Making Tax Digital for Business (MTDfB)
Extensive changes to how taxpayers record and report income to HMRC are being introduced under a project entitled Making Tax Digital for Business.
The government has decided how the general principles of MTDfB will operate. Draft legislation has been issued on some aspects and more will be published in Finance Bill 2017.
Under MTDfB, businesses, self-employed people and landlords 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 its tax details in one place and interact with HMRC digitally.
The End of Year declaration will be similar to the online submission of a self assessment tax return but may be required to be submitted earlier than a tax return. Businesses will have 10 months from the end of their period of account (or 31 January following the tax year – the due date for a self assessment tax return – if sooner).
Businesses, self-employed people and landlords with turnovers under £10,000 are exempt from these requirements.
Changes announced in the Budget
The government has now announced a one year deferral from the mandating of MTDfB for unincorporated businesses and unincorporated landlords with turnovers below the VAT threshold. For those that have turnovers in excess of the VAT threshold the commencement date will be from the start of accounting periods which begin after 5 April 2018.
Cash basis for unincorporated landlords
As part of the wider proposals for Making Tax Digital, the government has decided that, from April 2017, many unincorporated property businesses will compute taxable profits for the purposes of income tax on a cash basis rather than the usual accruals basis.
The cash basis means a business will account for income and expenses when the income is received and expenses are paid. The accruals basis means accounting for income over the period to which it relates and accounting for expenses in the period for which the liability is incurred.
For affected property businesses, the cash basis will first apply for the 2017/18 tax year which means that a tax return for 2017/18, which has to be submitted by 31 January 2019, will be the first one submitted on the new basis.
Not all property businesses will move to the cash basis:
•• property businesses will remain on the accruals basis if their cash basis receipts are more than £150,000
•• there is an option to elect out of cash basis accounting and to use accruals basis instead
•• the cash basis does not apply to property businesses carried out by a company, an LLP, a corporate firm (ie a partner in the firm is not an individual), the trustees of a trust or the personal representatives of a person.