MTD: Making Tax Digital

The former Chancellor, George Osborne, in his 2015 Budget, announced his plans for a  "brave new world" of transparency and accessibility in the UK tax system which would be the envy of the world!  His vision of Making Tax Digital would be fully implemented by HMRC by 2020 giving us all, including HMRC, a very challenging target!

In August, HMRC released not one but six Consultation Documents on the subject and all of us in the accountancy profession have been busy picking over the bones of the proposals and formulating our responses and feeding in comments to our various professional bodies who will respond to HMRC on the content of the ConDocs on behalf of millions of members.   The deadline for responses is 7 November 2016.

So, on the eve of the deadline, just what do we know? Firstly, the Government started by rolling out Digital Tax Accounts for individuals and similar accounts for businesses.  This should eventually ensure that taxpayers no longer have to report income that HMRC has already been told about by, for example, banks, employers, stock brokers etc.  Taxpayers should have the complete picture of their tax situation in one place.  So far, so good. 

HMRC then announced Quarterly Reporting would be introduced, effectively making self-employed individuals, businesses and landlords report and update their tax affairs every three months.   MTD will start with the smallest businesses first but there is an exemption for those small businesses and landlords where the gross income from their activities is under £10,000 p.a.  This is not a particularly generous move by HMRC, considering income of this level would be covered by the annual personal allowance and so unlikely to be subject to tax!  

These quarterly updates would not be necessary for employed individuals and pensioners with secondary sources of income below the £10,000 limit. 

So, whilst George Osborne trumpeted the end of the annual tax return, this will effectively be replaced by "Reports" uploaded every quarter with a year-end summary to reconcile the Quarterly Reports and to make any necessary adjustments.  So, for millions of taxpayers, the annual tax return will be replaced by five digital inter-actions with HMRC every year!    

HMRC envisage this digital revolution is just a tap of an app away!  It is intended that the Quarterly Reporting can be done from a smart phone or through HMRC's (own) provided software or third party software.  HMRC say there will be help and even some limited financial support to assist individuals and businesses cope but this unlikely to stretch to enough money to buy a smart phone if you do not already have one!

The proposed time line is very challenging in every respect with small businesses and landlords starting  reporting under MTD from April 2018, VAT registered businesses from April 2019 and companies from April 2020.  There is much debate around potential delays for the implementation of MTD.  The consultation timetable suffered when the original ConDocs were not ready for the  scheduled release in March 2016 and then there were further delays due to the EU Referendum.  So HMRC are slipping from their original objectives; questions are being asked whether software houses can produce, test and offer to the market the necessary software, and add to the mix the fact that HMRC are in the midst of major IT transitions of their existing systems and it is no wonder the original timetable is looking shaky.  

Of course, the responses to HMRC's ConDocs by the ICAEW, the ATT and AIETP, of which we are members, will be focusing on many of the practical issues associated with MTD - a generation who are not comfortable with smartphone technology, intermittent internet coverage, untried and unproven HMRC software, the unseemly haste of implementation, the low exemption level etc.

We will be updating you on developments for MTD on our blog, so watch this space.  If you have any questions, then please contact either Gerry or Paulette or email: info@petersonsims.com

 

Giving to charity can now mean a tax liability!

The recent changes to the taxation of investment income, with the introduction of the £5,000 dividend nil rate band and £1,000 personal savings allowance, could mean that many individuals donating to charity under the Gift Aid scheme, will have insufficient taxed income to cover their Gift Aid donations.  In this event, HMRC will come knocking on the door of the individual concerned in order to recover the shortfall of tax that has been passed to the charity and which has served to augment the donation to the charity.

Some charities have been criticised as being slow to react to these fundamental changes and to alert their millions of generous donors as to the potential tax implications.

Certain groups of individuals are now at risk that they will have paid insufficient tax on their own income and so should review their Gift Aid declarations and consider carefully whether this mechanism is appropriate to them now.  

Low income pensioners are an obvious group who may fall foul of the rules, because if they have little or no tax liability, following the introduction of the £5,000 and £1,000 investment income tax breaks, some tax on their Gift Aid donations will be due to be paid by them - this may come as an unwelcome surprise to many!

Similarly, some expatriates with limited on-going UK tax liabilities, for example, on rental income, UK dividend income or on Government Service pensions, may have opted to give donations under the Gift Aid scheme but they, too, may not have paid sufficient UK tax to cover their Gift Aid tax.

