The Headlines
Under Making Tax Digital (MTD) businesses, the self employed and landlords will be required to:
- keep digital accounting records; and
- use accounting software to make quarterly reports of income and expenses to HMRC.
These requirements are set to be phased in beginning from April 2018.
There are still many unanswered questions about the practicality of MTD but it is happening.
The most important and welcome change announced in the Spring 2017 Budget is that unincorporated businesses and landlords with turnover below the VAT threshold will be given a one year deferral not to have to comply with MTD until April 2019.
Those with low levels of sales or rents will be exempt from making quarterly reports and the Government appears to have confirmed that this minimum turnover threshold will be £10,000. It remains to be seen whether this threshold will be increased. We await the final legislation for clarity on this key point.
Those in employment who have secondary income of more than £10,000 per year through self employment or property will also be required to comply with MTD.
Quarterly Reporting
The most important and welcome change announced in the Spring 2017 Budget is that unincorporated businesses and landlords with turnover below the VAT threshold will be given a one year deferral not to have to comply with MTD until April 2019.
Those with low levels of sales or rents will be exempt from making quarterly reports and the Government appears to have confirmed that this minimum turnover threshold will be £10,000. It remains to be seen whether this threshold will be increased. We await the final legislation for clarity on this key point.
Those in employment who have secondary income of more than £10,000 per year through self employment or property will also be required to comply with MTD.
Digital Record Keeping Under MTD
MTD will make electronic record keeping mandatory for businesses and landlords. You will be permitted to use spreadsheets to record day to day transactions however to make MTD reports the data is likely to have to be transferred into MTD compliant accounting software. We envisage that most businesses will need to make at least some changes to the way they record and report their financial information. We can discuss how your accounting systems may need to change to prepare for MTD. This can include an assessment of your current level of computerisation to find out how much help you might need from us to get ready. We are also in a position to advise you on cloud based accounting software as now is a good opportunity to consider changing to a digital system.
Digital Exclusion
The Government has confirmed that those who genuinely cannot get online due to their individual circumstances such as disability, age, religious or geographical reasons will be exempt from the record keeping and quarterly reporting requirements described above and HMRC will provide non digital alternative options to them.
Revised Cash Basis
Reporting income and expenses under MTD will be easier for businesses who draw up their accounts using the cash basis. This is a basic form of accounting which suits certain small unincorporated businesses.
Currently, in order to use the cash basis you must be a trading business not a limited liability partnership or property investor with turnover not exceeding the VAT registration threshold. You must switch to a traditional accruals basis of accounting once your turnover exceeds twice the VAT threshold.
The entry and exit thresholds for the cash basis will increase to £150,000 and £300,000 respectively on 6 April 2017. However, other restrictions remain including a block on setting losses against the trader's other income and a £500 cap on the amount of interest which can be deducted per year.
Revised Cash Basis For Property Businesses
Individual landlords will be expected to use a special form of the cash basis from 6 April 2017 where their annual rental income does not exceed £150,000. If you do not want to use this cash basis for your property business you will have to opt out by checking a box on your Tax Return.
All individual landlords (not companies) who let residential property from April 2017 will have restrictions imposed on the amount of interest and finance charges they can deduct each year. These restrictions will equally apply to landlords using the cash basis. However, cash basis landlords will be subject to an additional restriction. The deduction for interest and finance charges will be proportionally reduced if the total value of the outstanding mortgages connected to the property business exceeds the market value of the let properties at the end of the year.
Conclusion
MTD is now not far away but we want to reassure you that there is nothing to worry about. We can help you start to plan for quarterly reporting and digital record keeping as and when required. When further details are available we will of course provide you with more information.
In the meantime please contact us if you have any questions.
