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MTD ITSA legislation: HMRC green-lights three-line accounts

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Long-awaited draft legislation for Making Tax Digital for income tax self assessment has confirmed that those with turnover under the VAT threshold will be asked to submit just two figures to HMRC under the scheme’s new quarterly update requirements.

4th Jul 2022
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The document confirms that a “relevant person” with an annual turnover below the VAT registration threshold - currently frozen at £85,000 until 31 March 2024 - may choose to “provide the total of all income and the total of all expenses instead of the totals of the amounts falling within each category of transaction”. 

While the decision did not meet AccountingWEB member calls for the MTD ITSA threshold to rise to £85,000, the simplification of the reporting was welcomed by the community as a ‘relief’ that will help lower-income traders comply with the new scheme. However, some members felt the draft regulations called into question the need for quarterly reporting, given HMRC would not be able to perform analysis or interrogation of the numbers on a three-line report.

"We have some important but relatively dry lists of data etc. that will need to go in quarterly updates and end of period statements," said Emma Rawson, technical officer for the Association of Tax Technicians. "Whilst it’s critical to have this, we will need to wait until HMRC publishes its guidance to get more information on how this will work in practice, in particular how tax and accounting adjustments will be handled and how everything hangs together.

"One thing which readers may welcome is the confirmation that those using ‘three-line accounts’ will be able to continue to report on these lines – ie if you are below the VAT registration threshold you can report total income and expenses (without splitting into categories) on your quarterly updates and end of period statements," continued Rawson.

Caroline Miskin, senior technical manager, digital taxation at ICAEW's Tax Faculty, commented that while the draft notices list some of the requirements, until the full guidance is revealed taxpayers, agents and software developers will be left with many unanswered questions. "In particular, the notices do not address the practicalties of reporting income from jointly held property," she said.

Miskin also reminded taxpayers and agents that there are no inaccuracy penalties associated with quarterly updates. "It's a summary of transactions, not a tax return," she added.

From a software perspective, Coconut co-founder Adam Goodall said HMRC "would be mad" not to do this. "Giving sole traders under the VAT threshold the option to submit consolidated income and expenses makes sense given they can do this under the current self assessment process already," said Goodall. "As HMRC has specified the consolidated submission on the MTD ITSA technical guidelines already, this will also bring alignment between technical specifications and governing rules - which brings welcome certainty for software providers like us."

Business types

The draft notices make it clear there are five different types of quarterly updates, depending on the type of business a taxpayer is conducting: 

  1. Businesses with trade profits
  2. Businesses with property income (not UK or EEA furnished holiday lets (FHL))
  3. Overseas property (not EEA FHL) 
  4. FHL in the UK
  5. FHL in the EEA

The draft document confirms that the MTD ITSA end-of-period statements (EOPS) will also follow the five categories above.

One point that may need further clarification is the relationship between the quarterly updates and EOPS - in particular, whether the figures need to be entered on the quarterly update submission and then entered again for the final statement. Accountants have questioned whether there will be a relationship or connection between the two - something hinted at in HMRC’s developer hub but not touched on in the draft notices.

While the draft notices don’t officially confirm this, AccountingWEB understands that the information in the quarterly updates will be effectively ‘played back’ to the agent or taxpayer when preparing the EOPS using data HMRC holds. The agent or taxpayer will then need to amend as required to get to the final taxable figures.

A related grey area is around where adjustments for disallowables must be made, and what mechanism will be used to make them. The document states: “Where a relevant person has not already decided whether the amounts included in each expense category of transaction set out in the Update Notice include any elements which are disallowable, the relevant person must remove any disallowable expenditure prior to providing the EOPS total for the relevant period.

More guidance is expected on this later in the year, but it is anticipated that all tax and accounting adjustments will be made in the EOPS - they can be made in the quarterly updates, but there is no requirement to do so. Agents or taxpayers may, however, have to amend a quarterly update if an income or expense item is missed by accident.

Retail sales and consultation period

The document clarifies the position on retail sales. Similar to the MTD VAT notice, digital records mean a single digital record of the daily gross takings for any retail sales made. The gross daily retail sales digital record must include:

  • all payments as they are received by the relevant person or on the relevant person’s behalf from its own cash-paying retail consumers. This includes payments by cheque, debit or credit card, maestro, visa or similar electronic transactions and electronic cash;
  • the full value of all credit or other non-cash retail sales received by the relevant person or on the relevant person’s behalf. This includes the full value of credit sales, the cash value of payment in kind for retail sales, the face value of gift, book and record vouchers received and any other payments for retail sales including those sales completed via third-party online sales platforms.