UK Budget 2016 - main points

Yesterday's Budget has been described as a "sweet & sour" Budget - depending upon your perspective!

Some of the main areas of interest are:

Re-basing of cost base for assets belonging to certain non-doms

From April 2017, there will be a re-basing of the cost base of foreign assets owned by non-domiciled individuals who become deemed domiciled under the new 15 out of 20 years of residence rules.  This is an amazing stroke of good fortune for the non-doms concerned and effectively means that they will  benefit from full rebasing to the market value of the asset in April 2017.  Furthermore, it appears there will be no requirement that the proceeds are left offshore but, as ever, we await the HMRC policy update document for more detail.

UK Non Resident Capital Gains Tax Return

The requirement for a non resident to report a disposal of a residence within 30 days of the conveyance has been relaxed, provided the disposal meets the following conditions:

·       a disposal of a residential property on or after 6 April 2015 is for no gain or loss; or

·       the grant of a lease for no premium to an unconnected person is a bargain at arm’s length.

 

Small scale self-employment and Rent-a-Room

 Small scale e-Bay vendors and Airb'nb landlords have been given two new tax reliefs.   From April 2017, small internet-based traders with annual income of less than £1,000 will be exempt from taxation and the profits will not even have to be reported.  If their income actually exceeds £1,000, this exempt £1,000 can be deducted from the income so it would appear there is no need to calculate actual expenses for these small-time traders. 

 

In advance of this measure, for 2016/17, the Rent-a-Room exemption has significantly increased from £4,250 to £7,500. 

 

Personal Allowances and Capital Gains Tax Rates

 The 2017/18 personal allowance has increased to £11,500 and this is an across-the-board figure, as the higher Age Allowances will have been phased out by April 2017.   The 40% higher rate tax threshold will then start at £45,000 for 2017/18.

 To encourage investment in shares, the capital gains tax rates have been reduced to 10% for basic rate taxpayers and 20% for higher rate taxpayers but this generous reduction does not apply to gains from real property.  Capital gains tax rates for buy-to-let or second homes remain at 18% and 28%, as now.

 ISAs

The ISA subscription limit for 2016/17 has been increased to £20,000.

From April 2017, a new type of "lifetime" ISA has been introduced, with a sweetner of a maximum £1,000 contribution from the Government each year until age 50 but this ISA is designed for long-term savings by under 40 year olds for either a first time home purchase or for a pension.  

 

If you have any questions on these or other tax issues, please contact us on info@petersonsims.com

Making Tax Digital - where are we right now?

Making Tax Digital (MTD) was announced in the Autumn Statement 2015 with two main thrusts - Business MTD and Personal MTD.   The idea has been generally well received and, if implementation goes according to plan, will be a step towards transparency in the tax affairs of both individuals and businesses, but commentators have also noted MTD is clearly leading to an advance in the payment of tax which hitherto, in some cases, has been made well after the end of the relevant tax year. 

Despite the relatively short lead time to first implementation in 2018/19, HMRC has been rather shy of sharing detailed information on this initiative with the professional bodies and the general public.

So far, there has been some generalisations about the aims for Personal MTD and only limited information on the Business MTD.  HMRC have indicated that the initiative will start with the quarterly digital reporting of income/expenditure by the smallest businesses (including landlords) first, until eventually the largest businesses in the land will be brought within the Business MTD by 2020.  This seems a somewhat inverted approach since it is likely that smaller business owners will require much more education (or even the purchase of a computer!) in order to be "up to speed" by 2018/19, whereas larger businesses are much more likely to be capable, already, of the quarterly digital reporting because of more sophisticated internal accounting systems and staff expertise.   

HMRC's perception is that poor record keeping by smaller businesses has led to a loss of tax to the Exchequer but no evidence has been presented by HMRC in support of this.  In fact, in most accountants' experience, poor record keeping is more likely to lead to understated expenditure, which leads to more, rather than less, of the income being taxed!  Small businesses will, undoubtedly, need more professional help and one of the main concerns of MTD centres around the additional reporting burden this quarterly digital account will bring for small businesses and landlords.   The ubiquitous "cash" book and annual accounting will be a thing of the past!  

Of course, no new HMRC initiative requiring "participation" by the taxpayer, arrives without sanctions and penalties for failure to comply!  The formal consultation on these will be later this year.

For those interested, the Government's MTD document, including the timeline for implementation, can be found at:

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/484668/making-tax-digital.pdf