Tax

MTD for VAT rules will apply to all VAT-registered clients from 1st April

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On 1st April 2022, Making Tax Digital (MTD), the government’s initiative to implement a fully digital tax system within the UK, will reach a new milestone: all VAT-registered clients will be required to follow MTD for VAT rules. 

What are the rules?

MTD for VAT requires affected clients to keep digital records and file their VAT returns through MTD-compatible software like FreeAgent. Currently, only VAT-registered clients with a turnover above the VAT registration threshold of £85,000 a year are required to follow MTD for VAT rules.

What’s changing?

From 1st April 2022, all VAT-registered clients, regardless of turnover, will be required to follow MTD for VAT rules, and the option to file VAT returns through HMRC’s website will no longer be available. 

The estimated 1.1 million business owners who will be affected by this change, they will need to start using MTD-compatible software to: 

  • store their business records digitally
  • send their VAT returns to HMRC
DMS Posts, Tax

Treasury to simplify Capital Gains Tax 

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Chancellor Rishi Sunak has confirmed that the government will implement some of the recommendations for simplifying Capital Gains Tax (CGT) put forward by the Office of Tax Simplification (OTS)

However, the OTS’ more radical proposals, such as aligning capital gains and income tax rates, will not be pursued.

As well as directing HMRC to improve its CGT guidance to taxpayers, the Chancellor has tasked HMRC with implementing reforms to:

  • Increase the filing deadline for the standalone CGT return on residential property gains from 30 days to 60 days (announced in the Autumn Budget 2021).
  • Extend the time window for no gain/no loss transfers of assets between separating/divorcing individuals by a year (there will be a consultation on this).
  • Expand CGT Rollover Relief to cover reinvestment in the form of enhancing land already owned (there will be a consultation on this).
  • Consider integrating the different ways of reporting and paying CGT into the ‘Single Customer Account’ that HMRC is developing.

In addition to accepting these recommendations from the OTS, HM Treasury is still considering:

  • The idea of a standalone CGT return system online (rather than the current combined income tax and CGT Self-Assessment return).
  • Treating individuals holding the same share or unit trust unit in more than one portfolio as holding them in separate share pools for CGT purposes (which would make calculations simpler and potentially facilitate automated online filing).
  • A review of the practical operation of Private Residence Relief nominations by taxpayers, and raising awareness of how the rules operate.
  • The way CGT exemptions for corporate bonds work.
  • The rules for Enterprise Investment Schemes to remove procedural or administrative issues that prevent their practical operation (the Treasury may carry out a much wider review of these reliefs).

However, there is to be no change to the CGT treatment of a disposal where proceeds are deferred, nor any change to the complex way that gains on foreign assets are calculated (converting values to sterling at each relevant date will continue).

The treatment of housing developments in a taxpayer’s garden will not change, nor will the treatment of a freeholder extending a lease.

DMS Posts

MTD ITSA delayed to 2024

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by Rebecca Cave

Delayed

The government has delayed the start of MTD ITSA to 6 April 2024, with MTD for general partnerships postponed to 2025. The change to the tax year basis has also been delayed until at least April 2024.

In a written statement to the House of Commons on 23 September 2021, it was announced that MTD for income tax self assessment (MTD ITSA) would be postponed yet again to April 2024. 

“We recognise that, as we emerge from the pandemic, it’s critical that everyone has enough time to prepare for the change, which is why we’re giving people an extra year to do so. We remain firmly committed to Making Tax Digital and building a tax system fit for the 21st Century” announced the new financial secretary Lucy Frazer. 

Long time coming

This is the latest in a series of delays and deferrals in the MTD programme, which was proposed by Chancellor George Osborne in late 2015. The MTD start date for small businesses was first planned to be in April 2018, then the focus switched to MTD for VAT. The MTD for income tax programme was to be delayed until lessons had been learnt from the VAT roll-out.

