Making Tax Digital: quarterly reporting requirements for businesses and landlords - known information as at February 2017
Quarterly reporting for landlords and the self employed will start from 6 April 2018 although the threshold of £10,000, suggested in the original proposal documents, is still up for review, with the government yet to confirm whether this will be raised to exclude more of the smallest unincorporated businesses and sole traders. This arbitrary figure has come in for criticism as it is even below the current tax free threshold for individual taxpayers.
A decision on both threshold issues will be made by the middle of the year at the latest, but it will definitely have to be taken before the Finance Bill 2017 is laid in July. There is likely to be more consultation on this particularly complex issue.
From next year – 6 April 2018 - businesses, self-employed people and landlords will be required to start using the new digital service.
The key dates are:
• April 2018 if profits chargeable to income tax and pay Class 4 national insurance contributions (NICs);
• April 2019 onwards VAT falls under Making Tax Digital, so anyone registered for VAT will report and pay this through the new system;
• April 2020 for corporation tax payers.
There will be higher costs for businesses with the annual licensing charges for use of dedicated tax reporting software, as well as initial training and deployment costs.
Individuals in employment and pensioners will be exempt from digital tax reporting unless they have secondary incomes of more than £10,000 per year from self-employment or property (this is the proposed limit but has yet to be confirmed).
Legislation will be introduced in Finance Bill 2017 that will set out:
Digital record keeping - how to keep records of trading and transactions digitally, and categorise expenses with help from prompts and guidance in the software.
Establishing taxable profit - how Making Tax Digital will be used to establish taxable profit, including details on how the self-employed and landlords will have to record accounting and tax adjustments for the purposes of arriving at a taxable profit and reporting procedures for reliefs and allowances.
• Quarterly reporting – the process for quarterly updates, including level of detail, time periods and deadlines for submissions. This includes:
(1) for VAT, these quarterly updates will effectively replace the VAT return; and
• (2) for income tax and corporate tax, these updates will cumulatively build an in-year picture of the business’ tax position, while also giving HMRC a much deeper view of the overall tax position of individual businesses.
On the contentious fifth return, defined as ‘End of Year’ activity by the government and HMRC, there are further details about how businesses will have to finalise their taxable profit for a period, as well as reporting deadlines.
The year end reconciliation will have to be submitted within 10 months after the fourth quarter end and will crystallise the taxable profits of that business for the previous year:
• for many businesses, this will involve checking and agreeing the total for that year, based on the information which they have provided in the relevant four quarters; and
• businesses with more complex affairs will be able to add and apply annualised reliefs and allowances for the period as these would not have been reflected in the quarterly reporting updates.
What does it mean to you? Inevitably some sort of software will be required to be used. But will the software you are using be able to file these returns? We simply do not know yet. Spreadsheets can be used, but these must link to other software for upload to HMRC so it is highly unlikely you will be able to carry on using any spreadsheets your are currently using. This is a continuously developing area and we will keep you informed as more information becomes available.
T 01271 375271 or 01237 471881