A full list of things to exclude when calculating daily gross takings is also provided, including counterfeit notes, refunds to a consumer for overcharges or faulty/unsuitable goods, and instalments in respect of credit sales.

Published on 1 July, the document is an open consultation running until 11:45pm on 28 July 2022. Although there are no formal questions accompanying the consultation, accountants and other interested parties can respond to the government via the following email address: [email protected] 

AccountingWEB is also in regular contact with HMRC and the relevant tax and accountancy bodies to answer questions relating to MTD ITSA. If you have a question you’d like to answer please add it to the comments below.

Rebecca Benneyworth will cover the MTD ITSA draft notices on AccountingWEB’s Tax Talk webinar on Wednesday 6 July at 9am. For more information or to sign up please click here.

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Replies (103)

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By Winnie Wiggleroom
04th Jul 2022 12:49

The obvious question is - what's the point?

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Replying to Winnie Wiggleroom:
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By Open all hours
04th Jul 2022 12:53

And until your excellent concise question is answered comprehensively by HMRC we should hear no more about this vanity project.

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Replying to Winnie Wiggleroom:
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By sammerchant
04th Jul 2022 13:00

Tick the box! Which is imperative with HMRC.

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Replying to Winnie Wiggleroom:
By ireallyshouldknowthisbut
04th Jul 2022 15:03

Winnie Wiggleroom wrote:

The obvious question is - what's the point?

its going to close the tax gap and improve efficiencies in small business through digitalisation of records.

I think that is the genuine reason offered. However ludicrous it seems.

In other news the answer to Climate Change is my running to Edinburgh with a potato balanced on my head.

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Replying to Winnie Wiggleroom:
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By Paul Crowley
04th Jul 2022 15:12

I recon this will exceed 150 comments requiring a fourth page

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Replying to Paul Crowley:
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By Hugo Fair
04th Jul 2022 16:53

Especially if anyone manages to find what HMRC actually published ... and manages to read it without dying of either ennui or a sense of 'and where's the rest of it?'

It's not that long, but neither is it laid out with comprehensibility in mind.

https://www.gov.uk/government/consultations/tertiary-legislation-for-mak...

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Replying to Hugo Fair:
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By NotAnAccountant2
04th Jul 2022 17:12

Hugo Fair wrote:

Especially if anyone manages to find what HMRC actually published ... and manages to read it without dying of either ennui or a sense of 'and where's the rest of it?'

It's not that long, but neither is it laid out with comprehensibility in mind.

https://www.gov.uk/government/consultations/tertiary-legislation-for-mak...

Update notice – made further to regulation 8

o Businesses with property income (income chargeable under Part 3 of ITTOIA)

oo UK property (not UK or EEA Furnished Holiday Let (FHL))

ooo Transactions that lead to property expenses

Residential property finance costs

So mortgage interest is an expense again?

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Replying to NotAnAccountant2:
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By Hugo Fair
04th Jul 2022 17:25

Who knows?
And I include HMRC in that cohort of non-knowers.

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By North East Accountant
04th Jul 2022 12:55

Sub headline
"Long-awaited draft legislation for Making Tax Digital for income tax self assessment has confirmed"
In the article
"the document is an open consultation"

Cool your jets people.......this doesn't look like the long awaited MTD ITSA answers....HMRC are still asking questions.

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Replying to North East Accountant:
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By MCV71
04th Jul 2022 13:09

Yes, like you say, key word draft. Seeing as it has reduced to just two numbers in a draft, what's the betting by the time it's final then it will only apply to those already VAT registered.

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Replying to MCV71:
By ireallyshouldknowthisbut
04th Jul 2022 15:04

MCV71 wrote:

Yes, like you say, key word draft.

heh i read that as "Daft"

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Replying to ireallyshouldknowthisbut:
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By BryanS1958
04th Jul 2022 16:52

The key word IS daft.

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Replying to ireallyshouldknowthisbut:
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By BryanS1958
04th Jul 2022 16:52

The key word IS daft.

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Replying to North East Accountant:
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By Hugo Fair
04th Jul 2022 14:45

Quite ... draft legislation doesn't provide much of a bedrock, but a mere 'open consultation' is really more of a 'leaked' document to 'test the water'.