MTD for VAT commenced on time for most VAT registered businesses for VAT periods starting on and after 1 April 2019 but a number of “complex” entities had a deferred start date to 1 October 2019. A similar deferral is now in place for general partnerships (ie not LLPs, mixed or corporate partnerships), with those “ordinary partnerships” due to enter MTD ITSA from April 2025.

There is no indication of when other more complex partnerships will have to join MTD, and we don’t know if the MTD for corporation tax project will start as planned in 2026 or not.

What is the base year?

The turnover for mandation into the MTD ITSA regime remains at only £10,000 per year, much to disappointment of many who were lobbying for a much higher entry threshold.

As the turnover threshold must take into account the taxpayer’s income from all of their sole-trader businesses, plus their rental income, HMRC needs to pull together several figures from the taxpayer’s self assessment tax returns. Only when the tax return totals reach the £10,000 threshold will HMRC issue a notice to file under the MTD regulations.

If MTD ITSA was mandated from 6 April 2023, the turnover test would need to apply to the figures reported in the 2021/22 tax return, submitted by 31 January 2023, and possibly turnover reported in the 2021/22. Both of those years were affected by the pandemic which reduced turnover and rental income for many businesses and landlords.

Local authority grants for businesses liable for business rates would also increase business turnover for those periods. The SEISS grants should not have been included in business turnover, but some taxpayers have reported them as such, leading to HMRC having to make many corrections taxpayers’ self-assessments for 2020/21, and possibly also for 2021/22. 

As MTD ITSA will now start in April 2024 the base year for testing the MTD turnover threshold will be the tax year 2022/23. The turnover figures for that year should not be distorted by Covid-related grants, and hopefully will reflect normal trading beyond the pandemic for most businesses. 

Tax year basis

When the consultation on changing to the tax year basis of assessment was released in July 2021, doubts were raised on whether there was sufficient time to introduce such a fundamental change to tax law before the mandation of MTD ITSA.

It was apparent that HMRC wanted all unincorporated businesses to switch to the tax year basis before the introduction of MTD ITSA in 2023, but this would make 2022/23 the difficult transitional year.

For businesses with an accounting year end that doesn’t approximate to the tax year, more than 12 months of profits would be assessed in 2022/23. This would have a knock-on effect for a wide range of allowances and charges, including NIC, student loan repayments and capital allowances, to name a few. There was just not enough time to write amendments to regulations in all the areas affected before April 2022.    

What’s more using the tax year basis would bring forward the start of MTD ITSA for businesses with a 31 March year end, from 1 April 2024 to 6 April 2023 – which came as a big shock for many accountants and businesses.

The written statement from the new financial secretary to the Treasury, confirmed the change to the tax year basis will not come into effect before April 2024, with a transition year no earlier than 2023. The government will respond to the consultation on reforming basis periods “in due course” but the wording of this statement makes the change to the tax year basis look uncertain.

DMS Posts

MTD ITSA: Your questions answered – part 2

Debonair Management Services Limted

by Rebecca Cave

What are the basic requirements for MTD ITSA?

There are four requirements for MTD ITSA (draft reg 3):

  1. record business transactions in a digital manner
  2. preserve those records for the defined period
  3. provide a quarterly update to HMRC
  4. provide an end of period statement (EOPS) to HMRC 

The records in 1) and 2) comprise data needed to populate the reports required for points 3) and 4), which in turn must be submitted using MTD-compatible software.

The digital means for recording the data does not have to be the same software that submits the data. However, there should be a digital link between the recording software and the submission software. 

What exactly must be recorded?

Each transaction must have these data points recorded digitally:

  • the date of the transaction – the exact time is not required
  • for expenses – the category out of the specified list of expenses (see below)  
  • for income – the trade or property business the income relates to   
  • the amount or value. 

Retail businesses will be able to elect to record daily gross takings rather than every single transaction (draft reg 17), but only if it would be unreasonable for the business to keep digital records of every individual sale. 

In addition, the business will have to record the following permanent information as part of its digital records:  

∙ the business name 

∙ the address of the principal place of business 

∙ whether it uses cash accounting or accruals accounting

Can the client give their accountant paper records to enter into software? 

