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Making Tax Digital rewrites GAAP

MTD cash basis plan rewrites accounting rules

15th Aug 2016
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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:

  • 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.

Reduced GAAP

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.

Replies (14)

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By Tim Vane
16th Aug 2016 10:11

So, doubling the upper limit for unincorporated businesses would extend the cash basis option to another 175,000 companies?

I don't think so.

Thanks (1)
By petestar1969
16th Aug 2016 11:50

Cash basis is nonsense, not because its cash but because of the daft rules on expenses that can/can't be claimed.

This is a recipe for disaster and bigger tax bills.....

Thanks (0)
By coolmanwithbeard
16th Aug 2016 12:18

This is the tail wagging the dog - HMRC want something so everything changes around it including things they have held dear for so long. Ultimately businesses need accounts for many reasons and accounts as we have them meet those wider needs.

Good luck to anyone trying to get a mortgage or will the lenders just accept any old rubbish because it's on an SA302???

If they really want to make it easy for very small business they should roll out a flat rate scheme for tax based on turnover as with VAT. This works elsewhere in the world and might work here.

They will struggle to risk assess for investigation too as a large order on the last day of a quarter will screw up most small business GPP.

Their lax use of the word company (noted by another poster) indicates too they don't understand the huge divide they are creating between business types. Or maybe they will accepted this cash nonsense from companies for corporation tax purposes even though the final accounts will not really reflect what they have submitted.

I'm not filled with confidence (was I ever?)

Thanks (1)
Replying to coolmanwithbeard:
John Stokdyk, AccountingWEB head of insight
By John Stokdyk
16th Aug 2016 12:48

The incorrect use of the word "companies" in relation to the cash basis threshold was my mistake, not HMRC's. The text has been corrected.

Thank you for pointing out the error. Please accept my apologies if it caused any addition confusion around the proposed reporting regimes under MTD.

Thanks (0)
Replying to coolmanwithbeard:
By ringi
20th Aug 2016 13:46

Most mortgage providers look at 3 years worth of AS302, it will be very hard to use the cash bases to make them all rubbish and not have “the errors” cancel each other out. (While still having money to live on etc.)

Remember it is cashflow not profit that is used to pay someone's morgage.

Thanks (1)
By Tom 7000
16th Aug 2016 12:24

It says unincorporated businessess not Companies. Although I will give you later on the writer says companies....

I wonder how much HMRC will sell me a list of all 175,000 of the self employed with turnovers 83k-166k? I could incorporate the whole lot save them quarterly digital accounting give them Ltd liability oooohhh and a whole load of other benefits ;) They must have really bad accountants to not have moved them to companies by now. Perhaps they are all LLPs with ltd companies as members...

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By youngloch
16th Aug 2016 12:30

No mention of how submissions will be made? No mention of whether digital software must be used? No mention of how long a business would have from the date of their deemed quarter end until the submission deadline? No mention of the catch up period? No mention of how quarterly reporting squares with the requirement for companies to file their annual accounts? No mention of whether estimating during a year would be allowed and how any earlier period errors could be corrected.

I could go on but, from my perspective, it is down to us in the majority of cases to be the messenger between HMRC and the small business owner and right now, with perhaps now only 19 and a half months to go, the simple fact is that we, and even software providers, have no idea what is expected.

I have made all clients aware of the new proposals in broad basic terms and not one, of 300, has heralded its arrival.......

I personally feel that we as a practice will best be served by focusing on the clients that engage with us pro-actively rather than those that we constantly have to chase up.

The alternative would be to recruit probably another member of staff solely to be constantly chasing up instructions and that is just not viable and a stress that we could do without. Once a year is tough enough for this category of client.

Overall though, at first glance, I'm very disappointed with this consultation as it is not consulting on the key issue which, quite simply, is logistically and practically how can we all (HMRC and accountants) make this work.

I also question why this is actually needed in the first place?

The other point I would make about cash basis is that, yes, for many it would make it easier to calculate their tax but there is the risk of peaks and troughs from one year to the next in terms of profits and, whether that may then present issues with mortgage applications or the simple ability to properly advise clients on the performance of their business, then I fear that all MTD is really focused on is tax tax tax with no consideration of business issues.

So I will respond to the consultation document but alas I feel that they are simply not asking the right questions at this stage.

To counteract that I actually wrote a long letter of my thoughts to my MP Chris Grayling just over a month ago and received a proper reply within a week advising he had passed it on to senior levels in HMRC and would advise me when he has further news.

Personally I think that is the kind of noise we need to be making here. Let those feelings be truly known to those in power.

