By Matthew Perry
HMRC’s vision to digitalise the UK tax system is due to officially begin in April 2019 with VAT. Brexit may introduce some complications as the scheduled date of completion for Britain’s exit of the EU is March 29, 2019, although HMRC have not yet issued any news as to delays of MTD. Businesses and landlords will be required to use commercial software to manage their records at HMRC quartlerly, starting with VAT.
- From April 2019: VAT reporting by all VAT registered businesses with turnover above the VAT threshold.
- From April 2020, at the earliest: All other taxes (income tax and corporation tax).
From April 2019, all VAT registered businesses with turnover above the VAT threshold will be required to maintain digital records and will need to send their VAT information to HMRC using third-party commercial software. HMRC’s online portal will remain available to all other businesses that complete a VAT return but have turnover below the VAT threshold.
What we know so far…
|Start date||We expect that a business will have to keep digital records and submit its VAT returns digitally with effect from the first VAT return period beginning on or after 1 April 2019.|
|Exemptions||The exemptions that currently apply for electronic VAT filing will be extended to cover MTD for VAT. There will be an automatic exemption for businesses which are registered for VAT but have turnover below the threshold. These businesses must elect for the exemption not to apply if they wish to submit their VAT information under MTD.|
|Free software||There will be no free software for MTD VAT. HMRC is working closely with software providers to ensure a range of suitable products will be available.|
|Software requirements||Commercial software must be able to:
• Keep records in a digital form.
• Preserve digital records in a digital form.
• Create a VAT return from the digital records.
• Provide HMRC with VAT data on a voluntary basis.
• Receive information from HMRC via the API (application programme interfaces) platform. This will allow HMRC to send ‘nudges’ to the business/agent.
|Spreadsheets||The use of spreadsheets will be permitted although they will need to be combined with third-party commercial software, using APIs, to ensure a seamless flow of data from the business to HMRC (and vice versa).|
|Digital record-keeping requirements||HMRC has stated that the following records will need to be kept digitally:
• Your business name
• The address of your principle place of business
• Your VAT registration number
• A record of any VAT accounting schemes that you use.For each supply you make you must record:
• The time of supply
• The value of the supply
• The rate of VAT charged.If you make multiple supplies at the same time these do not have to be recorded separately. You can record the total value of supplies on each invoice or receipt that have the same time of supply and rate of VAT charged. You must also have a record of outputs value for the period split between standard rate, reduced rate, zero rate, exempt and outside the scope outputs.
For each supply you receive you must record:
If more than one supply is on an invoice you can record the totals from the invoice.
To show the link between the output tax in your records and the output tax on the return, you must have a record of:
To show the link between the input tax in your records and the input tax on your return you must have a record of:
Records must be kept for six years (or 10 years if you use VATMOSS). Digital records will need to be maintained for six years following deregistration.
|Monthly and non-standard returns||Businesses will still be able to submit monthly and non-standard returns under MTD.|
|Periodic updates||Businesses can, if they wish, provide information more frequently than quarterly.|
|Flat rate scheme||Businesses will still be able to use the flat rate scheme under MTD meaning digital records of purchase invoices will not be required (unless they relate to capital items which cost more than £2,000 including VAT).|
|Annual accounting scheme||Users of the annual accounting scheme will continue to send in one annual VAT return rather than quarterly reports under MTD.|
|Retail scheme||Retailers will be able to record gross daily takings rather than each individual transaction|
||The existing error correction rules will apply under MTD. In some cases, amendments can be made through the MTD compatible software.|
Income tax is expected to be mandated in April 2020. Software pilots are ongoing and clients can contact their Account Manager for advice.