The taxpayer does not have to record the business data digitally themselves. They can pass this task over to a bookkeeper or to their accountant to make the entries into accounting software, or a spreadsheet.

Although the aim of MTD is to encourage businesses to record their business transactions in real-time, as they occur, there is nothing in the draft regulations that stipulates exactly when the data must be committed into the digital record. As long as the data for the quarter is recorded before the quarterly submission is compiled and sent to HMRC, there is nothing to prevent a bulk recording of transactions every few weeks or months.

However, the longer the delay between the transaction and being recorded digitally, the greater the risk of loss or corruption of data – which is the whole point of MTD (as HMRC would argue).    

Can a spreadsheet be the first entry for digital records?

A spreadsheet can be the entry point for transactional data into the accounting system. However, once that data has been recorded, the MTD regulations stipulate that there should be “digital links” that move the data around the accounting system. This means the data should not be retyped or copied by human hand once it has entered the system. 

Think about where the accounting system starts. That is the point the transaction (sale or purchase) is recorded. It may be convenient to capture transactions using optical character readers, or bank feeds, but that doesn’t have to be the entry point of all the data.  

A business can still issue paper invoices if the information from that invoice is digitally recorded in the accounting system.  

What information is required to be submitted quarterly?

The quarterly submissions will be the totals for the quarter of:

  • sales income for each trade
  • purchases/expenses for each category 

The categories of expenses are expected to be the same as those currently required in the self-employment section (form SA105) and property section (form SA103F) of the self-assessment tax return. More detail will be set out in the final MTD ITSA regulations.

In essence, the quarterly submission is a rough profit and loss account, no balance sheet figures are required. The data for individual transactions are not required.

Can the accountant make changes in the final submission?

This quarterly data dump does not have to be accurate, any misallocation between expense categories can be adjusted at the end of the period statement (EOPS).

It is in the EOPS that the accountant can make any adjustments for capital allowances, losses, reliefs, disallowable expenses, transactions that have been missed or double-counted.  

One EOPS will be required of each trade or property business by 31 January following the end of the tax year. 

Can the taxpayer submit estimated figures on the quarterly submissions?

Yes, if the taxpayer wishes to submit estimated expense figures, or even only the income amounts, in the quarterly submissions, that would be acceptable within the current draft MTD regulations. 

To avoid the risk of a penalty for late filing some form of data needs to be submitted each quarter.   

The quarterly submissions do not contain an accuracy statement. The taxpayer (or accountant) is not required to declare that the quarterly submission is a complete or correct reflection of the net or gross income of the business. 

The taxpayer must make a declaration of accuracy on the EOPS, once all the adjustments for the four quarters have been made.

What will HMRC do with the quarterly data?

The quarterly submission will be used by HMRC to calculate an estimate of the business’s tax liability throughout the year, and that figure will be reflected back to the taxpayer. This is likely to confuse rather than assist the taxpayer as the current timing of tax payments will not be changed (for now).

Will tax payments change to quarterly?

Earlier this year there was a Call for evidence: timely payment, which asked for ideas on how the payment of income tax under self assessment, and corporation tax for small companies, could move to more frequent payment dates based on in-year calculations.

DMS Posts, Tax

MTD for ITSA: Your questions answered

Debonair Management Services Limted

by Rebecca Cave

These answers are based on the guidance produced so far by the professional bodies and HMRC, the draft legislation and consultation documents. The final regulations for MTD for income tax (MTD ITSA) will be published in the Autumn (probably in October), so we can’t be confident of how the rules will work exactly until we see those regs.  

When must a business join MTD?

It is now apparent that there will be a big bang joining date for MTD ITSA on 6 April 2023 for all unincorporated businesses, whatever their current accounting period end.

Changing to a tax year basis from 2023/24 will mean that all businesses will have to report income and expenses that fall exactly into the tax year. Also, the draft legislation to bring about this change deems an accounting period ending on 31 March to be treated as ending on 5 April for tax purposes.

