HMRC have announced that they are looking for suitable businesses to sign up for the pilot testing of the new system of digital reporting of VAT information. Turkeys voting for Christmas springs to mind?
After a period of testing the new system is scheduled to go live in April 2019 for VAT registered businesses with turnover in excess of the £85,000 VAT registration threshold.
Making Tax Digital (MTD) for VAT is scheduled to start in April 2019 which means that your VAT information needs to be submitted to HMRC digitally.
On 18 December 2017, HMRC published draft legislation together with examples of how the business account records might link with the HMRC computer in order to comply with MTD for VAT. The legislation specifies that “functional compatible software” must be used to record and preserve prescribed VAT related data.
What are Digital records?
“Functional compatible software” must be used to calculate the VAT due, report the VAT figures (as per the current VAT return) to HMRC, and to receive information back from HMRC.
VAT related data for each sale and purchase made by the business includes the time of the supply, the value and the rate of VAT charged, or in the case of purchases, the amount of input VAT allowed.
There is no requirement in the draft regulations that the electronic recording of this data must be done at the time the supply is made, or when the purchase is received. As long as the data is recorded electronically by the earlier of the date that the VAT return must be submitted, or is actually submitted.
Digital Links in the Trail
The business can use more than one piece of software to keep its digital records, but those separate software programmes must be “digitally linked”. HMRC provides examples of what it means by digitally linked in the draft notice.
One example is a business which uses one piece of accounting software to record all sales and purchases, this software then calculates the return and submits it to HMRC. As well as the records in the accounting software the business uses a spreadsheet to keep track of a fleet of cars and work out its road fuel scale charges. The draft guidance suggests that the business can type the adjustment into its accounting software.
We can of course work with you to make sure that your accounting systems will comply with the new VAT rules before they start in 2019. Note that MTD for VAT will not be mandatory where turnover is below the VAT registration limit, currently £85,000 per annum.
The VAT registration limit normally increases in line with inflation each year, however the limit has been frozen at £85,000 until 1 April 2020. At the same time the deregistration limit remains at £83,000.
There had been rumours that the VAT threshold would be reduced so that more businesses would be required to charge VAT on their sales. The UK currently has the highest VAT registration threshold in Europe.
Note that the introduction of Making Tax Digital (MTD) for VAT in April 2019 will apply to those businesses above the registration limit. Freezing or reducing the threshold will bring more businesses within the scope of MTD.
Last month we reported that the government had announced the delay of Making Tax Digital for Business (MTDfB) to 2020 at the earliest but that quarterly VAT reporting, using the new system will be mandatory from 2019.
Surely we are doing that already you might say. However, currently businesses are only required to complete 9 boxes when they submit their quarterly, monthly, or annual VAT return online. Under the latest proposal for MTDfB the business will be required to submit the detailed transaction data supporting the output tax and input tax figures on a quarterly basis. This will therefore require those businesses affected to keep their accounting records digitally from the 2019 start date.
These changes won’t affect business that are not VAT registered such as buy to let landlords for whom MTDfB will not apply until 2020 at the earliest, and even then only if their gross rental income exceeds the VAT registration threshold.
The Government has responded to pressure from accountants and other interested parties and announced the delay of Making Tax Digital for Business to 2020 at the earliest.
Quarterly VAT reporting using the new system will be mandatory from 2019.
In a further U-turn, three million small businesses and buy to let landlords below the VAT threshold will now not be required to keep digital accounting records but will be able to move to the new system for keeping tax records at a pace that is right for them. For such businesses, Making Tax Digital will be voluntary.
Mel Stride, the new Financial Secretary to the Treasury and Paymaster General, announced that the roll out for Making Tax Digital has been amended to ensure businesses have plenty of time to adapt to the changes. Under the revised timetable:
As VAT already requires quarterly returns, no business will need to provide information to HMRC more regularly during this initial phase than they do now.
All businesses and landlords will have at least two years to adapt to the changes before being asked to keep digital records for other taxes. This deferral will give much more time for businesses, supported by their advisers, to identify for themselves, at their own pace, the benefits of digital record keeping. It will also ensure that many more software products can be developed and tested before the system is mandatory.
The original Finance Bill published after the Spring Budget ran to nearly 700 pages. As a result of the announcement of the General Election on 8th June a significantly shorter Finance Bill was passed with many of the more detailed and more controversial measures being deferred to a later Bill. Whether those measures will reappear after the election will depend upon who wins on 8th June.
Among the tax changes that didn’t make the cut was the legislation to introduce Making Tax Digital, all of the corporation tax changes such as those affecting company losses and the changes affecting non-domiciled Individuals.
