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MTD for businesses

HMRC's vision to digitalise the UK tax system is well underway. Businesses and landlords will be required to use commercial software to maintain their records and to update HMRC quarterly, starting with VAT.

Timeline for MTD

  1. From April 2019: VAT reporting by all VAT registered businesses with turnover above the VAT threshold.
  2. From April 2020, at the earliest: All other taxes (income tax and corporation tax).

VAT

Page last updated

9 October 2017

From April 2019 all VAT registered businesses with turnover above the VAT threshold will be required to maintain digital records and will need to send their VAT information to HMRC using third party commercial software. HMRC’s online portal will remain available to all other businesses that complete a VAT return but have turnover below the VAT threshold.

Who's in?

MTD for VAT will apply to VAT registered businesses with turnover above the VAT threshold. This includes unincorporated businesses, companies, LLPs, and charities. Businesses registered for VAT but with turnover below the VAT threshold can opt in and file their VAT information via MTD if they wish.

What we know so far...

 
 
Start date It is not yet clear when exactly a business will fall within the MTD for VAT regime but we expect it will be based on the first stagger period starting on/after 1 April 2019.
Exemptions  The exemptions that currently apply for electronic VAT filing will be extended to cover MTD for VAT. There will be an automatic exemption for businesses which are registered for VAT but have turnover below the threshold. These businesses must elect for the exemption not to apply if they wish to submit their VAT information under MTD.
Free software
At this time we understand there will be no free software for MTD for VAT. HMRC is working closely with software providers to ensure a range of suitable products will be available.
Software requirements

Commercial software must be able to:
Keep records in a digital form.
Preserve digital records in a digital form.
Create a VAT return from the digital records.
Provide HMRC with VAT data on a voluntary basis.
Receive information from HMRC via the API (application programme interfaces) platform. This will allow HMRC to send ‘nudges’ to the business/agent.

Spreadsheets
The use of spreadsheets will be permitted although they will need to be combined with third-party commercial software, using APIs, to ensure a seamless flow of data from the business to HMRC (and vice versa). 
Digital record-keeping requirements

HMRC has confirmed that the requirement to keep digital records does not mean that businesses will have to make and store invoices and receipts digitally. Businesses can continue to keep documents in paper form if they prefer, although transactions will need to be stored digitally. The information that must be reported includes:
• Business name
• Place of business and VAT registration number
• Information about supplies made and received 

Records must be kept for six years (or 10 years if you use VATMOSS). Digital records will need to be maintained for six years following deregistration.

Monthly and non-standard returns Businesses will still be able to submit monthly and non-standard returns under MTD.
Periodic updates  Businesses can, if they wish, provide information more frequently than quarterly.
Flat rate scheme
Businesses will still be able to use the flat rate scheme under MTD meaning digital records of purchase invoices will not be required (unless they relate to capital items which cost more than £2,000 including VAT). 
Annual accounting scheme
Users of the annual accounting scheme will continue to send in one annual VAT return rather than quarterly reports under MTD.
Retail scheme Retailers will be able to record gross daily takings rather than each individual transaction
Amendments
The existing error correction rules will apply under MTD. In some cases, amendments can be made through the MTD compatible software. 

Income tax

While income tax will not be mandated until April 2020 at the earliest we have outlined below what we know about how it is likely to work. Software pilots are ongoing and businesses should speak to their software provider in the first instance.

What does MTD mean for unincorporated business?

The first step for unincorporated businesses will be to consider how they will comply with the new requirement to keep electronic accounting records using commercial software. Landlords receiving income from property will also be required to maintain electronic accounting records and to update HMRC quarterly.

Businesses which have appointed an accountant should discuss the changes, and how they will comply with their tax compliance obligations in the future, with their adviser. Those businesses who have not appointed an accountant will also need to consider how they deal with the more frequent record keeping and reporting obligations.

It is likely there will be some limited exemptions available: for example, those with annual turnover below a set amount (previously £10,000 was suggested) and those who are unable to engage digitally – businesses which consider they are exempt may be required to apply to HMRC for the exemption.

Although the start date for MTDfB for unincorporated businesses has been deferred we encourage businesses to review existing record-keeping practices and discuss with an agent, where one is used. 

What we know so far

HMRC published draft primary and secondary legislation in September 2017 below you will find a summary of the main requirements:

 
 
Start date Under the original MTD timetable, MTDfB obligations were to start with effect from the first accounting period beginning after 5 April 2018. The legislation is now drafted in such a way that the obligations are likely to begin with effect from the first accounting periods beginning after 5 April of the relevant tax year that MTDfB is introduced. 
Free software
Free software will be available to businesses with the most straightforward affairs. HMRC’s working assumption is that these businesses are likely to be those that are unincorporated, have income under the VAT threshold, and have no employees. HMRC is currently working with software developers to define the minimum functionality of a free software package that would meet MTDfB requirements. It is proposing that the minimum offering would allow businesses to:
- keep digital records
- generate and send quarterly updates to HMRC
- complete end of year activity to ensure compliance with MTDfB requirements
- include arithmetical error correction
- include a basic level of built-in prompts and nudges and basic help functions, and
- enable information to be sent from HMRC to businesses about their tax liability.

