Extensive changes to how taxpayers record and report income to HMRC are being introduced under a project entitled Making Tax Digital for Business (MTDfB).
The government has decided how the general principles of MTDfB will operate. Draft legislation has been issued on some aspects and more will be published in Finance Bill 2017.
Under MTDfB, businesses, self-employed people and landlords will be required to:
- Maintain their records digitally, through software or apps
- Report summary information to HMRC quarterly through their ‘digital tax accounts’ (DTAs)
- Make an ‘End of Year’ declaration through their DTAs.
DTAs are like online bank accounts – secure areas where a business can see all its tax details in one place and interact with HMRC digitally.
The End of Year declaration will be similar to the online submission of a self-assessment tax return but may be required to be submitted earlier than a tax return. Businesses will have 10 months from the end of their period of account (or 31 January following the tax year – the due date for a self-assessment tax return – if sooner).
Businesses, self-employed people and landlords with turnovers under £10,000 are exempt from the above requirements, so they will not need to change to digital reporting, they will maintain their current reporting requirements.
Changes announced in the Budget
The government has now announced a one-year deferral from the mandating of MTDfB for unincorporated businesses and unincorporated landlords with turnovers below the VAT threshold. For those that have turnovers in excess of the VAT threshold, the commencement date will be from the start of accounting periods which begin after 5 April 2018.
Cash basis for unincorporated landlords
As part of the wider proposals for Making Tax Digital, the government has decided that, from April 2017, many unincorporated property businesses will compute taxable profits for the purposes of income tax on a cash basis rather than the usual accruals basis.
The cash basis means a business will account for income and expenses when the income is received and expenses are paid. The accruals basis means accounting for income over the period to which it relates and accounting for expenses in the period for which the liability is incurred.
For affected property businesses, the cash basis will first apply for the 2017/18 tax year which means that a tax return for 2017/18, which must be submitted by 31 January 2019, will be the first one submitted on the new basis.
Not all property businesses will move to the cash basis:
- Property businesses will remain on the accruals basis if their cash basis receipts are more than £150,000
- There is an option to elect out of cash basis accounting and to use accruals basis instead
- The cash basis does not apply to property businesses carried out by a company, an LLP, a corporate firm (i.e. a partner in the firm is not an individual), the trustees of a trust or the personal representatives of a person.
Cash basis for unincorporated businesses
The government is also extending the cash basis option for the self-employed and trading partnerships. The cash receipts threshold for being able to move to the cash basis will increase from the current £83,000 to £150,000 and the threshold for having to move back to the accruals basis will increase to £300,000 from April 2017.
Currently, the rules for the calculation of profits under cash basis accounting do not allow a deduction for expenditure of a capital nature, unless that expenditure qualifies for plant and machinery capital allowances under ordinary tax rules. This results in taxpayers needing to consider whether items are capital in nature and whether they qualify for capital allowances. New rules will be introduced that list types of expenditure which will or will not be allowed as a tax deduction.
It is proposed these changes will come into effect from the 2017/18 tax year.
There is no requirement for traders to switch to the cash basis. There are potential problems in adopting the cash basis including restrictions on interest relief on business finance and special calculations which need to be performed on moving to the cash basis. We can, of course, advise you of the issues involved.
For some free and impartial advice download our Spring Budget 2017 Summary for a complete look at the details of the Budget. Our full summary focuses on the issues likely to affect you, your family and your business.
You can learn more about Making Tax Digital for business from gov.uk