What is Making Tax Digital (MTD)?
Making Tax Digital (MTD) will fundamentally change the administration of the UK tax system. On 13 July 2017 the government announced a new timetable and changes to the implementation, which mean that MTD will not take effect until April 2019 and will only be mandatory at that time for VAT registered businesses over the VAT threshold.
MTD is being rolled out in 2 phases:
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.
MTD for VAT will apply to VAT registered businesses with turnover above the VAT threshold. This includes unincorporated businesses, companies, LLPs, and charities. Businesses registered for VAT but with turnover below the VAT threshold can opt in and file their VAT information via MTD if they wish
While income tax will not be mandated until April 2020 at the earliest we have outlined below what we know about how it is likely to work. Software pilots are ongoing and businesses should speak to their software provider in the first instance.
What does MTD mean for unincorporated business?
The first step for unincorporated businesses will be to consider how they will comply with the new requirement to keep electronic accounting records using commercial software. Landlords receiving income from property will also be required to maintain electronic accounting records and to update HMRC quarterly.
Businesses which have appointed an accountant should discuss the changes, and how they will comply with their tax compliance obligations in the future, with their adviser. Those businesses who have not appointed an accountant will also need to consider how they deal with the more frequent record keeping and reporting obligations.
It is likely there will be some limited exemptions available: for example, those with annual turnover below a set amount (previously £10,000 was suggested) and those who are unable to engage digitally – businesses which consider they are exempt may be required to apply to HMRC for the exemption.
Although the start date for MTDfB for unincorporated businesses has been deferred we encourage businesses to review existing record-keeping practices and discuss with an agent, where one is used.
Simplifying tax for unincorporated businesses
Following consultation, the entry threshold for the cash basis increased from 6 April 2017 to £150,000 with the exit threshold set at double the entry limit. For universal credit claimants the entry and exit threshold is now £300,000.
Finance (No 2) Act 2017 also sets out new rules relating to capital/revenue divide with effect from April 2017:
- No deduction will be allowed for an item of capital nature incurred on, or in connection with the acquisition or disposal of a business or part of a business.
- No deduction will be allowed for an item of capital nature incurred on, or in connection with the provision, alteration or disposal of:
– any asset that is not a depreciating asset;
– any asset not acquired or created for use on a continuing basis in the trade;
– a car;
– a non-qualifying intangible asset, including education or training; or
– a financial asset.
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.
We understand that further to consultation, HMRC has decided that a digital record will be required for a property business as a whole rather than property by property. We are waiting for 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 an agent, 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.