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Changes to reporting income for SMEs and Individuals

July 7th, 2017 Posted by Accounts software, Business, Cloud accounting, MTD, Tax 0 thoughts on “Changes to reporting income for SMEs and Individuals”

I would urge you to spend just a few minutes reading this … I’ll do my best to keep this as short as possible, sticking to the key points …

Making Tax Digital (MTD) is a HMRC initiative which is due to come into effect from April 2018.  Essentially, all businesses (sole traders; partnerships; limited companies) and individuals who are required to submit Self Assessment Tax Returns with income over £10,000 per annum, will be required to submit details of their income and expenditure to HMRC on a quarterly basis, digitally, in a pre-prescribed format.

Businesses and individuals will inform HMRC of their income and expenditure for a three month period, and HMRC will calculate the tax payable.  This calculation will not take account of accounting and tax adjustments, this will be just a simple calculation of income less expenditure, which will need to be submitted within 30 days of each quarter.   Larger businesses and those who are VAT registered should not find this too onerous task, as these businesses will already be in the habit of collating information for tight deadlines.  However, smaller businesses and those who are, shall we say, a little less organised, need to get organised for Making Tax Digital coming into force.

I have heard some businesses saying “Oh, it doesn’t matter my accountant will take care of it” …. Yes, we shall where clients want us to deal with the additional filing, however …. or maybe “but” would be a more appropriate word, there are a couple of issues:

Firstly, as springs to most smaller business owner’s minds, what will the costs be for this extra work carried out by my accountant?   There will be additional fees where we are instructed to deal with the additional quarterly filing.  However, at the moment until we can see exactly what the requirements will be we are unable to confirm costs.  We generally anticipate though that the smaller the business, the lower the fees.

Secondly, and this is probably the factor of more concern, is the impact on cashflow once quarterly tax payments come into effect.   At some point, a date yet to be confirmed, tax payers will be expected to pay the tax payable each quarter (in real time).  Clearly, spreading the payment of tax throughout the year is a great idea – not having a large tax bill nine/ten months after a year end is a far improved process.    However, the information which will be submitted to HMRC will not take account of tax adjustments and therefore it is far more likely that tax will be overpaid throughout the year, and then refunded once the final year end accounts and tax returns are submitted.

There is also the effect on cashflow on the transitional year where we move from paying tax once or twice a year (depending on the business structure) to paying on a quarterly basis.  There will be a year where many are paying tax for the previous year (as we do currently) and also need to pay any tax due every three months, with that same year.

Quarterly reporting is due to take effect from April 2018 for businesses (sole traders and partnerships) and individuals who have income over the VAT threshold (£85,000).  Limited companies and those that are VAT registered will move over later.  Those with a turnover under £10,000 are exempt.  It may well be that in light of Brexit and other challenges that the Government has, that MTD going live is pushed back until 2019.   However, it has been made clear that this will go ahead at some stage.  The UK are basing their model on that of Sweden, which went live four years.  Much of Europe and the US already file quarterly tax returns.  The dates are yet to be confirmed as to when quarterly payments will take effect.

I hope that I don’t sound too negative about these changes … I am all for it … At Clarand we work digitally with our clients and we anticipate the transition should be smooth, however there will be some challenges ahead for some businesses and individuals in the transitional years.  I think the saying goes …. “By failing to prepare … you are preparing to fail”.  Clarand Accountants have already held a seminar about MTD for their clients, and will be holding more later in the year.

Claire Priestley

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