There will be no free software provided by HMRC for agents. This means that in future, all agents will need to purchase commercial software.
Spreadsheets Businesses will be able to continue to use spreadsheets for record keeping, but they must ensure that their spreadsheet meets the necessary requirements of MTDfB and this will involve combining spreadsheets with software.
Three line accounts Under the current system, businesses with annual income below the VAT threshold are eligible to use ‘three line accounts’, meaning only income, expenses and profit need to be reported. Under MTDfB, these small businesses will be able to submit a quarterly update with only three lines of data in the same way.
Digital record-keeping
HMRC has confirmed that the requirement to keep digital records does not mean that businesses will have to make and store invoices and receipts digitally. Businesses can continue to keep documents in paper form if they prefer, although transactions will need to be stored digitally. It will still be possible to compile the digital records at quarterly intervals, using a book keeper or other agent if required, provided the information is entered into a digital record keeping system at that stage.
Quarterly updates Businesses will be able to choose their periods of account and their update periods. The basic requirement will be for four quarterly updates a year. The draft legislation does not allow HMRC to require returns more often, but a business can submit extra updates mid-cycle if it wants to submit an extra one. The time window for submission will be from 10 days before the quarter end to one month after.

The information submitted will be either three line account information, or based on the level of detail required by the current system of categorisation in the self assessment return.
Multiple businesses We understand that a quarterly return must be filed for each businesses, for example, an individual operating as a sole trader who also has a property business would need to make eight quarterly returns. 
End of year activity The deadline for finalising taxable profit for a period will be 31 January following the year of assessment in which the profits for that period of account are chargeable to income tax (the existing self assessment deadline).

This finalisation could be done at the same time as the final regular update for the year is submitted, but for businesses making year-end adjustments or claims to reliefs, it is more likely to be done later.
Late payment penalties and interest On 20 March 2017, the government published a further consultation document on the proposed model for late submission penalties and on penalties for late payment of tax. We have yet to hear anything further on this, despite responding to HMRC's consultation on sanctions for late submission and late payment published by 20 March 2017. (See ICAEW Rep 68/17)

Simplifying tax for unincorporated businesses

The following measures were reintroduced in Finance Bill 2017-19 which we expect will receive Royal Assent in November 2017.

On 31 January 2017, HMRC published the outcome of the consultation on Simplifying tax for unincorporated businesses. This included a summary of the consultation responses together with the government’s comments and conclusions, and sets out next steps.

Following the consultation, the entry threshold for the cash basis will be increased from 6 April 2017 to £150,000 with the exit threshold set at double the entry limit. For universal credit claimants the entry and exit threshold will be set at £300,000.

HMRC also consulted on the capital/revenue divide and has now published draft legislation to take effect from April 2017.

The proposed exclusions for capital expenditure are:

  • No deduction will be allowed for an item of capital nature incurred on, or in connection with the acquisition or disposal of a business or part of a business.
  • No deduction will be allowed for an item of capital nature incurred on, or in connection with the provision, alteration or disposal of:
    - any asset that is not a depreciating asset;
    - any asset not acquired or created for use on a continuing basis in the trade;
    - a car;
    - land;
    - a non-qualifying intangible asset, including education or training; or
    - a financial asset.

Property income 

Individuals with property income will be required to comply with MTDfB requirements. For jointly owned property, each individual must make a digital record for their share of income and expenditure.

We understand that further to consultation, HMRC has decided that a digital record will be required for a property business as a whole rather than property by property. We are waiting for further information about different types of property businesses and how this will work.

Cash basis for property income

The following measures were reintroduced in Finance Bill 2017-19 which we expect will receive Royal Assent in November 2017.

A number of changes are expected to take place from 6 April 2017. Property businesses and landlords should be aware that:

  • The cash basis will be the default method for calculating rental profits and losses for individuals unless the landlord opts out, or the gross annual rents exceed £150,000, in which case the accruals basis must be used.
  • If the cash basis is going to be used, it must be used for the rental business as a whole, it is not an election on a property by property basis. If a husband and wife each have a rental business, and they own just one property jointly, then they will have to use the same basis for their entire property business as they must use the same basis for their jointly owned property. 
  • Joint owners of a rental property can take an independent decision as to whether or not to use the cash basis, except where the joint owners are a married couple or civil partners when they must both use the same basis (see above). 
  • Overseas and UK property businesses will be treated as separate businesses and the decision over whether or not the cash basis is used can be made separately for each business.
  • Refundable security deposits will not have to be accounted for under the cash basis until they become rightfully the landlords, at which point there should be an expense to match against it for the remedial work that the deposit was retained for.
  • If the landlord also has a trading business, a separate decision can be taken for the trading and property business. 
  • The timing for receipts and expenditure where the property is managed by an agent, will be the date the cash is received or paid by the agent and not the date that the agent accounts for it to the landlord.
  • The cash basis is not available to trustees, personal representatives, companies, limited liability partnerships and corporate firms (one where one of the partners is not an individual). 

Corporation tax 

MTD for corporation tax will not be mandated until April 2020 at the earliest. We are expecting a formal consultation before the end of 2017.