The FreeAgent Blog
The snap general election has resulted in a bump in the road for Making Tax Digital (MTD). MTD, along with a number of other tax measures, has been dropped from the government’s Finance Bill 2017, although it could reappear in the Autumn Finance Bill.
The clause to introduce digital reporting for Income Tax has not been included in the final Finance Bill. Under current proposals, unincorporated businesses above the VAT threshold were due to start reporting their business’s financial data digitally to HMRC in April 2018. It’s not yet clear whether this date has been, or will be, pushed back following MTD’s removal from the Finance Bill.
With the UK’s small businesses, freelancers and their accountants eagerly awaiting more information about MTD in draft legislation which was planned for later this year, it’s now likely that they will have to wait a little bit longer.
Will Making Tax Digital be scrapped?
The next Finance Bill is scheduled for the Autumn so this could well be no more than a short delay in setting the proposed MTD timeline in stone - though this will of course depend on which party wins the general election. Just 63 out of 135 clauses in the Bill survived the amendments, with MTD among the 72 clauses scrapped. The amendments are likely due to the government’s preparations for the general election.
As an accounting software developer actively working with HMRC to implement Making Tax Digital, we’re always keeping up to date with the impact the initiative will have on our customers. We recently found out more information of particular interest to sole traders whose accounting year does not match the tax year.
Sole traders whose accounting year end is just after the end of the tax year will have to comply with MTD in 2018
Assuming a sole trader has sales over the VAT threshold, they will be required to file quarterly submissions to HMRC in 2018, even if their accounting year end is just after the end of the tax year. For example, a business with a year end of 30th April 2018 will have their first quarterly filing deadline on 31st July 2018 and a business with a year end of 31st May will have a deadline of 31st August 2018.
This means that businesses with an accounting year end just after the tax year end will be filing quarterly reports under MTD about one year before they’ve filed the return for the previous year.
Sole traders whose accounting year end is just before the end of the tax year will have extra year to comply
If a business makes sales over the VAT threshold and has an accounting year end just before the end of the tax year – for example, 28th February 2018 – their next accounting period will begin on, for example, 1st March 2018. Since the accounting year that starts on 1st March 2018 falls before the mandated roll out of MTD, this business would not have to comply until the start of their next accounting year on 1st March 2019.
This means that a business with a year end just before the tax year end would actually get a whole extra year before MTD compliance becomes mandatory for them.
No penalties in the first 12 months
The good news is that HMRC have also said they won’t be charging penalties for a business’s first 12 months of compulsory MTD, so if you get confused and miss your first filing deadline, it’s not the end of the world.
Also, if your business’s sales are under the VAT threshold, you’ll get an extra year to comply because MTD will start for you in April 2019, not April 2018.
If you are at all unsure of when your business will need to start using MTD, please ask your accountant for help.
Co-authored by FreeAgent's compliance product manager, George Grigolava.
It’s been just over a week since the Self Assessment deadline - and unless you were one of those super-organised people who got their tax return completed months in advance, chances are that you found it stressful trying to get all of your financial information correct and submitted to HMRC on time.
So how can you avoid this hassle next time your tax return is due?
Here’s our top tips for getting your books in order now, so you can avoid a Self Assessment headache next year:
Collect and file everything as it arrives
It’s not uncommon for small business owners to find themselves searching desperately for a vital receipt or bank statement to include in their tax return. So if you had that problem, you can prevent it from happening next time by setting up a file to keep your paperwork in for your tax return.
If you only have a little paperwork, for example interest on one bank account and two dividends each year, then you could use a simple box file. However, if you have more paperwork to deal with, you may want to consider using a lever-arch file with dividers so that you keep different documents separate from each other. Then, as each different piece of important paperwork arrives, put it in your file ready for when you come to prepare your tax return.
Get into good habits - manage your books regularly
If you run your own business, don’t leave the bookkeeping till the last minute! Otherwise you’ll be frantically looking through all of your expense receipts and bank statements next January, trying desperately to work out how much money you’ve made and how much tax you owe.
An effective bookkeeping system can take as little as an hour a week to maintain. Just make every simple task like invoicing, managing expenses and forecasting your tax an integral, but manageable, part of your working life. You might find it’s easier to create a routine by keeping the same time every week - for example an hour on a Monday morning - to look at your current financial position, create, send and chase invoices and log your most recent expenses.
