Making Tax Digital will affect most businesses including micro and small businesses. Also affected will be three million individuals who are self-employed, within this category there are approximately 900,000 buy-to-let landlords; 1.6m companies; over 400,000 partnerships and around 600,000 businesses with income from different sources including self-employment and property.
The introduction of quarterly reporting and a subsequent year end reconciliation will be staggered, dependent on the size of the business. By 2021, it will be mandatory for all businesses, with many being introduced in 2019.
Landlords and the self-employed will need to begin quarterly reporting from 6 April 2018. Currently the threshold for this reporting is set at £10,000, although this is under review and will be confirmed later in the year. The £10,000 figure is below the current tax-free threshold for individual taxpayers, which will therefore affect many individuals with small property portfolios.
From 6 April 2018, landlords and self-employed individuals will be required to utilise HMRC’s digital tax service. The gradual introduction will follow in this order:
- April 2018, if profits chargeable to income tax and pay Class 4 national insurance contributions for those with profits over £85,000
- April 2018, untaxed income and rental income in excess of £85,000
- April 2019, remainder of sole traders and rental income
- April 2019, if registered for and pay VAT
- April 2020, for corporation tax payers
Individuals in employment who have a secondary income of more than £10,000 will also need to use digital reporting. The consultation paper stated that the government was yet to confirm if they would exempt the smallest unincorporated businesses from the requirement to keep digital records and report earnings.
The Finance Bill 2017 will set out legislation for digital record keeping, establishing taxable profit and quarterly reporting. It will provide clarity on the following:
- how to keep records of trading and transactions digitally, categorise expenses with help from prompts and guidance in the software
- how Making Tax Digital will be used to establish taxable profit, 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
- the process for quarterly updates, including level of detail, time periods and deadlines for submissions.
- for VAT, these quarterly updates will effectively replace the VAT return
- for income tax and corporate tax these updates will cumulatively build an in-year picture of the business’ tax position, whilst providing HMRC with a deeper view of the overall tax position of individual businesses.
HMRC has stated that landlords will be able to use the cash basis rather than the generally accepted accounting practice (GAAP) as the default method of calculation, unless a landlord opts out or has rental receipts in excess of the threshold. A landlord with more than one property business will be able to choose the cash basis or GAAP for each of their businesses.
The fifth return will require businesses to finalise their returns as an ‘End of Period Statement’. The year-end reconciliation will have to be submitted within 10 months after the fourth quarter end and will finalise the taxable profits of the business for the previous year. A ‘Final Declaration’ will also need to be completed; this will act as an annual tax return. Final details about this fifth return will be confirmed within the Finance Bill 2017. Please note that due to the General Election, this legislation is subject to change.
For individuals within partnerships, they will no longer have to separately provide HMRC with details of their share of the profits and losses from the partnership.
For many landlords, this will involve checking and agreeing the total income for that year, based on the information they have provided by the four previous quarters. 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.