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.
So how could this 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 rather than annually 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.
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.
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.
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 then 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 can RNS help you
Please be assured that we will continue to assist you with your accounts and tax affairs.
If you are concerned that your current record keeping will not be suitable for Making Tax Digital, ie. you keep manual records or spreadsheets then please contact us to discuss the options and solutions available to you. We are working in partnership with software providers to provide the best solution to meet your needs.
We will keep you informed of developments in the Making Tax Digital for Business project.
Please contact our “MTD Champions” Karen Lyth karen.lyth@rnsca.co.uk or Jenny Camm Jennifer.camm@rnsca.co.uk if you have any questions regarding Making Tax Digital.