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Draft MTD response: Computing profit or loss
This is the third of six blogs in which I present my personal views on the questions in the consultation document MTD: Bringing business tax into the digital age
Do you agree with my answers? Please post your views below. I will be making a formal response to HMRC on behalf of the AccountingWeb community, and want to incorporate as many of your views as possible.
Q 14: Do you agree that businesses should have the choice as to when to record accounting adjustments?
Yes, businesses should have the choice as to when to record accounting adjustments. If the accounting adjustments are made every quarter that will require professional accounting advice and the work done will amount to four tax returns a year.
However, if accounting adjustments are only recorded at the year end finalisation (ie the tax return stage) those quarterly updates are meaningless for tax purposes, in all cases other than those businesses which use cash accounting.
The case for quarterly updates has not been made. If HMRC want taxpayers to make quarterly updates they must show this will benefit the taxpayer. This must be proven, or disproved through a live pilot – see answer to Q 28.
Q 15: Do you agree that business should have the flexibility to reflect reliefs and allowances when they choose?
Yes, businesses should have flexibility to claim reliefs and allowances when they choose. Businesses will need expert accounting guidance to determine which reliefs and allowances should be claimed, and this needs to be done after the year end so the entire profit /loss situation for the period can be reviewed before decisions as to loss and allowance claims are made.
How will MTD fit in with claims for averaging of profits for farmers and authors over five or two tax years?
How will MTD deal with losses which are carried back or sideways loss relief?
Q 16: What do you consider is the most appropriate approach to reflecting the effect of the personal allowance on an individual’s taxable business profit?
The personal allowance should be reflected in the personal digital tax account online, not in the accounting software. The accounting software will deal with only one part of the taxpayer’s income. The availability of the personal allowance depends on the taxpayer’s entire income for the year, taking into account any losses carried back, and in some cases donations carried back or made in the year.
Q 17: Is this the right treatment of partnerships? Are there any additional partnership issues that need to be considered?
No, this approach will not suit complex partnerships. All partnerships other than those which consist of two closely-related individuals (eg husband and wife) should be considered “complex”.
We understand a separate consultation will be conducted into MTD for complex partnerships. As those proposals for complex partnerships will need a full 12 weeks consultation period and a full 21 month pilot period; MTD for complex partnerships (as defined above) must not start until 2020/21 at the earliest.
A complex partnership will not decide until after the accounting period end how profits will be allocated between the partners for the accounting period. Quarterly updates would require the partnership to estimate the final profit allocation between partners. This quarterly estimate could be very different to the final profit share, particularly for partners who join or leave during the year, and for partnerships which allocate profits on basis of the performance of units/sections within the firm.
The quarterly update would provide no useful data to the partner or to HMRC in relation to the final amount of tax which will be payable. In addition, the quarterly update would give the partner an incorrect impression of the amount of profit which is due to him for the year, and may lead to him paying a pension contribution which is not supported by his taxable income.
Q 18: Is this the right treatment of individuals who receive income from property, let jointly?
This may work for a property which is jointly owned between just two individuals, but the taxpayer who is not the nominated individual would be vulnerable to the other person submitting incorrect information. The penalty position in this situation needs to be carefully thought through to protect the rights of all the joint owners of the property.
Q 19: Is this the right treatment of subcontractors within the Construction Industry Scheme? Are there any other CIS issues that need to be considered?
The pre-population of the subcontractor’s digital tax account with CIS income and CIS deductions is a good idea, but what happens if the contractor dos not supply the right details or there is an error? How can the subcontractor challenge the data if it is wrong?
This is my personal response to HMRC. If you have views on these questions please also make a response directly to HMRC at: [email protected] or by completing the HMRC survey which covers the main questions from this consultation document. You don’t have to answer all the MTD questions. A response to just one or two key issues is worthwhile.
The consultation period ends on Monday 7th November. Shout and be heard!