DMS Posts, Tax

MTD: Monthly reports may be needed

Four million taxpayers will need to submit quarterly plus end of period reports for each trade and property business, leading to multiple submissions for different periods under MTD for income tax.

MTD for income tax has now morphed into MTD for income tax self-assessment (ITSA), and HMRC are now referring to the regime as ‘MTD ITSA’.

HMRC estimates there are four million businesses that pay income tax, but who are not VAT registered, so they are not already keeping digital business records. All of these businesses need to enter the MTD ITSA regime from April 2023 (see start dates below).  

What reports are required?

For each trading or property business the taxpayer operates they will have to submit a quarterly report of income and expenses in defined categories. The taxpayer will also have to submit an end of period statement (EOPS) for each of those businesses (the fifth report).

The MTD ITSA regime will incorporate all of the reporting required on the current SA tax return into a ‘finalisation’ or ‘crystallisation’ statement. This statement will bring together all of the information included in the MTD reports, plus other taxable income (such as investment and employment) to calculate the tax liability for the tax year. 

The draft MTD ITSA regulations (see developer hub policy update) indicate that individual landlords must submit separate quarterly updates for each category of property business (eg long term letting, FHL, overseas lettings).

All property businesses must use the tax year as the accounting basis period, but trades can use any accounting period. The quarterly reports are due exactly one month from the end of each of the quarter, which contrasts with one month and seven days after the end of the quarter for VAT.

The EPOS and the finalisation statement are both due by 31 January after the tax year end.

Example 1

Shaun is a self-employed builder who makes up his accounts to 30 April, and his VAT returns are submitted for the quarters to the end of April, July, October and January. He also lets two residential properties, one as furnished holiday accommodation (FHL) and the other as a long term let.

Shaun’s pattern of MTD reporting will be:

MonthProperty businesses: 5 April yearVAT returns Building trade: 30 April year endEOPS and year end finalisation
January   31 Jan x 3 EPOS31 Jan: Finalisation
February5 Feb x 2 28 Feb 
March  7 March  
April    
May5 May x 2 31 May 
June 7 June  
July    
August5 August x 2 31 August 
September 7 Sept  
October    
November5 Nov x 2 30 Nov 
December 7 Dec  
Total reports8444

Shaun needs to submit a quarterly MTD report for each of his property businesses and his building trade, an EOPS for each of those businesses, four VAT returns and a finalisation statement – a total of 20 reports to HMRC for each tax year.

Start dates

The mandation dates for MTD ITSA were announced in July 2020 and will be follows:

  • Existing property income: 6 April 2023
  • Existing trading income: first accounting period starting on or after 6 April 2023
  • New property business: 6 April following the start date
  • New trade: start of accounting period in year three

Individuals who have a combined gross income from all trades and letting businesses in excess of £10,000 per year are within scope of MTD ITSA. These people may not be liable to pay any income tax as the entry test is based on gross income not net, and the personal allowance will cover small profits up to at least £12,570.

Example 2

Jade lets her first investment property from 1 June 2023, and also starts a new trade as a self-employed diving instructor from 1 May 2023, making up accounts to 30 April. She will have to come within the MTD ITSA regime from these dates:

  • Property business: from 6 April 2024
  • Self-employed trade: from 1 May 2025

Combinations and mismatches

If Shaun in Example 1 uses the same accounting/MTD-compatible software for all of his property businesses and his building trade, that smart software may combine some of his MTD reports into a single submission. For example, his quarterly reports for his property businesses may be submitted together and all three EOPS may be delivered in one action.

HMRC intends to give businesses some flexibility to align their quarterly reporting periods, but this point is still being debated between the professional bodies and HMRC. The quarterly periods must be matched to the accounting basis periods.

It is clear that some simplification of the tax rules for accounting basis periods is required to make the implementation of MTD run smoothly for small businesses and landlords. The ICAEW has called for this in its Budget representations.

Change the tax year

ICAEW has also asked that the tax year end be changed to align with the end of a calendar month. Moving the year end back from 5 April to 31 March would be easiest to achieve.

However, Anita Monteith has argued more boldly in the FT that the UK should follow the Irish example and change its tax year to the calendar year, to make it more competitive internationally. The Republic of Ireland changed to a 31 December tax year end in 2002 when it joined the Euro.

DMS Posts, Other, PAYE, Tax

Inside and outside IR35: What you need to know

With rules set to change in the private sector from 6 April 2021, it’s important to understand what implications this might have on your contracts and tax bills.

The responsibility for determining your status in the private sector will shift to your client, if they are eligible. If you believe you are outside IR35, you’ll need to ensure your freelance contract and working practices clearly demonstrate your relationship as a contractor.

