Making Tax Digital – Update from Chancellor in Budget

More on Making Tax Digital

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.

Landlords’ options under Making Tax Digital

Cash basis will become the default option for calculating taxable profits.

It’s stated that landlords will be able to use the cash basis rather than generally accepted accounting practice (GAAP) as the default method of calculation, ‘unless a landlord opts out or has rental receipts for the business in excess of the threshold in which case they will continue to use GAAP’. It is stated that the measure will have effect for the ‘tax year starting 2017 to 2018 onwards’.

The calculation of taxable profits for property business income is calculated in accordance with GAAP and is adjusted for income tax purposes. The proposed change will see the cash basis being the default option where the cash basis receipts of that business don’t exceed £150,000.

The HMRC notes highlight that landlords ‘will continue to be able to opt to use GAAP to prepare their profits for tax purposes’. Landlords with more than one property business will be able to choose the ‘cash basis or GAAP for each of their property businesses’.

It is also highlighted that landlords who have ‘overseas property businesses alongside a UK property business will be able to make the decision about whether using GAAP is more appropriate for either’. It is also stated that landlords ‘other than spouses or civil partners who jointly own a rental property will be able to decide individually’.

In addition, the note highlights that:
capital allowances are not available
landlords will be able to claim the upfront cost of capital items used in the business
interest expense will be treated consistently between those using the cash basis and those using GAAP.

#Berkshire Accountants Ltd