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By 2020, most businesses, self-employed people and landlords will be required to use software or apps (“digital tools”) to keep their business records and to provide regular updates of information. This first consultation looks at how HMRC intend to make this happen.
Businesses will begin to fall within the requirement to keep digital records and make regular updates for income tax and NIC from April 2018.
Evidence of transactions and trading – copies of invoices, receipts and cash takings records – are currently required as part of the record keeping obligations; these requirements will not change. HMRC state that software will be available that makes it easy to keep evidence of transactions and trading digitally. They note that it is likely that software functionality will be available to scan paper invoices and receipts into the software, using a smartphone camera. These scanned records would be readable by the software.
For many businesses, HMRC expect that the scanned evidence of transactions will be processed by software which will extract the data and automate the accounting entries. However, in cases where a paper invoice has to be entered manually, because, for example, it was too faint or damaged to be scanned, then the user would need to ensure that all relevant data fields have been completed.
HMRC’s preferred approach for unincorporated businesses is that the following data fields are completed for each receipt or expense item. This is the minimum required data to identify and categorise each transaction:
Retailers will record their expenses as above but those who have high volume, low value cash transactions may be able, as an alternative, to complete the following minimum data fields in relation to their income:
Those businesses who take the option of making in-year accruals adjustments, will need software that has the additional functionality to allow opening and closing balances (e.g. stock) over longer periods than the period the transaction falls into, so that profits estimates remain accurate. Where businesses are using software, HMRC want to align MTD records with the existing records that they prepare and maintain. So HMRC’s preferred approach would be for businesses to have the flexibility to make in-year accruals adjustments if they so wish – but there will be no requirement placed upon businesses to do this.
For landlords, the following would need to be captured.
For capital gains on business assets, the data to be captured would be:
When VAT comes into the scope of MTD after April 2019 business’s updates will cover both direct tax and VAT.
Once a business’s software has compiled the relevant data, they will feed it – via the updates – directly into HMRC systems. HMRC have confirmed that the update of income and expenditure will be only summary data. The periodic updates of summary data to HMRC will be made quarterly but could be made more frequently, if businesses choose to do so. VAT registered businesses who are currently required to submit monthly returns would continue on a monthly basis.
When an update is due, businesses will have time to compile this and declare that that period’s data is complete to the best of their knowledge. HMRC proposes to standardise the time limit for businesses to upload their updates at one month following the end of each update cycle.
HMRC believe that maintaining digital records provides the opportunity to begin to give an in-year estimate of taxpayers Income Tax and National Insurance Contributions (NICs) position. It will be ‘estimated’ because the annual nature of profit-based taxes remains unchanged. The final position for such taxes and NICs can only be established after the end of the period(s) of accounts that end in the relevant tax year and once all relevant adjustments relating to those periods have been made
Tax legislation contains a variety of rules on allowable and non-allowable expenses. To generate tax estimates, therefore, transactions will need to be categorised in the accounting software into income and expense types.
As part of their record keeping, businesses will categorise some expenses that are generally not allowable at all for tax purposes – for example ‘business entertaining’ – and the software will aid accuracy by ensuring that they are not deducted from taxable income. For other categories – for example telephone expenses – the proportion that can be allowed against tax varies with individual circumstances and this proportion will need to be entered by the software user. Here, businesses will be able to estimate the deductible percentage at the outset of the year, and confirm it later, rather than have to apply it to individual transactions.
HMRC will work with software developers, helping them develop capabilities to highlight entries and figures that appear to be incorrect and nudge users who seem to be making common errors or prompt users for information that appears to be missing or incomplete. In particular, the use of prompts when categorising expenses as allowable for tax purposes will help businesses receive targeted guidance rather than have to search for it.
Once businesses have made the necessary accounting adjustments to arrive at a profit or loss figure, they then make a number of adjustments required or authorised by tax law to arrive at a taxable profit. For example, these may include the disallowance of depreciation or pension scheme adjustments. In addition reliefs and allowances may be available to the business eg loss relief and capital allowance claims. These items would need to be entered manually into the software to be able to provide an estimate of taxable profit.
HMRC’s preferred approach is to allow flexibility to businesses as to when these tax adjustments are made, although they note that a benefit of performing these earlier would be to provide the business with a more accurate in-year tax estimate.
Having made all final adjustments and made claims to reliefs or allowances to arrive at a taxable profit or loss for the period, businesses will then make a declaration that everything is complete and correct as regards their business. This would be an ‘End of Year’ declaration. HMRC propose that this declaration should be made within nine months of the end of a period of account.
HMRC propose several exemptions from the obligations to make quarterly returns. The consultation confirms that the limited exemption noted in the 2015 Autumn Statement of ‘individuals in employment or pensioners with secondary incomes of less than £10,000 per year from self-employment or property’ is now extended to all unincorporated businesses and landlords with annual incomes below £10,000. HMRC also proposes to defer implementation by one year for a limited group of businesses and landlords with annual incomes above £10,000 but below a defined threshold. This defined threshold has not yet been defined for this deferment. There will also be further exemptions for charities and community amateur sports clubs and those taxpayers who cannot engage digitally.
Addison & Co