What’s the difference between inside IR35 and outside IR35?

Your status impacts the employment taxes you will pay.


Inside IR35
  • You pay the same tax and National Insurance as you would if you were an employee. 
  • You are only an employee for tax purposes, you have no employment rights.
  • Your client will be required to pay the necessary tax and NIC, which includes Employers’ NIC and the apprenticeship Levy where applicable.
Outside IR35
  • Nothing changes. You are paid a flat fee as normal and are responsible for managing your own taxes.

How and who pays the appropriate taxes largely depends upon a number of key factors: control over how the work is done, whether your personal service is required and mutuality of obligation. However, how you are set up in business can also be an influencing factor.

Not sure whether your contract is inside or outside?

You can check your employment status for tax using this tool from HMRC

Having a tax specialist review your contract can give you peace of mind. FSB members have access to a contract review service, for an additional fixed fee.

My last contract was outside IR35, but this one is inside?

IR35 applies on a contract by contract basis, so your status may differ depending on the contract agreed.

To remain compliant, you’ll want to brush up on your understanding of the new rules in the private sector.

If you don’t agree with your client’s decision about your employment status the legislation gives you the right to submit a written challenge to the Status Determination Statement and requires the end client to respond within 45 days to further explain their reasoning.

DMS Posts

The post-transition border plan

The UK government’s Border Operating Model (BOM) is the plan detailing the processes and systems, across all government departments, that will be used at the borders of Great Britain from 1 January 2021.

What will this mean?

Customs declarations

Import VAT

  • VAT will be levied on consignments of EU goods exceeding £135 in value following the same rates and structures as are applied for the Rest of the World imports.
  • VAT-registered importers will be able to use postponed VAT accounting and different rules will apply to consignments valued less than £135.

UK Global Tariff

  • Importers will need to pay customs duties under the new UK Global Tariff, unless the import is covered by the preferential terms of a UK free trade agreement.
  • Duty will need to be paid on the basis of the origin, classification and customs value of the imported goods.

Exporting

Safety and Security declarations

  • Not required for EU-to-GB standard goods until July 2021
  • Products of animal origin will require pre-notification of relevant health documentation from April 2021. 

Temporary Storage and Pre-lodgement models at ports

  • Temporary Storage model:  imported goods can be stored at the frontier for up to 90 days before being declared to customs
  • Pre-lodgement model: a customs declaration will be submitted in advance of boarding on the EU side.

Goods Vehicle Movement Services

  • Will be used in Northern Ireland from 1 January and for imports to Great Britain from 1 January for transit movements and thereafter as checks are introduced.
  • Full use from July 2021.
  • Goods moving between GB, NI and onto the EU will be governed by the Northern Ireland Protocol.
DMS Posts

Brexit: how small businesses can prepare

The road to Brexit hasn’t been the smoothest journey for small businesses so far and as the new year approaches, there are a number of new rules for businesses on the horizon. Despite some remaining uncertainty surrounding the details of Brexit, we know that the UK’s transition period for leaving the EU will officially end on 31st December 2020 and will not be extended.

As a result, your business may need to make a few changes from 1st January 2021 onwards. Most of these changes will need to take place regardless of the agreement the UK reaches with the EU on its future relationship because the UK will definitely be leaving the single market and customs union.

If any of the following conditions apply to your business, you’ll need to make sure you comply with any relevant new rules from 1st January:

If you sell goods to the EU then you must prepare for new customs procedures.
If you travel to the EU for work purposes, you will need to check if you need a visa or work permit and then apply if necessary.
If you employ overseas nationals, you will need to prepare your business for the implementation of a new immigration system.


If you run a UK business that receives personal data from contacts in the EEA, you may need to take extra steps to ensure that the data can continue to flow legally at the end of the transition period.


If you provide services in the EU, you must ensure that your qualifications are recognised by EU regulations in order to be able to practise or service clients in the EU.


Every business will have different rules to comply with, so the government has created a handy tool to help you identify the actions that your business needs to take. As January is rapidly approaching, we’d strongly recommend that you find out what your responsibilities are as soon as possible.

DMS Posts

CJRS extension: Get the details right

The policy paper that accompanied Chancellor Rishi Sunak’s announcement on 5 November provides us with a little more information, but it promises that more guidance will be produced on Tuesday 10 November. A further announcement will detail whether the full 80% employer funding will continue from January to the end of the scheme.  

Weekly payrolls

The first weekly payrolls for November have already been run, when there was no indication of what reference pay or usual hours calculation was to be used for employees who had not been furloughed previously. Hopefully the new guidance will allow corrections to be made next week and before the vast majority of monthly payrolls are run.

