Most businesses, self-employed people and landlords will soon have to manage their tax affairs digitally and update HM Revenue & Customs (HMRC) at least quarterly.
The radical reform will spell an end to the annual tax return by 2020 and the government is promoting it as a simplification of the tax system. But it has caused some confusion and concern among those affected.
Many of the details of how Making Tax Digital (MTD) will work have yet to be decided and have been subject to consultation. So far HMRC has announced two exemptions from MTD and these are: all unincorporated businesses and landlords with turnover under £10,000, and anyone who is unable to use digital tools. MTD for income tax and national insurance will start in April 2018.
However, to give smaller businesses more time to prepare, the government has postponed its introduction until 2019 for small unincorporated businesses with income between £10,000 and an upper threshold to be determined.
One issue still subject to consultation is the continuation of ‘three-line accounting’, whereby businesses below the VAT registration threshold currently only have to report income, total expenses and profit. The facility maybe removed or restricted. However, there may be an extension of the cash basis for income tax. HMRC has no plans to offer its own free software, but wants software developers to provide free and low cost software for businesses with the most straightforward affairs.
HMRC has confirmed that quarterly updates need only be summary data. Partnerships may benefit because quarterly updates by the partnership could feed directly into each partner’s digital tax account.
MTD will also enable businesses and landlords to make voluntary tax payments towards their liabilities. Voluntary ‘pay-as-you-go’ (PAYG) sums would sit as credits on a taxpayer’s digital tax account and be allocated against tax, including VAT, liabilities as they become due.
For taxpayers who do not have business or letting income, MTD may remove the need to complete a self-assessment tax return, because HMRC hopes to receive information directly from third parties about a greater range of income types, such as dividends.
Much of the detail remains uncertain, but as all gradually becomes clear we will be here to help you understand and comply with the new obligations.
Capital gains tax: reliefs and timing
It is important to make the most of the various capital gains tax (CGT) reliefs available to taxpayers.
Principal private residence relief (PRR) exempts one home from CGT provided it is used as your main residence. There are various planning possibilities should you own additional properties. If you live in two (or more) properties, then an election can be made as to which one is treated as your main residence. If PRR is available, then the final 18 months of ownership are always exempt.
The decision of which property to elect as your main residence will depend on the amounts of potential gain, lengths of ownership and disposal plans. However, you only have two years after acquiring an additional residence to make the election. If a let property qualifies at some point for PRR, then a further letting relief (of up to £40,000) is available. It might therefore be worthwhile moving into a let property before its disposal.
Disposal of a business
A disposal of a business qualifying for entrepreneurs’ relief benefits from a 10% tax rate.
There is a general one-year qualifying condition, so it might be worth delaying a disposal if not currently met. However, where a sole trade or partnership is being disposed of, it is only the business itself which must be run for one year.
Although the whole business need not be disposed of, it is necessary to dispose of a clearly identifiable part. If a shareholding is disposed of, the company must be a trading company for the preceding year. If this test is not met because surplus funds have been invested in property or other investments, it might be possible to rectify the situation before disposal.
Replacing business assets
Gains on the disposal of certain business assets can be deferred (rolled over) if new qualifying assets are bought. This must be done during the four-year period running from one year before the disposal to three years after. The most common qualifying assets are land and buildings, fixed plant and machinery and goodwill (disposals by individuals only). So plan carefully – it might be worthwhile bringing forward a disposal to match an acquisition within the previous year if no more purchases are planned.
Be warned that CGT is far more complicated than this basic outline, so please contact us for more detailed advice.