Mandatory digital record keeping and reporting for business will be phased in from April 2018, with unincorporated businesses with turnovers above the VAT threshold the first to make quarterly reports.
Digital reporting for business
The Making Tax Digital (MTD) proposals represent a major reform of the current tax reporting system and will ultimately have implications for the vast majority of businesses (including property businesses) operating in the UK, regardless of their legal form. The response documents, published in January 2017, confirmed a staggered implementation, with unincorporated businesses having to tackle the new reporting requirements first (see table below).
There is an exception to this timetable for the largest partnerships: those with a turnover of over £10 million will not have to report their profits digitally until 2020. Whilst this is a welcome concession for these businesses, there are many smaller partnerships with relatively complex tax affairs that will still have to report from 2018.
The 2017 Spring Budget seems to confirm that only those businesses with a turnover below £10,000 will be exempt from the requirements, although those with turnovers between £10,000 and the VAT threshold benefit from a one year deferral. The £10,000 threshold was a contentious point during last year’s consultations – a business turning over £10,000 is likely to have profits well below the income tax personal allowance – and the fact that it remains unchanged to date highlights the fact that the smallest businesses are particularly in the MTD spotlight.
HM Revenue & Customs (HMRC) sees the shift to digital record-keeping and quarterly reporting as key to improving the quality of small business records – and an improvement in small business record-keeping as a driver for increased tax. HMRC anticipates that the shift to quarterly reporting will “take out around 10% of error on an ongoing basis”, and forecasts that it will raise an additional £800 million in 2020-21, and more than £960 million for 2021-22.
In addition to the de minimis exemption noted above, the response documents confirmed that the following will be exempt from MTD for business:
- Charities (but not their trading subsidiaries);
- Community Amateur Sports Clubs;
- Lloyds underwriters;
- Exempt Unauthorised Unit Trusts; and
- Property Income distributions for individual shareholders in REITs and PAIFs.
In addition, businesses in insolvency will be temporarily exempt, although there is a clear intention to bring them within MTD in the future.
Businesses may also be exempt where they are ‘digitally excluded’. This definition is based on that currently in use for VAT, and exempts those for whom it is not reasonably practicable to keep digital records, or make digital reports to HMRC, as well as those who are precluded on religious grounds. Remoteness, age, and disability are all explicitly included as possible reasons that digital reporting might not be reasonably practicable.
What does digital reporting mean?
HMRC’s vision is of a shift to a system where tax compliance is integrated into a business’ daily activities rather than a separate exercise carried out purely after the year end. Businesses will be required to maintain digital records and to report summary figures to HMRC at least quarterly. These quarterly reports will then be supplemented by a year end declaration finalising the business’ tax position for the year.
The response documents have provided some details on how this is expected to work in practice. Whilst business records must be kept digitally, this requirement will not extend to the underlying invoices and receipts, which can be kept in whatever format best suits each business. Businesses will be able to keep records on spreadsheets, although these will have to be MTD-compatible (which is likely to mean using them in conjunction with some form of software to enable the actual reporting to HMRC).
Quarterly reports will include a summary of the business income and expenditure for the quarter. This will be broken down into categories based on those currently used in self-assessment tax returns. There will be no requirement to make any required tax or accounting adjustments on a quarterly basis; these can instead be incorporated into the year-end submission.
Where business is carried on through a partnership, one nominated partner will be responsible for making digital submissions on behalf of the partnership. Information from the partnership’s year end submission will then flow through into the individual partners’ own Personal Tax Accounts: individual partners will not have a requirement to make quarterly or year end submissions in respect of their partnership interest.
Partnerships will be required to report all income and expenses (not just business income) on a quarterly basis. They will also need to include details of any capital disposals in their year-end submission.
Filing and payment dates
Businesses will have a month from the end of each quarter to submit their quarterly report. An unincorporated business will have to make its first quarterly report for the first quarter of the first accounting period starting after 5 April 2018.
Year end updates will have to be filed by the earlier of 10 months from the end of the business’ accounting period and the 31 January following the relevant tax year (the current filing date for income tax returns). Depending on its accounting date, a business could, therefore, see a substantial tightening of their year end deadline. For example, a business making up accounts to 30 June 2019 will have to file its year end submission by 30 April 2020 (rather than 31 January 2021 as under the current system).
Payment dates will remain unchanged, although the government has confirmed that it will go ahead with the introduction of a voluntary pay-as-you-go system to allow taxpayers to make payments throughout the year where they wish to.
Other changes for business
The government has confirmed that the following changes, intended to help make MTD reporting more straightforward, will be introduced from April 2017:
- An increase in the thresholds for accessing the cash basis. Businesses with turnovers up to £150,000 will be able to opt into the scheme, with the upper limit being increased to £300,000.
- A new cash basis for unincorporated property businesses with turnovers up to £150,000. Significantly, this will become the default reporting position for qualifying businesses from April 2017: any businesses wishing to continue to use the accruals basis will need to make an election to do so.
Interaction with self-assessment
The quarterly and year end reporting outlined above will apply only to business and property income. Individuals within self-assessment will need to continue to confirm details of their other income, including interest, dividends and capital gains (and business or property income where the business is not required to report under MTD), separately. The deadline for such returns will remain at 31 January following the tax year. Where an individual has both business and other income in a year, they may, therefore, be required to make six submissions to HMRC – four quarterly updates and a year end submission in respect of the business, and a further return in respect of the rest.
HMRC is planning, over the coming years, to make greater use of information from third parties such as banks to pre-populate information in individuals’ Personal Tax Accounts. Much of the detail of how this will work in practice is not yet available, but we expect to see a gradual shift towards individuals corroborating and supplementing information HMRC has collated from various sources via their digital account, rather than completing a self-assessment return from scratch.
The consultation responses, and Budget announcements, have provided some welcome clarity, particularly for unincorporated businesses. The MTD picture is, however, far from complete. The shift to digital reporting is to be accompanied by a new late filing and late payment penalty regime, which is the subject of a separate consultation. The government has promised a further consultation on quarterly reporting requirements for companies and complex businesses, but the Budget was silent on when this might be released. Complex unincorporated businesses – other than the largest partnerships – would, therefore, be well advised to assume for the moment that they will be required to report quarterly from 2018.
What should I do?
Unincorporated businesses (and particularly those with a turnover above the VAT threshold) do not have long to prepare before they are pulled into the quarterly reporting regime: now is the time to lay the groundwork.
Businesses should consider whether they fall within one of the exemptions or deferrals. Where they do not, they should begin to assess the impact of digital record-keeping quarterly reporting on their current accounts and tax processes, and identify the key features that they would require from MTD software. It is worth noting that software capable of handling MTD reporting is currently in development, with HMRC’s public beta test due to start in April 2017: more detail on the various options available, including the promised free software for small businesses, should emerge over the next few months.
We can help you assess the impact on your business and plan for the changes: please get in touch with your usual Saffery Champness partner if you would like to discuss the issues.