This combination of basis period and deeming provision means that unincorporated businesses will need to enter the MTD ITSA regime from the next accounting period starting on or after 1 April 2023. Thus businesses which draw up accounts to 31 March 2023 will join MTD ISA from 1 April 2023 not 1 April 2024.

It is possible that Treasury Ministers will be persuaded that having all unincorporated businesses joining MTD ITSA at exactly the same time, and reporting to the same quarterly deadlines, will put an impossible strain on HMRC’s systems and resources. We will have to wait and see what the final MTD regulations say when they are released.   

Will the turnover threshold change?

We do not expect the turnover threshold to change in the final MTD ITSA regulations. HMRC has made it clear that all unincorporated businesses with an annual turnover exceeding £10,000 will be required to report income and expenses under MTD ITSA.

This turnover threshold takes into account income from all businesses, trades and property. A person with £6,000 of trading income and £6,000 of rental income will be required to report under MTD ITSA as their total turnover exceeds £10,000.

Will there be any deferral of start date?

Partnerships which only have individuals as partners will have to join MTD ITSA from April 2023.

However, there will be a deferral (for an undefined period) for MTD ITSA mandation for the following categories of partnership:

  • Partnerships containing a corporate partner
  • LLPs
  • Limited partnerships

Will there be any exemptions?

The latest MTD ITSA policy update indicates that the following taxpayers will have full exemption from MTD ITSA:

  • Trusts (including trusts with property income)
  • Estates of deceased persons
  • Trustees of registered pension schemes
  • Non-resident companies 

In addition, some individuals may be able to claim exemption from MTD ITSA on the basis that they are digitally excluded.

We do not have the HMRC guidance for MTD ITSA at this point yet, but VAT Notice 700/22 indicates that if the taxpayer can get any internet access at their home, business or to another location they will not be exempt on the basis of digital exclusion. This takes no account of the speed or reliability of the internet access.    

Any easement?

HMRC has confirmed that there will be no easement for taxpayers attempting to comply with the MTD ITSA regulations in the first year, but a late filing penalty will not apply until four quarterly submissions have been filed late.

There is no information yet on whether penalties will apply for inaccurate quarterly submissions under MTD ITSA. 

The whole system of penalties for late filing and late payment of income tax and VAT is to be revised as set out in FA 2021 ss116-118, schs 24, 25, 26. The changes impose a complex system of points that build up to a financial penalty. It is expected that this new system will be brought in alongside MTD ITSA.

What are the filing deadlines?

HMRC has confirmed that the quarterly filing deadlines for all unincorporated businesses filing under MTD ITSA will be: 5 August, 5 November, 5 February, and 5 May. Those businesses with accounting dates of 31 March or 1, 2, 3, 4 April, will also file by these deadlines, so a business with a 31 March accounting date will have 5 extra days to file.   

The first mandated MTD submission for the first quarter to 5 July 2023 will have to reach HMRC by 5 August 2023, which is a Saturday in the Summer Bank Holiday weekend in Scotland. 

What exactly will be submitted?

The quarterly MTD ITSA submission will consist of total sales income in the period and totals of expenses in defined categories. It is expected that those categories will be aligned with expense totals currently required for the self-employed section of the self-assessment tax return. Quarterly balance sheet statements will not be required.

Any accounting adjustments, for say capital allowances or losses, will be made on the final submission for the year – known as the end of period statement (EOPS).

How will the tax position be finalised?

The EOPS will have to be submitted by 31 January following the end of the tax year. HMRC hope that tax software providers will incorporate the EOPS into the tax software which also compiles and submits the finalisation statement.

It is the finalisation statement, that calculates the tax liability for the year, which effectively replaces the SA tax return. Any sources of income which have not been reported on the quarterly MTD submissions or EOPS is included in the finalisation statement.

Taxpayers who are not within MTD ITSA, but are currently required to submit an SA return (eg to report gains or taxable interest) will continue to submit a SA tax return.

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