Quarterly reporting update – Consultation released by HMRC

Last week HMRC released consultation documents which had more detail on the move to quarterly reporting. We have highlighted some of the main areas of consideration from the consultation. The consultation discusses sole traders and partnerships and how the move to quarterly reporting will affect them.

Who will have to report quarterly and what will be reported to HMRC?

  • Exemptions from quarterly reporting for unincorporated businesses with annual turnover below £10,000. We believe this will be total annual turnover, not turnover per business.
  • Four submissions will be made annually to HMRC for those who need to report quarterly. The fourth submission each year will include any necessary adjustments to figures such as capital expenditure/capital allowances and is described as an “end of year activity” submission in the consultation. The three submissions prior to the end of year activity submission will include sales / expense invoices and bank receipts and payments.
  • Those who genuinely cannot use digital tools will not be forced to do so under Making Tax Digital and will be exempted from the new obligations. HMRC are considering who will be exempted and will release more detail.
  • A consideration to defer the introduction of these new obligations by one year (from 2018 to 2019) for a limited group of businesses and landlords with annual turnover above £10,000 but below a defined upper income threshold. The upper income threshold is to be decided upon.

Changes in late filling penalties and tax payment due dates;

  • Late penalties will change and a new regime will be introduced. The consultation proposes a graduated model with each non-deliberate failure to submit information on time attracting penalty points. Only once the points reach a set level would a penalty be charged. A stronger sanction is outlined for those who are deliberately non-compliant.
  • Voluntary payments are discussed in the consultation and how HMRC will allocate payments. Quarterly reporting can be used to estimate the tax due for the quarter to pay the tax to HMRC. Seasonal fluctuations with businesses and other adjustments such as stock levels, work in progress, capital expenditure, bad debts and other yearly adjustments will not be included in every quarterly report, they will be included once a year in the end of year activity submissions.

 

 Software options;

  • HMRC will not be providing free software for businesses to use to report quarterly.
  • Some software providers will provide free software for very simple submissions but most businesses will have to pick software to use so that they can report quarterly to HMRC.

We have been working with Quickbooks to provide a cost effective solution to clients to enable them to report quarterly to HMRC. Please get in touch if you want to find out more about the Quickbooks online packages.

Property expenses changes in 16/17 tax year

Changes to the way in which landlords deduct costs for replacing furniture and fittings in rented properties from 6 April 16:

 

Who is likely to be affected

Companies, individuals and others, such as trusts or collective investment schemes that let residential properties.

General description of the measure

The Wear and Tear Allowance for fully furnished properties will be replaced with a relief that enables all landlords of residential dwelling houses to deduct the costs they actually incur on replacing furnishings, appliances and kitchenware in the property.

The relief given will be for the cost of a like-for-like, or nearest modern equivalent, replacement asset, plus any costs incurred in disposing of, or less any proceeds received for, the asset being replaced.

Detailed proposal

Operative date

The measure will have effect for expenditure incurred on or after 1 April 2016 for corporation tax payers and 6 April 2016 for Income Tax payers.

Current law

Current law providing for the Wear and Tear allowance is contained in sections 308A, 308B and 308C of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) for Income Tax and at sections 248A, 248B and 248C of the Corporation Tax Act 2009 (CTA 2009 for Corporation Tax).

Proposed revisions

Legislation will be introduced in Finance Bill 2016 to repeal the Wear and Tear Allowance provisions and make new provision for a deduction for the replacement of furnishings.

The deduction will be available in calculating the profits of a property business which includes a dwelling-house. The deduction is available for capital expenditure on furniture, furnishings, appliances (including white goods) and kitchenware, where the expenditure is on a replacement item provided for use in the dwelling.

The amount of the deduction is:

  • the cost of the new replacement item, limited to the cost of an equivalent item if it represents an improvement on the old item (beyond the reasonable modern equivalent) plus
  • the incidental costs of disposing of the old item or acquiring the replacement less
  • any amounts received on disposal of the old item

This deduction will not be available for furnished holiday lettings because capital allowances will continue to be available for them.

 

Considerations – previously payments towards white goods, such as fridges and freezers for rented properties did not gain any tax relief; the only allowance available was the wear and tear allowance. We believe this is a good change, as it encourages landlords to replace items in rented properties and also gives the fair amount of tax relief for this expenditure.

One area of caution is that the new relief from 6 April 16 is available on replacement of items, not on new items purchased.

 

Please feel free to ask us any questions you have about the changes.

 

HMRC “making tax digital”- Update delayed

HMRC were due to release more information in July, after the referendum, to give more detail on the move to quarterly reporting.

The initial document released by HMRC on quarterly reporting stated;

“By 2020, most businesses, self-employed people and landlords will be required to keep track of their tax affairs digitally and update HMRC at least quarterly via their digital tax account. These changes will be introduced for some businesses from April 2018, and will be phased-in by 2020, giving businesses time to adapt.”

