The long-awaited MTD consultation documents are with us. Over the next 12 weeks, there is going to be a lot of hard thinking needed and some detailed suggestions to be fed into HMRC about the practical implications of the systems change envisaged. But to go with a first impression now, what does it all look like?
The con docs make quite surprising reading; breath-taking, in fact. The surprises? They included the very much appreciated fact that HMRC has listened to some of the initial input from businesses, agents, professional bodies and organisations like the Federation of Small Businesses and adapted the programme accordingly.
So we have exemptions for unincorporated businesses and landlords with turnover under £10,000 p.a. There’s a year’s grace for a tranche of other small businesses – threshold here yet to be determined. There are some concessions on the digitally excluded. Other aspects have been outlined here, and include the possibility of financial support to help businesses make the transition.
All this is very encouraging. It can’t but help public confidence in government if stakeholder engagement can be used constructively in this way.
MTD - Plus
But on a first consideration of the proposals, perhaps the biggest surprise is that we’re not just looking at Making Tax Digital.
‘The way you interact with the tax system is changing. From 2018 it will become increasingly digital and most businesses, the self-employed and landlords will need to use software or apps to keep their business records, and to update quarterly,’ to quote the overview document.
That’s the news we were expecting. But the plans are even more ambitious and far-reaching than that. We’re looking at Making Tax Digital – Plus. The Plus involves all sorts of ancillary changes to make MTD ‘fit.’
‘The underlying tax rules will be simplified to support these changes,’ as the overview puts it.
Some of these changes are quite radical, and they’re proposed for the same timescale as the MTD roll-out.
Simplifying tax for unincorporated business
The simplifying tax for unincorporated businesses con doc is a case in point. The issues dealt with here are increasing the turnover threshold for use of the cash basis of accounting (s31A ff, ITTOIA 2005) and redefining basis periods. Note the simplified expenses rules are not being reconsidered (s94Bff, ITTOIA 2005).
So we don’t just have MTD, we have MTD Plus fundamental change in basis period, non-GAAP compliant accounts and new rules to simplify decisions on deductibility of capital expenses.
The basis period suggestions are quite radical, and could see a move towards a system similar to that for companies, or even to non-annual tax periods. This would open the door to, for example, three-monthly updates where the tax liability would crystallise for each quarterly period, without any annual computation.
For universal credit claimants, there would be the possibility of monthly tax periods, so giving finality in each claim period.
From a practical point of view, simplification of basis periods could be a significant advantage, once the initial hurdle of overlap relief for pre-existing business with non 31 March / 5 April year ends is overcome.
And digital as well
Quarterly updates are likely to comprise three-line accounts for businesses that are under the VAT registration threshold, but more detailed accounting analysis will be required behind this.
The big question is who will make the quarterly submissions? Client digital records will be linked to their Business Tax Accounts, and all the HMRC examples in the con docs assume the client presses the button, and catches up with their accountant at the year-end. For some, one self-assessment return becomes four self-submitted quarterly updates, plus a final, fifth, update by the accountant.
With one month from the end of the quarter to make submissions, the nine months offered to complete the year-end submission looks generous.
More generally, the consultation suggests the possibility of ‘non-GAAP’ compliant accounts. For businesses unable to use the cash basis, but which don’t require GAAP compliant accounts for other purposes, the suggestion is to modify or relax rules for closing stock, long-term contracts lasting up to one year in length, bad debt provision, and accruals and prepayments.
From a business point of view, it seems a mixed bag, potentially offering limited real advantage. But taking a step back, it’s all very busy. There’s a lot of tinkering around the edges going on.
Cash basis: looking at the capital - revenue divide
Here again, we’re not just looking at MTD, we’re looking at new rules, and we’re looking – ostensibly - to simplify decisions on deductibility of capital expenses.
The aim is essentially to give 100% immediate relief for most tangible depreciating assets, excluding cars; while disallowing expenditure on property, long-life intangible assets and more complex items such as financial instruments. For an overview, see
This is an acknowledgement that the current capital deduction rules for the cash basis can require significant expertise.
Simplified cash basis for unincorporated property business
The proposal here is to extend a slightly modified version of the cash basis, as available for trading income, to unincorporated property businesses.
It is suggested that this could apply to property businesses with a turnover of under the compulsory VAT registration threshold (£83,000 in 2016-17).
On the plus side, this would give immediate relief for unpaid rent. On the downside, interest relief would be restricted. The trading cash basis limit of £500 would not apply, but mortgages would need to be tied to property used in the business, and not exceed the value of the property. Interest relief on residential property would be restricted to basic rate (in line with 2015 Budget).
For residential lettings, furniture etc would be allowed on a replacement basis. There are potential complexities around security deposits: where these are held by the landlord, the cash basis would treat them as income.
All in all, not only do we need to think about MTD - as a profession, we are being asked to think through the implications of these proposed changes for our clients, and get that input back to HMRC.
Rabbits from the hat
So when it came down to it, the MTD con doc launch wasn’t just about MTD, it was very much wider than that - and it has produced some unexpected rabbits from the hat.
This means there are number of major challenges ahead. We have the prospect of smoothing a digital path for client and business alike – something we have hardly touched on here. But not only that, we have simultaneous add-on changes as well.
Mostly to be effected by 2018.
I think we cancel the Hebridean cruise, Jeeves.
Over the next three months AccountingWEB will be collecting feedback to HMRC's package of MTD consultations. Feel free to raise any points about the different issues by commenting here, on the individual consultation summaries or our MTD frequently asked questions article. If you'd like to find out more about Making Tax Digital, register for our online 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.