Making Tax Digital – for the Self-employed

In August 2016, the government published their proposals on how businesses will maintain their accounting records for tax purposes in the future and also how businesses will report their profits to HMRC. At the end of January 2017, after consideration of suggestions made by interested parties, revised proposals on many aspects of the new regime were published. This article aims to set out how these proposals, known as Making Tax Digital for Business (MTDfB), could affect your business.

At the moment, businesses keep their accounting records in a variety of ways, from paper records, spreadsheets or accounting software. These records are then used to prepare a tax return for the business at a later date. Under MTDfB, businesses will be required to:

• maintain their records digitally, through software or apps
• report summary information to HMRC quarterly through their ‘digital tax accounts’ (DTAs)
• make an ‘End of Year’ declaration through their DTAs.

DTAs are like online bank accounts – secure areas where a business can see all of their tax details in one place and interact with HMRC digitally.

When does MTDfB apply to you?

In the Spring Budget, the government announced its proposed timetable for the introduction of MTDfB. Unincorporated businesses with annual turnover:

• above the VAT threshold (which has been set at £85,000 from 1 April 2017) will need to comply with the requirements of MTDfB from the start of accounting periods which begin after 5 April 2018
• at or below the VAT threshold but above £10,000 will need to comply from the start of accounting periods which begin after 5 April 2019.

A business with annual turnover of less than £10,000 is exempt from MTDfB.

The appendix to this letter provides some examples of when the new requirements will apply depending upon the accounting period of the business.

What are digital records?

A digital record is a record of data for each transaction of the business. The proposed minimum required data will be:

• invoice date
• invoice value
• income or expense category
• deducted amount / percentage for expenses.

Retailers with high volumes of low value cash sales transactions will be able to just record the trading date, gross cash takings and income category.

The software that could be used may be a smartphone app or software on a tablet or a desk-based computer. This software would be able to scan paper invoices and receipts into the software, using a smartphone camera. The software will be available from third party suppliers and HMRC have confirmed they will ensure there will be some products which are free of charge.

Tax legislation contains a variety of rules on allowable and non-allowable expenses. So transactions will need to be categorised in the software into income and expense types – for example advertising or professional expenses.

The software will either store the records locally, for example on a computer, or in the cloud. HMRC expect that the software will, after an initial phase of manually assigning transactions to income or expense categories, start to recognise regular items and automatically assign them.

Under the original proposals, HMRC envisaged that a digital record would include not only a record of each item of income and expense but also evidence of each transaction such as copies of invoices and receipts. In the revised proposals the requirement to keep digital records will not include an obligation to store images of invoices and receipts digitally.

HMRC are aware that a lot of businesses use spreadsheets to currently record their data and have now confirmed that spreadsheets will be one of the options for maintaining digital records. But users will need to ensure that the spreadsheet is able to meet all the necessary requirements of MTDfB (ie not just keeping a record of each transaction but also providing quarterly summary updates and End of Year information).

Businesses will need to use software appropriate to their business requirements. For example, a business that is registered for VAT will need the software to cope with the VAT scheme it uses.

Quarterly returns

Once all the relevant data for a quarter has been compiled into the software, the business will then feed this data directly into HMRC systems. The information that will be sent to HMRC will be summary data for the quarter, not all income and expense items. It is envisaged that the analysis of the data will be similar to the existing categories in the Self Assessment tax return. Smaller businesses will be able to prepare an update that contains only three lines of data – income, expenses and profit. If your business already completes a VAT return then the MTDfB updates will only include the current (nine box) VAT return from April 2019.

When the quarterly update is due, businesses will have one month to compile their records and complete the update.

What about a tax return for the business?

Throughout the year, businesses will have provided HMRC with regular updates, building a picture of their net income for the year. However, many businesses will need to make adjustments to that information, for example reconsidering which expenses are not allowable for tax and make claims to reliefs or allowances, such as capital allowances. Businesses will then make a declaration that everything is complete and correct as regards their business – an ‘End of Year’ declaration. The business will have 10 months from the end of their period of account (or 31 January following the tax year if sooner) to complete their End of Year declaration.

For a sole trader whose only income is from the business, there will be no requirement to complete a Self Assessment tax return.

How we can help you

Please note that, at the moment, you do not have to do anything in respect of these developments. However, please be assured that we will continue to assist you with your tax affairs and we will keep you informed of developments in the Making Tax Digital for Business project.

Please speak to us if you have any questions regarding Making Tax Digital.

Appendix

When does keeping digital records first apply? – Examples

A business has a 5 April year end:

		Digital records?
Year end	Tax year for which profits are assessable	Turnover above VAT threshold	Turnover at or below VAT threshold
12 months to 5 April 2018	2017/18	No	No
12 months to 5 April 2019	2018/19	Yes – from 6 April 2018	No
12 months to 5 April 2020	2019/20	Yes	Yes – from 6 April 2019

A business has a 31 December year end:

		Digital records?
Year end	Tax year for which profits are assessable	Turnover above VAT threshold	Turnover at or below VAT threshold
12 months to 31 December 2018	2018/19	No	No
12 months to 31 December 2019	2019/20	Yes – from 1 January 2019	No
12 months to 31 December 2020	2020/21	Yes	Yes – from 1 January 2020

A business has a 31 March year end:

		Digital records?
Year end	Tax year for which profits are assessable	Turnover above VAT threshold	Turnover at or below VAT threshold
12 months to 31 March 2019	2018/19	No	No
12 months to 31 March 2020	2019/20	Yes – from 1 April 2019	No
12 months to 31 March 2021	2020/21	Yes	Yes – from 1 April 2020

Under current proposals a business with a 31 March year end rather than a 5 April year end has almost 12 more months before it has to meet the digital records requirements.