As you may be aware HMRC are making significant changes to the tax system regarding Making Tax Digital, which is aimed at bringing businesses into the digital age. HMRC have now published further guidance following the 2017 budget and legislation will be introduced in Finance Bill 2017 to set out the changes.
What is happening?
HMRC are moving all businesses (including landlords with rental income over £10,000) onto Digital Tax Accounts (DTA).
This means that all businesses will be required to submit quarterly returns digitally to HMRC advising of the following accounting information:
• Other business income
• Cost of goods bought for resale or goods used
• Construction industry – payments to subcontractors
• Wages, salaries and other staff costs
• Car, van and travel expenses
• Rent, rates, power and insurance costs
• Repairs and renewals of property and equipment
• Phone, fax, stationery and other office costs
• Advertising and business entertainment costs
• Interest on bank and other loans
• Bank, credit card and other financial charges
• Irrecoverable debts written off
• Accountancy, legal and other professional fees
• Depreciation and loss/profit on sale of assets
• Other business expenses
The returns will report the figures on a cumulative basis so the final return in the year will theoretically reflect the annual accounts (but see below).
As well as the quarterly submissions, you are also required to make a final submission 10 months after the end of the accounting period. This will give the opportunity to check your prior submissions, include additional allowances that have not been included previously e.g. capital allowances. Your final tax liability will be calculated based on this final submission and the interim submissions will be used for guidance purposes only.
Who is affected by these changes?
All businesses and landlords will be required to complete quarterly submissions unless they meet any of the requirements for exclusion.
• “de minimis limit” – businesses (and landlords) with turnover under £10,000 will be excluded. There will be also be a one year end extension for unincorporated businesses under the VAT threshold (£85,000) until April 2019.
• Digitally excluded – if you live in an area where internet is non-existent or poor you may be able to apply for exclusion, this would need to be approved by HMRC and other ways of making your quarterly submissions are agreed.
• ‘A practising member of a religious society or order whose beliefs are incompatible with using electronic communications or keeping electronic records’.
When will the changes take place?
The introduction of these changes will occur over 3 years depending on what tax you are looking to report.
This is being phased in over the next few years as follows:
5th April 2018
Sole Traders, Partnerships (including LLPs) & Rental Income ***
5th April 2019
VAT Returns (will need to filed in this format)
5th April 2020
*** businesses with turnover under the VAT threshold (£85,000) will get a 12 month delay before being required to make quarterly submissions.
This means that for businesses with a year-end of 5th April, the first accounting period to be caught will be the period 6th April 2018 to 5th April 2019.
However, if your year-end is 31st March, the first accounting period to be caught will be the period 1st April 2019 to 31st March 2020, meaning that there will be a delay before your submissions need to begin.
However, it would still be recommended to get in the habit of keeping your information up to date so you are ready to complete the quarterly submissions when they are required.
HMRC have advised that there will be penalties in the future for the late submission of these returns which they have indicated will be on a points based system.
However, HMRC are giving a “soft landing” period where no late submission penalties will be applied for the first 12 months using this system.
Importance of submitting accurate information
HMRC’s guidance is that penalties will only be applied if the returns are not submitted, and not if the information is inaccurate
However, it is our opinion that if the quarterly submissions vary significantly from the final accounts there will be an increased risk of a tax enquiry.
We would therefore recommend that you do maintain accurate records to reduce this risk, and we can assist you with this.
Advantages to you
Although these changes appear to be severe and will impose administration to small businesses we do see that this could actually be of benefit of you.
By having all of this information in one place it enables you to:
• Manage your cash flow, by giving you an idea of your liabilities throughout the year.
• Opportunity for tax planning, your income is known before the end of the tax year enabling us to advise on any planning strategies to reduce your liabilities before it is too late (if you take up this service).
Do you need to modernise your record keeping?
If you are already using a cloud accounting software such as Xero or Quickbooks Online you are ahead of the game. It is our understanding that you will be able to make your submissions directly through these systems, therefore your main task will be to keep your system up to date and once a quarter publish a report to HMRC.
This is very similar to how many clients submit their VAT Returns so if you are already doing this, Making Tax Digital should not have a dramatic effect on your business.
However, if you are not using cloud accounting software you may need to alter your bookkeeping systems. Cloud accounting is included within certain packages offered by d&t so it may be worth getting a call booked in to discuss this in greater detail.
HMRC have indicated that spreadsheets on their own will not be sufficient, but could potentially be used in combination with HMRC recognised software.
Please note that if your current method of bookkeeping is the old fashioned ‘shoebox’ approach this will no longer be acceptable.
Q: If I have to move to cloud accounting, isn’t this expensive and complicated?
In an ever growing market, there are a number of great cloud based systems now available to use. One of the market leaders is a product called ‘QuickBooks Online’, which offers a very competitive monthly price. We offer comprehensive training and support for both QBO and another big player in the market called ‘Xero’. d&t will be able to support you in the transition to one of these systems and help you get the most out of them!
Q: What options do I have to move from the ‘shoe box’ of receipts?
You obviously still need to keep copies of your receipts and invoices for your accounting records, but there are a number of easy ways to get these into a cloud based system. A piece of software called ‘Receipt Bank’ is something we recommend and can assist with the acquisition and setup of. It is a big time saver and will essentially input your expenses into the system automatically, after you send an image of the receipt or invoice through to them.
Q: Can you do it for me and if so how much will that cost?
d&t are always on hand to help with these sort of changes. We can assist in the setup and support of moving your business records to a cloud based system and ensuring you get everything out of it you need out. Alternatively, we can do it all for you providing the correct records are supplied. Depending on the other services you have with d&t, we may be able to provide QuickBooks Online or
Xero for your business at no additional cost. The time that can be saved on bookkeeping by using these products to their full potential can be enormous, so this is likely to be beneficial to you.
Q: Are there any advantages to this change?
Yes, you can make more informed critical business decisions with more up-to-date metrics on business performance. Our clients who utilise our ‘management accounts’ service are already ahead of the game receiving (monthly/quarterly) analysis of their businesses performance. Please get in touch to find out more about Management Accounts from d&t.
The team at d&t are here to support and guide you and your business. If you have questions or queries please do not hesitate to get in touch.