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Making tax digital responses and draft legislation

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On 31 January, HMRC published its much-anticipated responses to the six ‘making tax digital’ consultation documents published in August 2016 (see HMRC received over 1,100 written responses and over 1,200 responses to the online survey in its short guide to the consultations. The government has confirmed it will legislate in Finance Bill 2017 for the first part of these ‘making tax digital: bringing business tax into the digital age’ reforms, with some changes from the consultation proposals. The income tax elements of the reforms will commence from April 2018. No firm decision will be made on the initial exemption threshold and whether to further defer the changes for some small businesses until the final legislation is laid later this year.

HMRC has now published three new sets of draft primary legislation for the Finance Bill to implement the core reforms and the simplified cash basis for unincorporated businesses. The closing date for comments on this draft legislation is 28 February 2017.

The core primary legislation is set out in a new clause, ‘Digital reporting and record-keeping for business: income tax’, which inserts a new schedule into TMA 1970. This defines those businesses in scope, including sole traders and landlords, with specific exemptions for:

  • entities, including trustees of charitable trusts and trustees of exempt unauthorised unit trusts; and
  • activities, including underwriting at Lloyd’s and holding shares in REITs.

There is also an exemption for the digitally-excluded. Final versions of these provisions and the remaining primary legislation covering additional areas, including compliance powers, low income exemption, insolvent businesses exemption, deferral until 2020 for larger partnerships with a turnover above £10m, and other consequential amendments, will be published in Finance Bill 2017.

The other draft primary legislation concerns proposals to extend and simplify the cash basis. This legislation comprises:

  • Calculation of profits of property businesses (clause and schedule): providing for the cash basis to be used to calculate the profits of property businesses with receipts not exceeding £150,000 (excluding companies, limited liability partnerships, corporate firms, trustees of a trust, or personal representatives of a person, certain shares of joint property income and where a balancing adjustment arises for business premises renovation allowances).
  • Cash basis: treatment of capital (clause): this clause replaces a general prohibition on deductions for capital expenditure, with a limited disallowance of capital expenditure incurred in relation to assets which are not used up in the business over a limited period, including acquiring or disposing of a business, education or training, land, financial assets, ‘non-qualifying’ intangible assets and cars.

HMRC has also published secondary legislation on the simplified cash basis. The draft Income Tax (Relevant Maximum for Calculating Trade Profits on the Cash Basis) Order 2017 will increase the threshold for the cash basis from £83,000 to £150,000, with the exit threshold set at £300,000.

At the time Finance Bill 2017 is published, the government will also publish draft regulations specifying that businesses within scope of the new schedule to TMA 1970 must use compatible software to meet the new requirements and allowing HMRC to set out details of compatible software in a published notice. The regulations will set out the information to be kept and preserved digitally, including categories of income and expenditure. HMRC has published a provisional indicative list of these categories. Businesses will need to provide an end-of-period statement for a relevant period. This statement will need to be provided by the earlier of:

  • 10 months after the end of the period to which the statement relates; or
  • 31 January following the tax year in which the relevant period ends.

The six response documents set out the government’s key decisions and changes from the original proposals. A firm decision on the initial exemption threshold and deferring the changes for some small businesses will not be made until final legislation is laid later this year.

Bringing business tax into the digital age: changes from the consultation proposals include:

  • allowing businesses to continue to use spreadsheets for record keeping;
  • allowing businesses eligible for three-line accounts to submit a quarterly update with only three lines of data;
  • making free software will available to businesses with the most straightforward affairs;
  • dropping the requirement for businesses to make and store invoices and receipts digitally;
  • allowing end-of-year activity to be concluded and sent by the sooner of ten months after the last day of the period of account, or 31 January;
  • dropping the requirement for charities (but not trading subsidiaries) to keep digital records;
  • deferring obligations until 2020 for partnerships with turnover above £10m; and
  • HMRC to begin piloting digital record keeping and quarterly updates for a full year from April 2017, in response to recommendations made by the Treasury select committee.

Tax administration: taxpayers will be given a period of at least 12 months before they are charged late submission penalties and the government will consult further on specific proposals for late payment penalty interest and the alignment of interest rules;

Simplifying tax for unincorporated businesses: the entry threshold for the cash basis will be set at £150,000, with simplified rules on capital and revenue expenditure, but the government will not proceed at this stage with the reform of the basis period rules proposed in the consultation and will consider further measures to simplify period-end reporting requirements;

Simplified cash basis for unincorporated property businesses: will be available to property businesses with receipts not exceeding £150,000;

Voluntary pay as you go: voluntary payments will be repayable shortly before a liability becomes due unless the taxpayer has failed to pay on time in the previous 12 months;

Transforming the tax system through the better use of information: HMRC will start in 2017 to use PAYE information during the tax year to calculate whether the right tax is being paid, with taxpayers continuing to receive letters directing them to their digital account in the short-term, but in future being prompted digitally to check their tax account.

Commenting on the response documents, the CIOT has welcomed a number of the government’s announcements, including continued use of spreadsheets for record keeping and confirmation that no penalties will be levied for late submissions in the first year of the new regime. CIOT President Bill Dodwell said: ‘The ‘soft landing’ on penalties for late submissions is a sensible proposal. An exemption for charities and a deferral for large partnerships are both pragmatic moves. The announcement that businesses will be able to continue to use spreadsheets for record keeping is positive, though we note the statement that this ‘is likely to involve combining the spreadsheet with software’. The devil will be in the detail’.

On the downside, Dodwell added that: ‘Today’s announcements highlight how much is still to be settled. On both the exemption threshold and deferring the changes for small businesses the government are still thinking. Put alongside the truncated timetable for consultation on the draft legislation (just three and a half weeks), and the fact that most of the draft legislation has not yet been published, as well as the launch of two new consultations on aspects of the proposals, this strongly suggests that the whole making tax digital project should be delayed by at least a year’.

The announcement of a broader pilot, starting in April 2017, presents yet another reason for delaying implementation beyond April 2018, Bill Dodwell argues, since the new regime: ‘will already be live before the pilot has finished a full reporting cycle, given that the end of year return for 2017-18 might not be due until the end of January 2019’.

The CIOT also expressed surprise at HMRC’s claims of annual savings for businesses, repeating its members’ views that ‘there will be no ongoing cost saving for business, as many small businesses will need to engage their tax advisers four or five times a year rather than annually, with associated costs’.

Issue: 1340
Categories: News