What we know so far
HMRC published draft primary and secondary legislation in September 2017. Here is a summary of the main requirements:
|Start date||The original start date for MTDfB obligations was with effect from the first accounting period beginning after 5 April 2018. Due to the delay, obligations are now likely to begin with effect from the first accounting periods beginning after 5 April of the relevant tax year that MTDfB is introduced.|
|Free software||Free software will be available to businesses with the most straightforward affairs. HMRC’s logic is that these businesses are likely to be those that are unincorporated, have income under the VAT threshold, and have no employees. HMRC is currently working with software developers to define the minimum functionality of a free software package that would meet MTDfB requirements. It is proposing that the minimum offering would allow businesses to:
– keep digital records
– generate and send quarterly updates to HMRC
– complete end of year activity to ensure compliance with MTDfB requirements
– include arithmetical error correction
– include a basic level of built-in prompts and nudges and basic help functions, and
– enable information to be sent from HMRC to businesses about their tax liability.
|Spreadsheets||Businesses will be able to continue to use spreadsheets for record keeping, but they must ensure that their spreadsheet meets the necessary requirements of MTDfB and this will involve combining spreadsheets with software.|
|Three line accounts||Under the current system, businesses with annual income below the VAT threshold are eligible to use ‘three line accounts’, meaning only income, expenses and profit need to be reported. Under MTDfB, these small businesses will be able to submit a quarterly update with only three lines of data in the same way.|
||HMRC has confirmed that the requirement to keep digital records does not mean that businesses will have to make and store invoices and receipts digitally. Businesses can continue to keep documents in paper form if they prefer, although transactions will need to be stored digitally. It will still be possible to compile the digital records at quarterly intervals, using a book keeper or other agent if required, provided the information is entered into a digital record keeping system at that stage.|
|Quarterly updates||Businesses will be able to choose their periods of account and their update periods. The basic requirement will be for four quarterly updates a year. The draft legislation does not allow HMRC to require returns more often, but a business can submit extra updates mid-cycle if it wants to submit an extra one. The time window for submission will be from 10 days before the quarter end to one month after.
The information submitted will be either three line account information, or based on the level of detail required by the current system of categorisation in the self assessment return.
|Multiple businesses||We understand that a quarterly return must be filed for each businesses, for example, an individual operating as a sole trader who also has a property business would need to make eight quarterly returns.|
|End of year activity||The deadline for finalising taxable profit for a period will be 31 January following the year of assessment in which the profits for that period of account are chargeable to income tax (the existing self assessment deadline).
This finalisation could be done at the same time as the final regular update for the year is submitted, but for businesses making year-end adjustments or claims to reliefs, it is more likely to be done later.
|Late payment penalties and interest||On 20 March 2017, the government published a consultation document on the proposed model for late submission penalties and on penalties for late payment of tax. The summary of responses, published on 1 December, confirms the announcement at Autumn Budget 2018 that the government intends to proceed with a points based penalty system for late submission. Comments are not being invited at this stage but there will be a technical consultation on the legislation in 2018. The government then intends to apply the new model in phases to different taxes. It is anticipated that the model will first be implemented for VAT, commencing in 2020, following a soft landing period of 12 months.|
Individuals with property income will be required to comply with MTDfB requirements. For jointly owned property, each individual must make a digital record for their share of income and expenditure.
HMRC has decided that a digital record will be required for a property business as a whole rather than property by property. This article will be updated when we have further information about different types of property businesses and how this will work.
Cash basis for property income
A number of changes were introduced from 6 April 2017. Property businesses and landlords should be aware that:
- The cash basis will be the default method for calculating rental profits and losses for individuals unless the landlord opts out, or the gross annual rents exceed £150,000, in which case the accruals basis must be used.
- If the cash basis is going to be used, it must be used for the rental business as a whole, it is not an election on a property by property basis. If a husband and wife each have a rental business, and they own just one property jointly, then they will have to use the same basis for their entire property business as they must use the same basis for their jointly owned property.
- Joint owners of a rental property can take an independent decision as to whether or not to use the cash basis, except where the joint owners are a married couple or civil partners when they must both use the same basis (see above).
- Overseas and UK property businesses will be treated as separate businesses and the decision over whether or not the cash basis is used can be made separately for each business.
- Refundable security deposits will not have to be accounted for under the cash basis until they become rightfully the landlords, at which point there should be an expense to match against it for the remedial work that the deposit was retained for.
- If the landlord also has a trading business, a separate decision can be taken for the trading and property business.
- The timing for receipts and expenditure where the property is managed by your accountant will be the date the cash is received or paid by the agent and not the date that the agent accounts for it to the landlord.
- The cash basis is not available to trustees, personal representatives, companies, limited liability partnerships and corporate firms (one where one of the partners is not an individual).
MTD for corporation tax will not be mandated until April 2020 at the earliest. We are expecting a formal consultation in early 2018.