Draft MTD response: Keeping business records
This is the second in a series 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 7: Do you have any comments about the practicalities of keeping evidence of transactions and trading when using digital tools?
The taxpayer needs to understand the tax treatment of the transaction when he records it. For example: the purchase of food – is it tax deductible as it is part of a travelling appointment, or not tax deductible as it entertainment for a client or sustenance which is not related to the business. I don’t see how software can predict what an item will be used for at the time it is purchased. The decision as to tax deductibility of the expense needs to be made after the item has been consumed, not at the point of purchase.
Q 8: Do you agree with the minimum transaction data fields proposed for trading businesses, including retailers? What other data fields might the record keeping software usefully include as a minimum?
A field or to indicate the currency the transaction was made in. Do not assume all transactions are made in £.
Will these data standards apply to all sizes of businesses from the largest PLC down to the smallest one man business? If different standards for tax records are to apply to different sizes of businesses based on turnover or structure (corporate or not), that point needs to be discussed in the design framework for MTD.
Will these standards for data fields be written in primary law or in regulations? Much detailed discussion is required on this point with software providers and lawyers, before the structure of MTD is finalised.
Q 9: Do you have any comments about reflecting the current VAT requirements in MTD-compatible software?
VAT registered businesses already submit a quarterly report to HMRC in the form of the VAT return. One pass of data to HMRC should be sufficient to complete the VAT return and the MTD quarterly update.
It follows that recording of transactions by all VAT registered business has to be in line with the VAT requirements.
Q 10: Do you have any comments on the additional data capture requirements for property income and capital gains?
Currently landlords are not required to record income and expenses property by property. This extra level of detail is not justified. Such a property by property requirement would force an unnecessary and arbitrary apportionment of overhead expenses.
Why does each property address need to be recorded in the accounting software for income tax purposes? The CGT reporting should be done at the annual finalisation (tax return stage).
The calculation of capital gains should not be mixed up in the reporting for income tax purposes. It is too complex to take into account of all the numerous CGT reliefs in order to produce a sensible figure of taxable gains before the tax year is complete.
HMRC must clarify what data will be reported by a landlord at a quarterly update. Will this include capital gains as well as income profits? There needs to be more detailed discussion of this point with examples as to how a quarterly update consisting of both income and gains would help the taxpayer.
Q 11: What should the minimum categorisation in the software be? Would additional sub-categories be useful?
The minimum requirement should be the current three line account submitted on SA tax returns: total turnover, total expenses and the resulting profit or loss.
Very small businesses will not be able to afford to use sophisticated software.
Q 12: Do you have any comments on how businesses should reflect transactions and expenditure with non-deductible elements in the software?
The assertion in para 3.22 that the software will recognise regular expenses by supplier is not believable. How will the software distinguish between private and business expenses from the same supplier eg a rail ticket?
Will taxpayers be required by law to keep a separate bank account and separate credit card for business purposes? If this is to be a requirement for all businesses, that point should be the subject of further consultation.
Q 13: What prompts and nudges would be most useful to businesses?
Prompts which alert the taxpayer to an unexpected level of sales or expenditure, should be included. Eg £30 normal weekly petrol purchase recorded as £300 should generate a prompt as to the correct amount.
Nudges that attempt to explain the tax law on deductible expenses are very dangerous. It is impossible to incorporate all the rules in tax law into simple software, and any dumbing down will put taxpayers who use the software at a disadvantage compared to those who use a qualified accountant to check their accounting data before submission.
If nudges are incorporated into software, what standards will be set for the software providers to ensure the same transaction prompts the same nudge in every software package? If different software contains different nudges, an identical set of transactions will produce a different taxable profit depending on the software product used. That would be inequitable and against the HMRC charter of treating all taxpayers equally.
You don’t have to answer all the MTD questions. A response to just one or two key issues is worthwhile. If you don’t speak-up you won’t be heard.