However the changes affecting workers supplying their services to the public sector via their own personal service company were enacted with effect from 6 April 2017.
Many hope that the deferral of the Making Tax Digital legislation to the next Finance Bill may mean that the planned start date in April 2018 will also be deferred. There will certainly be more time for proper debate of the proposed changes and the Treasury Select committee still has a number of reservations about the speedy implementation of such a significant change to the UK tax system. Watch this space.
The result of the General Election has left Teresa May and the Conservative Party clinging on to power with support from the Democratic Unionist Party (DUP) in Northern Ireland. This leads to a period of significant uncertainty for the country as the BREXIT negotiations are just about to start.
Following the General Election there have been important Cabinet reshuffles. Although Philip Hammond retained his position as Chancellor of the Exchequer, Jane Ellison MP the Chief Secretary to the Treasury lost her seat in Battersea. Ms Ellison was day-to-day lead for Making Tax Digital, so it’s not clear if her demise might lead to another delay, while her replacement Liz Truss gets up to speed. David Gauke has also moved from the Treasury to become Work and Pensions Secretary.
So what will happen to those measures in the original Finance Bill that did not make it into the first Finance Act 2017?
The planned changes to corporation tax such as the new losses rules were due to take effect from1 April 2017.
The changes to deemed domicile were also due to start 6 April 2017. This has put tax planning on hold for companies and individuals affected by the changes.
The Government and HMRC remain committed to the “Making Tax Digital” project with more information being sent online to HM Revenue and Customs (HMRC) by employers, pension funds, banks and other institutions.
The next big step will be the introduction of quarterly reporting of income and expenditure by businesses and landlords from 2018. HMRC are currently consulting on a number of proposals to make radical changes to facilitate the introduction of the new regime. We accountants have serious concerns about the timescale; HMRC say “you will not need an accountant to fill out the information on the new system.” They are expecting businesses to use new Apps on their Smart phones and Tablets to transmit their data to HMRC.
OVERVIEW OF MAIN PROPOSALS
Small businesses and landlords will be encouraged to prepare their accounts on a cash basis with the threshold for using the basis significantly increased.
The current basis period rules for unincorporated businesses to be reformed.
A new voluntary Pay As You Go (PAYG) system to be introduced to help businesses budget for their tax payments.
EXTENDING THE CASH BASIS
About 1 million small businesses currently prepare their accounts on a cash basis. The present threshold for using the cash basis is the VAT registration limit £83,000 and HMRC are consulting on the limit being significantly increased, possibly double the VAT threshold of £166,000, the current limit for leaving the scheme.
WHAT IS THE CASH BASIS?
The current cash basis for preparing accounts was introduced as a simplification measure from 6 April 2013. Using the cash basis means that businesses merely need to calculate their profits based on receipts and payments.
There are no adjustments at the end of each period for accrued expenses and amounts prepaid, and no adjustment for stock or bad debts at the end of the period.
Another simplification is that the cost of equipment bought for the business, except for motor cars, can be deducted directly in arriving at the profit without the need for a capital allowances claim. One disadvantage of the current cash basis rules is that interest on money borrowed to finance the business is limited to £500 a year and a similar restriction is likely to be incorporated into the new rules.
PROPOSALS TO SIMPLIFY BASIS PERIODS
The current basis period rules are complex, and many unincorporated business owners find them difficult to comprehend. Where the business makes up accounts to a date other than 5 April the accounts and profits have to be made to “fit” into the tax year. There are particular problems at the commencement of trading as some of the initial profits are taxed twice and the “overlap” profits are then deducted on cessation.
One proposal is for businesses to prepare accounts for a period that aligns with the tax year (6 April – 5 April) or even prepare accounts for shorter periods such as each quarter to align with their VAT quarters and submissions to HMRC.
PAY AS YOU GO
Another complication of the current self-assessment regime is that where tax has not been collected under PAYE or at source, primarily on self-employed profits and rental income, the taxpayer is required to make payments on account.
These payments on account are due on 31 January and 31 July based on 50% of the outstanding liability for the previous tax year with a balancing payment the following 31 January.
This can make budgeting cash flow for the self-employed and landlords difficult for some to manage.
The government is proposing to introduce a new voluntary Pay as You Go (PAYG) system for the self-employed and landlords to make payments towards their income tax, national insurance and VAT liabilities monthly with a reconciliation at the end of the year.
Many of these proposals may have significant implications for your business. We will update you on further details once we see the outcome of the various consultations. We can then discuss how we can assist you with your quarterly obligations.