I nearly posted an analysis of the document on Friday but couldn't be bothered - given that:
a) None of the key outstanding issues raised on this forum are addressed; and
b) Allowing "three-line accounts" is a public admission that the white flag is being readied (as it removes the last vestiges of justification but leaves in place the burden & costs for small sole traders).

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By mikeyban
04th Jul 2022 13:04

Really does not matter if it 1, 2 or 12 boxes it is not necessary and will either cause accountants to leave the profession and or have tax payers shoving any old rubbish (probably including their drawings) as expenses.

If they want quarterly payments have it as now based on the previous year.

This is the prince and his trousers.... any idiot can see he is in the nude.... except HMRC.

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By The Rogue
04th Jul 2022 13:05

Will a self-employed taxpayer need to acquire software to submit these two figures?

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Replying to The Rogue:
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By David Ex
04th Jul 2022 13:24

The Rogue wrote:

Will a self-employed taxpayer need to acquire software to submit these two figures?

Exactly. I made the point on the AA thread that surely 2 or 3 numbers a quarter can be manually entered onto the taxpayers online SA record. How much is the cheapest software likely to cost annually?

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Replying to David Ex:
By Nebs
16th Jul 2022 18:13

According to HMRC, on 2/2/2022....

Costs
HMRC estimates a transitional cost to business of around £1,383m and a net increase in the ongoing costs of tax compliance of around £152m for those businesses mandated to use MTD ITSA. This equates to an average transitional cost of £330 and an annual cost of £35 per business within scope.

Businesses within scope already operating MTD VAT or using digital tools for business administration may incur relatively little cost, where other, less digitally capable businesses, may be more affected by one-off transitional costs as they move to MTD processes.

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Replying to Nebs:
Morph
By kevinringer
18th Jul 2022 08:41

It's a far cry from HMRC's initial stance that MTD would be cheaper for businesses than non-MTD, though the costs are wildly out. £35 a year. The software alone will cost much more than that.

As for businesses already operating MTD VAT, currently most of my clients use spreadsheets and bridging software (mainly Absolute VAT Filer). Clients can generally cope with this because they're just typing in what is on the invoice and only needing to record VAT transactions. MTD ITSA requires the user to make judgement (eg capital v revenue), to split expenses and to include non-VAT transactions. Without doubt, few clients will be able to accurately record all this and none will be able to build their own spreadsheet.

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By MCV71
04th Jul 2022 13:06

So even more of a bang in any old number job then

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By JD
04th Jul 2022 13:15

Is there any reason why a client could not simply take the two totals (income and expense) from the bottom of their existing digital records (the bank statements) and file those.

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Replying to JD:
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By MCV71
04th Jul 2022 13:16

No reason at all as the adjustments will be done at the year end. It's a total farce.

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Replying to MCV71:
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By JD
04th Jul 2022 13:33

I would agree, no value or purpose to any of it

Given that the year end accounts are often completed from bank statements, you then have the link you may, or may not, feel you need from the initial submission

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Replying to JD:
Morph
By kevinringer
04th Jul 2022 15:05

A couple of problems with JD's suggestion to use the bank statement totals:
1. MTD ITSA requires a digital link between the bank statements and the submission so it won't be a case of inputting the totals but actually importing the bank statements which is beyond the ability of 99% of my clients.
2. The bank account statements will include non-business transactions such as drawings, tax etc. Whilst private usages can be dealt with on the final submission, that is only for mixed business/private transactions. My understanding is that transactions that are 0% business should not be recorded in the first place.

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Replying to kevinringer:
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By JD
04th Jul 2022 15:54

Thank you, Kevin

I was thinking in terms of CSV download, total the two columns and bridging software to file, which I assume will be available at the time, rather than import into software of choice (which I would agree is more than 99% of my clients could cope with as well)

I do note your 0% business purpose point (which is often beyond the average client as well). Within excel would it not be relatively easy to create a formula and/or macro to create your totals excluding obvious drawings.

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Replying to JD:
Morph
By kevinringer
04th Jul 2022 16:28

CSV download would work for the 1% of my clients that could handle it. But as for a macro for obvious drawings: what is obvious to me and you is not at all obvious to my clients. Most are farmers and there is a very indistinct line between business and non-business to the point that they often genuinely feel there is a business purpose to some 100% non-business expenses. But as only 1% of my clients could have to tackle this anyway, maybe I'll just have to check the whole lot and charge accordingly.

