Making Tax Digital
Accountant Richard Norbury gives a comprehensive round-up of the last Government’s plans to reform the payment of tax in an attempt to make it reflect real time.
Making Tax Digital (MTD) is a term that has been used for a number of years, but due to a mixture of reasons, including the Covid-19 pandemic, has been delayed.
The last Tory Government believed that there was a so called ‘tax gap’ and that failure to take reasonable care accounts for the largest proportion of the tax gap, followed by error as the second largest factor.
MTD has been a key part of its ten-year strategy to build a trusted, modern tax administration system – so they said!
Overview
MTD requirements for businesses and individuals include:
- Keeping digital records;
- Using software compatible with Making Tax Digital;
- Submitting updates every quarter, bringing the tax system closer to real time.
The aim is that these measures will make it easier for individuals and businesses to calculate their tax correctly and reduce the amount of tax lost due to avoidable errors and the new system will replace the more traditional methods of filing an annual tax return.
VAT-registered businesses
Those of you with medico-legal practices will be well aware that MTD VAT was introduced in April 2019 for some businesses and was extended to all VAT-registered businesses from April 2022.
Self-employed and rental income
MTD will be mandatory from April 2026 for the self-employed and those with income from property with gross income of more than £50,000 a year. Then one year later, from April 2027, the self-employed and income from property over £30,000 a year will join the scheme.
The limits are measured by comparing your sole-trader and property income previously reported.
For example, if you exceeded £50,000 in the tax year 2024-25, then you would be required to start MTD from April 2026 and if you exceeded £30,000 in the tax year 2025-26, you would be required to start MTD from April 2027.
It is important to plan ahead and file your tax returns in plenty of time to allow registration to the system and ensure that you have the relevant software and systems to be able to meet the demands. It is likely that financial penalties will be imposed for missed deadlines.
Corporation tax
For those of you who trade via a limited company, HM Revenue and Customs (HMRC) has stated that MTD for corporation tax will not be mandated before April 2026.
Partnerships
No timetable has yet been introduced for partnerships.
Exemptions
Certain businesses may be able to apply to HMRC to be exempt from MTD and will be considered on a case by case basis.
The only VAT-registered businesses who can apply for exemption are those businesses who cannot reasonably or practically use computers, software or the internet, which may be due to:
- Age;
- A disability;
- Running a business from a remote location;
- You object to using computers on religious grounds;
- Another reason why it is not reasonable or practical.
Planning
But the reality for most businesses is that MTD will be an administration and financial burden, so careful planning should be considered.
This may be planning to ensure that adequate systems and software are in place for you to meet the requirements or alternative measures such as bringing in family members to your business or property.
Cash basis
The cash basis is a method that eligible businesses can use to calculate trading profits for income tax purposes, as an alternative to using traditional ‘accruals’ accounting.
The traditional method of accounting will take into account fees invoiced as at the year-end but not paid at the year-end, amounts owing to creditors but not paid at the year-end and other balance sheet items.
It is worth noting that limited companies, partnerships with a corporate member or limited liability partnerships (LLP) cannot use the cash method.
HMRC believes that this method is a simplified regime that reduces the complexity of reporting income while still providing an appropriate measure of trading profits for many businesses.
Currently, a business has to elect to use the cash basis, usually through notifying HMRC as part of the tax return.
The accruals basis is the default method of calculating profits, and the cash basis is an ‘opt-in’ regime.
Default method
But, from the tax year 2024-25, the cash basis will be the default method of calculating trading profits and an election will no longer be required to use the cash basis, and businesses will calculate their trading profits using the cash basis unless they make an election to use the accruals basis.
Presently, businesses are only able to join the cash basis if their cash basis turnover is less than £150,000, and are forced to leave in certain circumstances where their turnover exceeds £300,000.
The new legislation removes this turnover restriction entirely, meaning eligible businesses of any size will be able to use the cash basis, allowing them to continue using the cash basis as they grow.
Other previous restrictions to the cash basis will also be relaxed including the ability to claim interest costs and loss relief.
This method of accounting may well be attractive to those of you with medico-legal practices due to the amount of time you have to wait before you are paid.
This method is not likely to suit large practices that may rely on a set of traditional-style accounts for finance from a lender or partnerships. In addition, it is very important that you continue to track your fees to ensure that you are paid for the work that you have performed.
Basis period reform
While not directly linked to Making Tax Digital, HMRC is attempting to make changes to the tax system, including basis period reform, which are designed to make the move towards MTD more streamlined.
If you have a sole trader or partnership business, it may be the case that your accounts are drawn up to a year-end that is not 31 March or 5 April.
In the year 2023-24, these businesses will undergo a transition whereby the ‘current year basis of assessment’ will be changed to a fiscal year basis – 31 March or 5 April.
The financial year-end of accounts can still be retained, if so desired, but adjustments made to tax profits on a fiscal year basis.
In these cases, it is likely that you were taxed twice on the same period of profit in the second year of private practice. This creates a figure known as overlap profit which normally will have been carried forward to the year that you retire or leave the business.
Sometimes this creates additional profit to bring into taxation. If this is the case, and you continue to trade in the business, then HMRC has allowed any additional profits to be taxed over a maximum period of five tax years from 2023-24 to 2027-28.
Any additional tax would have been payable on retirement from a partnership or cessation of private practice. There is also the option of bringing forward some profits and, in certain circumstances, accelerating the taxable profits may prove to be beneficial.
It is thought that the cash basis and basis period reform measures are designed to make the tax system simpler so that the reporting requirements can be achieved.
It has also been suggested that, once the system is up and running, HMRC may well use the quarterly reporting system to ask for more regular tax payments throughout the year.
Any decision on changing the method that you report your taxes should be a decision made after careful consideration and consultation from an accountant.
Richard Norbury (right) is a partner at Sandison Easson & Co, specialist medical accountants
