Finance Bill 2017 will outline provisions of the new system.
The Budget gave one small concession on Making Tax Digital (MTD) for those below the VAT threshold for quarterly accounting, but we now await further detail.
Legislation will be introduced in Finance Bill 2017 that will set out:
- digital record-keeping – how to keep records of trading and transactions digitally, and categorise expenses with help from prompts and guidance in the software
- establishing taxable profit – in particular, exploring when businesses should record accounting and tax adjustments for the purposes of arriving at a taxable profit, and how businesses should reflect reliefs and allowances
- providing HMRC with updates – how businesses (including sole traders and landlords) should provide HMRC with quarterly updates
- end-of-year activity – how businesses might finalise their taxable profit for a period, including the activity they may need to undertake and how long they should have to do so.
Businesses, self-employed people and landlords will be required to start using the new digital service from:
- April 2018 if they have profits chargeable to income tax and pay class 4 national insurance contributions (NICs) and their turnovers are in excess of the VAT threshold
- April 2019 if they have profits chargeable to income tax and pay class 4 NICs and their turnovers are below the VAT threshold
- April 2019 if they are registered for and pay VAT
- from April 2020 if they pay corporation tax.
Businesses, self-employed people and landlords with turnovers under £10,000 are exempt from these requirements.
Those in employment who have secondary income of more than £10,000 per year through self-employment or property will also be required to use the digital service.
Businesses (including the self-employed and landlords) will be able to keep records of their income and expenditure digitally, and send summary updates quarterly to HMRC from their software (or app).
Those who genuinely cannot get online due to their individual circumstances, such as disability, geographical or other reasons, will be exempted from these obligations.
HMRC’s responses to the MTD consultations, which took place in 2016, were published on 31 January 2017. A summary can be accessed here.
The main issues identified previously by our practitioners are:
HMRC’s estimate of £280 is way off the mark; the estimated transitional costs for an average self-employed client will exceed £650.
For an accountancy practice, the transitional costs will exceed £10,000 in additional software and staff training costs, which it is believed will be difficult to recover in fees.
It takes an accountancy firm an average of two years to find a member of staff who is capable of communicating with clients and understands clients’ needs.
Accountancy practices will need to disengage with low-earning fee clients. These clients will then be in the hands of unqualified bookkeepers or even trying to deal with their affairs themselves, which may make matters worse.
Some accountants are considering bringing forward their retirement date to avoid MTD.
Accountants feel that there should be a total exemption for any business under the VAT limit, as they will generally be one-man bands and use accountants.
Small business clients have suffered massively, both time- and cost-wise, from the imposition of auto-enrolment, business rate changes, constant changes to employment legislation (eg the horrendously complicated shared paternity leave), proposed changes to the VAT flat rate scheme, and now MTD. Many of them are seriously considering giving up as they cannot cope with any more bureaucracy and cannot afford further increases in compliance costs.
The imposition of quarterly reporting is a step too far. Many small businesses struggle to return information yearly and, if quarterly transaction reporting is required, this will lead to extra deadlines and no doubt more errors.
Practitioners believe that the threshold should be at least £150,000 and that the quarterly reporting should be voluntary for all sole traders, landlords and business with fewer than 25 employees.
There is an understanding of the need for change but MTD should be introduced gradually, starting with the largest businesses first as they are better equipped, having accounts departments.
MTD is not going to provide more accurate information to HMRC; it is going to cause additional confusion, work, costs and errors as clients cannot be relied upon to decide what is and isn’t tax allowable.
In conclusion, the main issues for practitioners seemed to be:
- increased costs for accountancy practices and business owners
- mandatory form of record-keeping irrespective of the business’s needs or owner’s capabilities
- training requirements.