Pay reference periods

For employees eligible for the previous iterations of the CJRS, the reference pay remains as the calculation for CJRS.2 that ended on 31 October. This is the case even if the employer did not make a claim for the employee.

Other employees may be now eligible for CJRS.3 as they either:

  • had earnings for 2019/20 reported on a full payment submission (FPS) from 20 March 2020 to 19 April 2020 (19 April being the deadline for 2019/20 submissions); or
  • had earnings for 2020/21 reported on a full payment submission from 6 April 2020 to 30 October 2020

The pay reference period will be:

  • for fixed-rate employees the last pay period on or before 30 October 2020.
  • for variable pay employees the average over the period from 6 April 2020 to last pay period on, or before, the day before they were furloughed under CJRS.3.

Note: Fixed-rate employees can be treated as variable if they have lots of fluctuating additional pay such as overtime.

Is it fair?

The calculation of reference pay appears more generous for variable-paid than for fixed-rate employees. Any pay rises from 1 November to start of furlough will be ignored for fixed rate employees, but pay will be included in the average for variable pay employees over (potentially) a much longer period if the business doesn’t need to furlough immediately under CJRS.3.

Conversely there doesn’t appear to be the option to use the pay period before the start of furlough if that was higher than the average for a variable pay employee.

There is also a strange outcome where an employee began work in October, as a fixed rate employee on say national minimum wage; they would be furloughed on £8.72 per hour, whereas a colleague employed since February 2020 would only be furloughed based on £8.21 per hour.

Owner managed businesses

Directors who reported their annual payment for 2019/20 to HMRC after 19 March 2020 will now be included in CJRS.3 having been excluded up until 31 October. The rate of earnings reported in the period from 20 March to 30 October 2020 can be claimed, subject to the £2,500 monthly pay cap. Remember this £2,500 cap is pro-rated to the number of furloughed hours as a proportion of usual hours.

With the ability to flexi-furlough being in place from 1 November 2020 this will be more attractive to such directors, but we still face the conundrum of trying to be able to evidence usual hours to support the claim.

Usual hours

For previously eligible employees the usual hours remain as per the calculation for CJRS.2 that ended on 31 October. This is the case even if the employer did not make a claim for the employee.

For newly eligible employees, usual hours will be:

  • for fixed rate employees the contracted hours worked in the last pay period ending on or before 30 October 2020.
  • for variable pay employees the average hours worked between 6 April 2020 and the day before they were furloughed under CJRS.3

The usual hours are based on calendar days in the claim period.

Claim deadline

One of the most concerning differences from the CJRS.2 is the fact that claims for the prior month have to be made by the 14th day of the following month. Thus, claims up to 30 November have to be claimed by 14 December.

This will put an enormous burden on employers and agents and may prove impossible where payments for the month of November are paid in arrears in December with timesheets having to be collated. We will have to see whether an estimated claim is worth making by the deadline, and whether HMRC will allow corrections after 14th of each month.

Claims will be able to be made in advance (I assume as now 14 days before payday) and will pay out within six days. The new claim portal will open at 8am on 11 November.

Employers are not required to submit their RTI returns before making a claim, so we appear to have returned to the ‘pay now check later’ model. There is also no mention in the policy paper of informing employees that their employer has claimed on their behalf as had been the intention with the JSS, but employers using the scheme will be named.

Rehires

Individuals who had a date of leaving reported after the 23 September 2020 can be reinstated if the employer so chooses.

Contract changes

The government has recognised that it has been impossible to put in place furlough agreements from 1 November, given that employers were not aware what the reference pay period would be. Contract changes can be backdated to 1 November 2020 but must be issued by 13 November 2020, but as the new guidance is promised on 10 November this could be challenging.

Claim periods will cover a minimum of seven days and I assume orphan periods will be a feature of the new scheme, where a week split is over two calendar months, meaning there will be less than seven days in the claims. This should be okay as long as it’s preceded or followed by a seven day period of furlough.

Schemes scrapped

The job support scheme will not be coming into effect this tax year and the job retention bonus has been scrapped.

What hasn’t changed from CJRS.1 and CJRS.2?

  • All employment rights continue during furlough, eg accrual of holiday pay and leave.
  • Employees can be included in a CJRS claim when they are off sick, and must be paid at least the level of SSP. Employers can choose to either pay SSP only or furlough pay, and clearly the latter is more beneficial to the employee and employer.
  • Employers can top up furlough pay but aren’t obliged to.
  • Employers will still be liable for employer’s NIC and pension contributions for any unworked hours
  • Employees can train, volunteer, or work for another employer whilst furloughed