Thanks (4)
Replying to youngloch:
By leon0001
16th Aug 2016 12:54

Don't just rely on Mr Stokdyk's, albeit intelligent, comments above.

The matters you have mentioned are spelt out in the other five consultation documents that HMRC issued yesterday. Each is between 20 and 40 odd pages. I strongly suggest that we must all carefully read all of the consultation documents and respond, while there is still a remote chance of mitigating the rolling disaster about to happen.

MTD constitutes the biggest change to UK taxation since the introduction of VAT in 1975. It is certainly more revolutionary than the introduction of SA twenty years ago.

The consultation titles are deceptive, "Simplified" means exactly the opposite and "tax administration" sets out a draconian new penalty regime for late filing and late payment.

These are indeed "interesting times" in the traditional Chinese sense.

Thanks (1)
By youngloch
16th Aug 2016 12:49

To update the above I have just seen that there have been other consultation documents issued yesterday on other topics around MTD so I "look forward" to reviewing those.......

Thanks (0)
By leon0001
16th Aug 2016 12:56

The above illustration is misleading. Handwritten records will not be accepted as sufficient under the new regime.

Thanks (0)
By MC1
16th Aug 2016 15:05

Some of us accountants (and the clients) may be thinking that small clients will defect from their accountants and pay a little more tax in the process.
HMRC's golden bonus will be in the raw cash savings generated by a reduction of tax credits (and other benefits) for a lot of these small businesses who will begin to declare larger profits. That tax credit saving rate is far far greater than any tax rate.
So a pat on the back for government giving a feel good factor with small businesses becoming more profitable. And a nice windfall of more tax and not only that lots and lots of advanced booty (voluntary payments, advanced CGT, etc, etc) on the horizon to add to the pot of advance payments they achieved on introducing SA POA's. Hmm...just need to see where that nice big SA pot has gone.
Government / HMRC playing with the fools yet again and laughing all the way to the bank I should think!!

Thanks (1)
By Michael Wigg
16th Aug 2016 15:24

Is it possible to explain to HMRC that accounting requirements are not only related to taxation? There are substantial requirements under the Company Acts, under trading when insolvent rules, under requirements for non-payment of bribes and so many other acts and judicial decisions. Perhaps, perhaps cash accounting will satisfy the Taxation authorities, but it does not satisfy these other legal requirements. Does this mean the production of separate accounts to satisfy each of these laws? It is not only to satisfy the Inland Revenue that accounts are needed.

Thanks (0)
Replying to Michael Wigg:
By youngloch
16th Aug 2016 17:12

What this will cause is those of us who "do things properly" being put under incredible time pressure and then potentially forced to take short cuts.

Call me old fashioned but we still prepare balance sheets for our self employed small business clients - HMRC seem to think that will go out the window.

It will just be a 30 day sprint once a quarter to calculate a 3 month profit and then, in theory, tidy up later in the year with the annual submission.

Or do we let the clients loose on their quarterly updates and then tidy up the mess..... Will clients really be able to balance bank/credit cards/debtors/creditors/payroll/cis themselves with an app?

"Take a picture of the receipt". Yes indeed every receipt they can find will be going in there.......

They say if it ain't broke don't fix it - well I fear it's about to get broke..........

Fee increases for "proper" business clients coupled with resigning from clients who are going to cause stress seems a sensible plan to me right now.

That's how we will have more time to do the more productive work we crave to do.

Thanks (3)
By coolmanwithbeard
17th Aug 2016 16:55

The whole take a picture on your phone is a reality - but it's not (afaik) an integrated part of any existing accounts software. The service I use (Receipt Bank) costs extra and will save time if used correctly and trained correctly. It is not particularly cheap - (but is OK compared to paying someone to do the same thing) and there are different offerings out there that of varying quality.

Free software - so where does my income stream of selling clients QB Online subscriptions fit into that. They're not going to pay me if some spotty youth writes Are they allowed to distort the market in this way?

The software they say they want is just not available nor is it likely to be and certainly not for free. Of course I can't find the question in the consultation that says are we living in cloud cuckoo land?

Timescales - one month for quarterly filing and then up to 9 months for the year end additional filing. Agreed that might spread it through the year except that most self employed people have taken the advice of their accountants to avoid overlap profits and have 31st March - so add 9 months .... yes 31st December. I assume they will be manning the phones Christmas Day and that their systems won't crash on New Year's Eve?

And then why all the full about digital - it boils down to a quarterly submission of a TB by the looks of it - no transactional information they say. So why cant we do it on paper and upload it like we do with the VAT now?

And what is the aim? Well the stated aim is so that Mr Client knows what his tax bill will be. I can tell him that!


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