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By Tri622
04th Jul 2022 13:15

Sure, it might only be two figures but the amount of work involved is the same as to get the individual box totals - might as well put zero's in and then work it all out at the year end correctly??? As clients are going to want to pay for this throughout the year or do it themselves and then realise how wrong they got it when the final one goes in! But hey ho - we obviously have lots of time on our hands and won't be charging our clients for this increase in work. Can't believe they are actually going to implement this!

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By MCV71
04th Jul 2022 13:24

Just use the previous year's tax return. Divide by 4. Enter same figures each quarter. Adjust at year-end. HMRC don't even have the staff to check current SA Returns and VAT Returns, never mind this ridiculous system.

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Replying to MCV71:
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By Cathy Milligan
04th Jul 2022 14:19

This will be my strategy.

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By tedbuck
04th Jul 2022 13:31

Lunatics in charge of the asylum.

This is just like Putin in Ukraine - we know it won't work and it is costing barrel loads of money but we will carry on as we don't want to lose face and admit we were wrong. It doesn't matter how much destruction it causes or how many people are stressed out or forced to spend money unnecessarily because HMRC are never wrong.

I don't think I have ever seen such stupidity and arrogant contempt for the people who have to pay their salaries and who will have to fork up for this nonsense. The kick-backs from the software people must be huge. I suppose that HMG members and HMRC members must have a few shares in the software companies. Sounds highly dodgy to me. Are there Oligarchs in HMRC? Perhaps they'll change its name to KGB at least it would be more honest and think of all the ink it would save.

I cannot remember being so disgusted with a government (?) department.

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By Kaylee100
04th Jul 2022 13:35

This is getting crazier by the week.

Set up MTD for ITSA like Annual Accounting VAT. Collect 9 payments on account by direct debit, based on the previous year, and the 10th on submission of one annual tax return based on a years digital records (if they really insist) for self employment, partnership and property. Rinse and repeat.

The thinking behind the technology for this is in place for this and tried and tested. The money is collected a bit earlier.

A two line requirement in its own way undermines the system before it starts as it makes it sound like a Friday afternoon afterthought, not some world beating move into a future world of digital reporting.

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By Silver Birch Accts
04th Jul 2022 13:38

You really would have to possess a hear of stone not to laugh. It has taken seven years to come up with the 'old three line accounts policy'. What the hell are these overpaid idiots, with their fancy titles, doing with their time. They expect us to explain to clients that it may cost£30.00 a month to file three figures, four times a year, to achieve beggar all. I think some HMRC people should now begin to consider their postions.

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Replying to Silver Birch Accts:
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By MCV71
04th Jul 2022 13:40

It's ranks about the same as most other policies from the last 12 years from this lot. Scandalous waste of taxpayers money.

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By Hometing
04th Jul 2022 13:39

I fail to see how this aids tax transparency.

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By taxinfohub
04th Jul 2022 13:48

I don't even know where to start, the brevity of the information provided, the inconsistency between these documents and the technical developer API documentation or the complete lack of any examples? A good starting point, if this has any hope of becoming a reality, would be for HMRC to provide some end-to-end examples, with real numbers that add up, going from quarterly updates, end of period statements, final declaration through to the tax calculation. Until we get that there is no chance of viable software being ready for April 2024.

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By taxinfohub
04th Jul 2022 13:48

I don't even know where to start, the brevity of the information provided, the inconsistency between these documents and the technical developer API documentation or the complete lack of any examples? A good starting point, if this has any hope of becoming a reality, would be for HMRC to provide some end-to-end examples, with real numbers that add up, going from quarterly updates, end of period statements, final declaration through to the tax calculation. Until we get that there is no chance of viable software being ready for April 2024.

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By petestar1969
04th Jul 2022 13:54

Hmm...

So, a VAT-registered sole trader (say a builder) who also has a BTL property as a pension, rented out at £900 a month, as an example.

Currently makes 5 submissions to HMRC in a year, 4 VAT returns and an SA return.

Under this system they will make 13? 14? Maybe 15? submissions to HMRC in a year.

The 4 VAT returns and 4 MTD ITSA returns each for the trade and rental (as the rental is more than £10k a year),that's 12.

Then the EOPS submissions, one for each (so 14), or just a combined one (so 13), or one for each and a combined one (15 total)?

Do they also need to keep 2 sets of digital records (2 Xero subs), one for the trade and another for the rental?

Please put these questions to whoever is in charge of this shambles-in-waiting.