Don’t wait to file your next tax return
You can’t file your tax return for 2015/16 until after 5th April 2017 (the end of the tax year) - but it’s a good idea to file it as soon as you can after that date, once all your paperwork has arrived. This means you’ll have one less job to worry about and can concentrate on running your business.
It’s also potentially good news from a tax point of view, because if your tax and class 4 NI liability for 2016/17 is less than your liability for 2015/16 was, then you may be able to reduce your 31st July 2017 payment on account. Also, if you’re due money back from HMRC, the sooner you file your tax return, the sooner they will repay that to you!
Use the right tools for the job
Spreadsheets are great for some simple tasks, but if you’re using them for small business accounting you’re actually creating more work for yourself. Spreadsheets are limited in functionality, time consuming and insecure, not to mention prone to human error. A new year is a great time to improve your processes and you can trial FreeAgent’s accounting software free for 30 days to see the difference it makes.
When you use FreeAgent you’ll be saving yourself time and effort. You can feed bank transactions into your accounts automatically, track expenses on the go using your smartphone, send your invoices by email and automatically chase up late payments. This will mean your data is always up to date, so you can see a real-time forecast of how much tax you owe and when it’s due (no nasty surprises next deadline!). You can even file your Self Assessment tax return through FreeAgent, so you can look forward to a whole lot less hassle next January!
It’s been quite a day - not only is it the Self Assessment tax deadline but HMRC has today published the eagerly anticipated response to the Making Tax Digital (MTD) consultations.
The consultations, which ran from 15th August to 7th November last year, asked for feedback from interested parties on the government’s plan for ‘a transformed tax system and the end of the tax return’ by 2020. The consultation looked at how digital record keeping and quarterly updates would work in practice.
HMRC received 618 responses from a broad spectrum of stakeholders, especially businesses, including the self-employed and landlords, as well as agents, trade and professional (tax/accountancy) representative bodies, software developers and insolvency practitioners.
Now that the response to the consultation is out, here’s an update on what we know:
More clarity on software and reporting
Sole traders and partnerships will need to send summary data about their business on a quarterly basis through digital means. Taxpayers who are currently using ‘three line accounts’ (where they report only income, expenses and profit) to HMRC will be able to continue submitting only three lines of data under MTD.
The consultation response says that while spreadsheets will be acceptable under MTD, they must meet the following requirements:
- they must include digital record-keeping functionality
- they must provide quarterly information updates
- they must support end-of-year activity
HMRC says that it is likely that spreadsheets will need to be combined with software in some way in order to meet these requirements. The question of how this could work will be explored in more detail during the initial pilot scheme, which begins in April this year.
HMRC has also said it is working closely with the software industry (we are part of this work), to ensure secure and effective MTD-compatible software is available.
Update on timeline for smallest businesses
In FreeAgent’s official response to the consultation we said we’d like to see the smallest businesses given a bit of additional time to prepare for MTD, rather than facing the same deadline as larger companies who will be better equipped to make the changeover.
We recommended that all unincorporated businesses making less than £83,000 - the VAT threshold - should have an additional year to prepare before they have to adhere to the new digital tax regime.
The consultation response has confirmed that MTD is still planned to be rolled out in April 2018. However, the consultation response also announces that the number of businesses and individuals affected, and the impact on them, will be reviewed throughout 2017, as large scale piloting takes place before the mandatory introduction of MTD.
Threshold decision yet to be made
HMRC had previously proposed a £10,000 threshold for exempting businesses from MTD. This was viewed by most respondents to the consultation as too low, suggesting that the imposition of the MTD obligations on businesses with such a low income would be unreasonable.
As there were a wide range of views about the threshold, the government has said that it is going to take more time to consider these issues. According to the documentation, we should expect a final decision on these points later this year.
Stay up to date on Making Tax Digital
You can read the consultation response yourself for more information on the proposals. We’re keeping a close eye on the progress of the Making Tax Digital plans and will be keeping you up to date!
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- A spring clean for FreeAgent Mobile
- Contractors, awaken your inner CEO! An accountant’s point of view
- Pre-election Finance Bill adds to MTD uncertainty
- How MTD will work for businesses with an accounting year that doesn't match the tax year
- New tax year: what has changed?