MTD cash basis plan rewrites accounting rules
HMRC wants more unincorporated businesses to use cash basis accounting to simplify their reporting requirements under the Making Tax Digital regime. John Stokdyk digs into the detail.
HMRC has produced a package of reform proposals to simplify the taxation of unincorporated businesses ahead of the migration to quarterly digital tax reporting.
The main plank of this simplification drive will be to raise the ceiling for the current cash basis mechanism that that allows businesses with trading income to calculate their tax liabilities based on amounts actually paid and received within a period.
It is currently available up to the VAT registration point of £83,000, but HMRC is consulting on raising it to as much as £166,000, double the existing figure. The popularity of the cash basis in its current form encouraged the MTD team to consider expansion, particularly since regular reporting updates will align more easily with the cash approach.
“Businesses who account this way will simply enter the details of their income and expenses as they actually receive payment or pay for an expense,” the HMRC consultation paper explained.
Doubling the upper limit would extend the cash basis option to another 175,000 business; those with higher turnovers are more likely to have complex tax affairs requiring accruals accounts for other purposes, it added.
An exit threshold at around twice the entry threshold is also being considered that would allow businesses with fluctuating turnovers up to £300,000 to continue to use cash basis accounting.
Capital allowances: a new definition of expenditure
The tax simplification consultation document tackles one of the most frequently recurring questions about the quarterly reporting regime envisaged under MTD: how will capital allowances be calculated?
The current general disallowance of capital expenditure would be replaced by a more limited disallowance of capital expenditure on assets not used up over a limited period.
The consultation document talks of reforming the capital/revenue divide, explaining, “The cash basis can provide a coherent tax result by making a different distinction, between expenditure on assets which store value, and those which are used up in the course of conducting the business.”
Even if this view prevails, however, assessments will still be needed on whether expenditure is a) capital and b) qualifies for capital allowances. Existing restrictions on allowability will continue to apply to:
Industry insightsView more
- real property, including integral fixtures bought with a property
- intangible assets with indefinite lives (so buying a trademark would be disallowed, unless the purchase applied to use of the trademark for a specified length of time) acquiring other businesses,including goodwill
- financial instruments and equivalent assets; and
- any other asset that has an unlimited effective life or is not expected to decline in value over the time.
Capital expenditure on cars would also be excluded in line with their exclusion from the annual investment allowance.
For property-related businesses in particular HMRC points out that the existing capital allowances regime caters for the complexities of valuing fixtures and apportioning expenditure. Businesses wishing to obtain tax relief for these elements in property purchases should stick to the ordinary rules.
Existing provisions in both regimes to deal with the subsequent disposal or change of use of assets on which tax relief was granted for expenditure will have to be adapted to ensure they continue to operate appropriately in relation to the new boundary.
Another chapter examines the potential for cutting down requirements for those who currently produce accounts in accordance with generally accepted accounting principles (GAAP) for tax purposes. The proposal would not be to make changes to GAAP itself, HMRC said, but rather aim at a reduced version under which a profit calculation would be acceptable for HMRC’s needs.
The adjustments for things like asset values typically undertaken at year end could be deferred to a later period or the point at which an underlying asset or liability is sold or realised.
“There is no intention for these simplifications to lead to a reduction in the tax payable over the lifetime of a business. Any advantage or disadvantage arising from these rules will be restricted to changes in the timing of profits arising,” HMRC said.
The adjustments identified for this approach include:
- adjustments to the closing stock figure
- profits where contracts span the period end
- provisions for bad debts; and
- adjustments for prepayments and accruals.
Those using GAAP accounts for other purposes would not be likely to benefit from the reduced regime.
Annual accounting periods in play
In its reforming zeal, HMRC is considering ending the requirement for unincorporated traders to compile annual accounts. With the advent of flexible, user-driven tax accounts, the department argued that “the complexity and inflexibility of the basis period system is outdated”.
The basis period rules for calculating tax were drawn up to accommodate situations where business accounting periods fall into different tax years than the tax year ending on 5 April. One option on the table is to let quarterly filers define their accounting periods to match each quarterly report, doing away with the need for any annual process.
“This might suit those with relatively simple business affairs, or those who need or want to use short accounting periods for other purposes,” HMRC said.
The consultation document offers a range of examples and options for unincorporated businesses is presented in, including a suggestion that HMRC mandates the end of the tax year as the accounting year to minimise any adjustments.
Constructive suggestions for alternative approaches that support the simplification objectives underlying MTD would also be welcomed, HMRC said.
In its assessment of the potential impacts of these changes, HMRC said individuals running small businesses by themselves will enjoy reduced complexity and administrative burdens within the tax system, but did not quantify any savings. There would be changes needed within HMRC systems, ranging from £40m-£145m, depending on the level selected for the extended cash basis regime, while the proposal to allow more flexibility for basis periods would add another £50m to the project cost.
HMRC business tax director general Jim Harra told AccountingWEB: “We made our first public stab at an impact assessment. We would want to do a full impact assessment when we publish the proposals and legislation and would really like people’s input on that, quite apart the specific measures.”
The consultation will run for 12 weeks until 7 November. HMRC would like to hear from unincorporated businesses and their advisers.
Over the next three months AccountingWEB will be collecting feedback to HMRC's package of consultations. Feel free to raise any points about the different issues by commenting here or on our MTD frequently asked questions article.
If you'd like to find out more about Making Tax Digital, click here to register for our live digital MTD sessions at Practice Excellence LIVE! on 24 October.
AccountingWEB is working with Thomson Reuters Digita to collate the profession's feedback to the MTD consultation documents. You can participate in our quick survey here to share your thoughts. The survey responses will feed directly in to the official AccountingWEB response to the consultation documents.
AccountingWEB’s Head of Insight has been with the site since 1999 and likes to spend his time studying accountants’ technology habits. When not nerding out, you can find him exploring obscure indie music and searching for the perfect organic sourdough loaf from his base in Brighton, UK.