The government is set to phase in its landmark digital tax initiative, Making Tax Digital, between 2018 and 2020.
Making Tax Digital for Business (MTDfB) is a key part of the new government initiative. From April 2018 many unincorporated businesses and landlords will be required to register, file, pay and update their financial information using a secure online tax account at least quarterly. Following consultation, the government has now made a number of key decisions.
Provision of MTDfB software
Free software will be provided to businesses with the ‘most straightforward’ tax affairs. Firms will be required to use appropriate software for the needs of the business.
Businesses will also be permitted to use spreadsheets for their record-keeping but these must meet the relevant requirements of the MTDfB scheme. The requirement to keep digital records does not mean that firms will have to make and store receipts and invoices online.
Changes to cash basis accounting
The cash basis entry threshold for unincorporated businesses has increased to £150,000. The exit threshold has risen to £300,000 – double the revised entry threshold.
HMRC is set to introduce a cash basis for unincorporated property businesses, which will serve as the default accounting method. However, there will be a choice to opt out and make use of an accruals basis. A maximum entry limit will be introduced, which is set at £150,000.
Two of the key tasks required of businesses are to report summary information to HMRC quarterly and include an ‘End of Year’ statement.
Most will be required to use software or apps to keep digital business records and make updates to HMRC at least quarterly in respect of their income tax, VAT and NICs online. When an update is due, taxpayers will have a period of one month to compile and submit their financial records. Businesses will be required to conclude their end of year activity and send their information to HMRC by either 31 January or 10 months after the last day of the period of account (whichever is soonest).
Exemptions and deferments
An exemption from MTDfB for businesses and landlords with income below £10,000 had previously been announced. Charities (but not their trading subsidiaries) will also be exempted from the need to keep records digitally.
The government also outlined that, for partnerships with a turnover above £10 million, MTDfB will be deferred until 2020.
Further changes were unveiled in the 2017 Spring Budget, including a one year deferral from the mandating of MTDfB for unincorporated businesses and landlords with turnovers below the VAT registration threshold (£85,000 from 1 April 2017). They will now be required to start using the new digital service from April 2019.
Penalties and fines
Taxpayers will be given at least 12 months to familiarise themselves with the changes before any late submission penalties are applied.
Please note that following Theresa May’s decision to call a snap General Election on 8 June, the government removed legislation to implement MTD from the Finance Bill 2017. The clauses are likely to be reinstated after the election.
As your accountants, we will be keeping you up-to-date with the latest MTD developments.