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Replying to petestar1969:
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By Cathy Milligan
04th Jul 2022 14:23

But wait...
This builder may also be a contractor so there may be CIS returns , and then, perhaps he takes on an employee, so there are RTI returns. Whoops - just added another 24 submissions....

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Replying to Cathy Milligan:
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By petestar1969
04th Jul 2022 15:07

I know, its bonkers

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Replying to petestar1969:
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By AlbertJ
04th Jul 2022 14:33

That is assuming they do not have to file weekly RTI reports (52) and monthly CIS returns (12).

As said earlier - "Time to retire"

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Replying to AlbertJ:
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By petestar1969
04th Jul 2022 15:08

I know, its bonkers.

Hmm, I turn 55 in 2024, retirement definitely beckons.

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Replying to AlbertJ:
Morph
By kevinringer
04th Jul 2022 15:10

Maybe we accountants should change or pricing model. We should ditch the time sheet and offer to do accounts for free and "only" charge for each HMRC submission, maybe £90 per submission for a small business/subcontractor/landlord ranging to perhaps £500 for a larger unincorporated client.

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Replying to kevinringer:
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By petestar1969
05th Jul 2022 11:32

Time sheet? I haven't filled one of those in for years....

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Replying to petestar1969:
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By Moo
05th Jul 2022 10:24

And then there is his wife co is co-owner of the rental property and a self employed hairdresser, so similar filings minus the VAT but she uses a different accountant. All very small business but big complexity.

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Morph
By kevinringer
04th Jul 2022 14:06

As MTD ITSA will permit 3-line P&L, how will the user input the data into software? Will the user still have to allocate expenses into one of the SEF2 P&L categories, or will it be sufficient just to allocate it as "expense"?

If the former, what's the point of the 3-line P&L because it won't save any time/complexity?

If the latter, I can see lots of small businesses allocated 100% of their bank debits to "expense" including drawings, tax etc. Also, what would happen if the business starts the year anticipating sub-£85k turnover and therefore allocate all expenses to "expenses", but turnover increases and they end up having turnover over £85k?

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By DMBAcc
04th Jul 2022 14:25

So again I ask. When are we going to say NO, enough is enough. A kindergarten would come up with a better plan than this. Let’s just offer to get our clients to agree to quarterly payments in advance based on the previous year and stop all this HMRC pretence.

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Replying to DMBAcc:
Morph
By kevinringer
04th Jul 2022 15:07

HMRC already receive payments in advance. The first payment on account is before the end of the tax year, so is always a payment in advance. The second payment on account is after the end of the tax year but before most business accounts are prepared, so it is an advance payment based on the previous year.

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By JohnB
04th Jul 2022 14:52

Interesting to note that this 'relief' was 'welcomed by the community'.
Since we heard about the relief approx a couple of hours ago, I wonder what community has had time to welcome it?
Possibly the 7 or so people who have signed up to the pilot scheme.
If so, we can calculate that 7/67,000,000 of the UK population has given a heartfelt welcome to this joyous announcement.

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Replying to JohnB:
Morph
By kevinringer
04th Jul 2022 15:12

That is 0.00001% of the population. HMRC will probably consider that a success.

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Replying to JohnB:
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By NotAnAccountant2
04th Jul 2022 15:31

JohnB wrote:

Interesting to note that this 'relief' was 'welcomed by the community'.
Since we heard about the relief approx a couple of hours ago, I wonder what community has had time to welcome it?
Possibly the 7 or so people who have signed up to the pilot scheme.
If so, we can calculate that 7/67,000,000 of the UK population has given a heartfelt welcome to this joyous announcement.

Well I'm confused because "three line summary accounts" has always been allowed by the api. But I'm at a loss as to how they work.

https://developer.service.hmrc.gov.uk/api-documentation/docs/api/service...

If you submit "consolidated expenses" in the quarterly figures then there is a single expense value. Look under this: Create a UK Property Income & Expenses Period Summary - Scenario: Consolidated Expenses request.

But in the Create and Amend a UK Property Business Annual Submission endpoint for the end of year I don't see any way to adjust "finance costs" - so I guess consolidated expenses only exist for people without a mortgage - and the finance costs must be submitted quarterly - which means every BTL lender is going to be inundated with requests for statements every quarter.

I cannot see any way to carry forward unused restricted finance from earlier years either.

(Or are they quietly removing the restriction on finance costs? Perhaps that's how they'll sell MTD...)

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