Smaller businesses are being required to move to “Making Tax Digital” before larger businesses. We believe that the first quarterly updates will be required by non-VAT registered self-employed businesses and landlords with an accounting period starting after April 2018. All VAT-registered businesses will be brought in from April 2019 and companies from April 2020.

There are many unanswered questions and we were hoping that the consultation due out in July would shed some light on some of the issues that have been raised. So far, the understanding is that in effect, a huge number of people that currently submit tax returns yearly and use spreadsheets, will have to start using software and submitting information quarterly to HMRC.

HMRC said that “following the early change of prime minister, HMRC’s executive leadership will need to be available to ministers at all times during the remainder of the week. “Unfortunately, this means that we will have to postpone the HMRC Stakeholder Conference on Thursday 14 July. We’re sorry for the short notice and inconvenience, and we will be in touch with a new date as soon as we can.”

“The political landscape has rapidly changed this week. We currently intend to publish the MTD consultation documents in the summer but understandably it won’t be this week.”

There has also been suggestions that the dates tax payments are due will change. This question has been put to the treasury to which the response was “no decision has yet been made about changing payment dates.”

So for the moment, we will have to wait for the update to see if there is more information from HMRC on quarterly reporting. We have been in discussion with Quickbooks to see what options are available for clients who currently use spreadsheets, to make sure that we can get the most cost effective solution.

Please let us know if you have any questions.

 

Class 2 National Insurance changes

The way class 2 national insurance is paid has changed. If you are self-employed, you will likely have been paying class 2 national insurance monthly, quarterly, or half yearly. The amounts were collected through direct debits to HMRC (equal to £2.80 per week). 

Now this has changed and the direct debits have all stopped, the class 2 national insurance will be collected in January following the end of the tax year. The first year this will apply to, is the tax year ended 5 April 2016. For self-employed individuals who have stopped paying class 2 national insurance by direct debit, the 31 January 2017 payment due for the tax year ended 5 April 2016 will now include the class 2 national insurance of £145.60.

Please feel free to ask us if you have any questions about this. 

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/331758/tiin-class2-nic.pdf

https://www.gov.uk/self-employed-national-insurance-rates

 

 

Quarterly tax returns…….

When the government released information on their “making tax digital” announcement, it left a lot of questions unanswered. The document said;

“The government will invest £1.3 billion to transform HM Revenue and Customs (HMRC) into one of the most digitally advanced tax administrations in the world. Most businesses, self-employed people and landlords will be required to keep track of their tax affairs digitally and update HMRC at least quarterly via their digital tax account, reducing errors through record keeping.

HMRC will ensure the availability of free apps and software that link securely to HMRC systems and provide support to those who need help using digital technology. This will not apply to individuals in employment, or pensioners, unless they have secondary incomes of more than £10,000 per year.”

This begs the question, how will submitting four rather than one tax return a year be better for tax payers? The idea is that in using cloud based software, tax payers will enter their invoices and bank transactions into the software, which will enable them to submit the information once a quarter to HMRC to calculate the tax due for the quarter.

This will mean then, for self employed individuals and others that have rental income in the year, if they are using spreadsheets to record their transactions, they will need to move on to software, such as Quickbooks or Xero. With current tax legislation and generally accepted accounting principles, there are a number of year end adjustments that are made before submitting returns to HMRC. It is not yet clear how this will be done, if these adjustments will be made once a year or every quarter. When I spoke to Quickbooks staff at the Accountex convention in London, they said that Quickbooks will eventually move away completely from a desktop based solution to a cloud based solution, which appears to be something that is happening in the whole industry.

The government were due to announce more information at the start of June, but due to the referendum, they have put it back to the beginning of July.

We will wait to see what they say. For anyone that uses spreadsheets currently and wants to find out more about “making tax digital,” please feel free to contact us.

 

 

HMRC extend data gathering powers

HMRC have focused on extending their data collecting powers to keep up with changing technology and payment methods.

Legislation gives HMRC the power to collect a wide range data about taxpayers financial affairs. Since 2014 HMRC has been able to collect data on credit and debit card transactions to help them identify traders who are not registered for VAT and should be, or traders who are not declaring income on their tax returns. HMRC also have powers to issue separate information notices to individuals and third parties who hold data on tax payers.

 

HMRC are now seeking to extend their bulk data collection powers to cover new payment methods and will also collect data from

  • Electronic payment providers and
  • Business intermediaries who facilitate transactions, usually online.

Data which HMRC can require includes the account holder’s

  • Name
  • Address
  • Telephone number
  • Email address
  • Website address
  • National Insurance number
  • VAT number
  • Unique Tax Reference (UTR)
  • Other identifying information
  • Bank account details
  • Status as individual, partnership or limited company