subcontractors
- Total Construction Industry Scheme deductions
- Other business expenses
Example: proposed income and expense categorisations for a UK property rental business
- Total rents
- Other income
- Tax taken from total rents and other income from property
- Premiums for the grant of a lease
- Reverse premiums and inducements
- Rent, rates, insurance, ground rents
- Property repairs and maintenance
- Loan interest and other financial costs
- Legal, management and other professional fees
- Costs of services provided, including wages
- Other allowable property expenses.
Robert Langston, Partner
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