Making Tax Digital for Business (MTDfB) is a key part in the Government’s plan to modernise the tax system – it is the biggest change in tax administration in decades.
It will affect every business in the UK, including those with rental income, and will change the way that businesses keep their accounting records, report profits and interact with HM Revenue & Customs (HMRC). The biggest change is the need for digital record-keeping. This will involve software or apps to record income and expenditure, which will be submitted to HMRC.
In recent times, software providers have produced amazing accounting programmes to make bookkeeping much easier and, to a certain extent, de-skilling the whole process. Larking Gowen works mainly with QuickBooks Online (QBO) but there are several other providers that offer similar programmes. These programmes are able to import data directly from your business bank account, analyse and reconcile transactions, and link to other programmes that may be appropriate to your business.
For example, ‘Receipt Bank’ can scan an invoice (you don’t need to keep the paper copy). The transaction is now in the accounting records and is reconciled to the matching payment. It sounds simple, and it is, but obviously it is important to have the set-up correct at the beginning.
Consequently, many have been predicting that MTDfB will make accountants redundant. ‘Great!’ I hear you say, ‘That will save me a few hundred pounds.’ However, before you consider sacking your accountant, think about how he or she can become a much more valuable investment. Whilst the previous Government introduced the Office of Tax Simplification (OTS), initially as an advisory organisation, the OTS has made useful recommendations, and some areas of tax have been simplified. However, Finance Acts are becoming longer and more complex, making it difficult for the public to understand the legislation.
Accountants are therefore a valuable resource as a trusted business adviser, in particular, someone you can talk to, making sure that you do not fall foul of the complex tax legislation.
The best way to illustrate this is to give you a few examples of scenarios that can, and have gone wrong:
• David has recently retired. As part of his inheritance tax planning, he is living in the property that he had gifted to his son. David could just as easily have gifted cash to acquire the property. David lives rent free and believes that his son will not be caught by inheritance tax as this change occurred four or five years ago. However, the tax situation is not clear cut. David’s gift is likely to be caught by inheritance tax under the gift with reservation rules, which would apply upon his death. In addition, with the complex rules, David could also be caught by the pre-owned assets tax (POAT), an annual income tax charge based on the rental value. Both taxes could be avoided with the correct tax planning advice.
• Sheila has also recently retired and lives a modest lifestyle. She has always given generously to charity and whilst her income has decreased in retirement, she still intends to Gift Aid about £1,200 per year. She receives a small occupational pension and her state pension, together with £3,500 of dividend income from inherited shares. For 2016/17, therefore, she will pay no income tax, her income being covered by her personal allowance and dividend tax allowance. The charity will reclaim £300 tax from HMRC. However, Sheila will now need to pay that £300, possibly via self-assessment, or alternatively, cancel her Gift Aid declaration.
• Jack recently received a significant tax free sum. He does not need the cash, and feels that he can make a large contribution to his pension. He feels he will also benefit from a tax saving for the contribution, and he is aware that he can carry forward unused annual allowance for three years. His annual salary is £65,000, and he contributes £80,000, expecting a tax refund based on higher tax relief. However, tax relief is restricted to his relevant earnings, so if Jack claims the gross relief of £100,000, his tax return will be incorrect and possibly subject to interest and penalties. The position could be even worse if his employer is also contributing. An adviser will be able to advise the correct limits.
• A few years ago, Heather married Warren, and decided to move abroad. She kept her property in the UK and decided to rent it. Her parents recently died and she is now also renting out the property she inherited from them. Whilst initially dealing with lettings herself, she has recently engaged an agent. She has been informed that as a non-resident landlord not registered with HMRC, her tenants should have been deducting tax from their rent. A tax adviser can help with a disclosure to HMRC and give advice regarding capital gains tax for non-residents.
Tip of the month: From April 2018, class 2 National Insurance contributions will be abolished. Self-employed workers will have to pay more expensive class 3 contributions to build up entitlement to contributory benefits. This could be important for the self-employed, particularly for those with low profits. I recommend that they check their National Insurance record and make up any deficiencies before that option becomes more expensive. Currently you can ‘plug the gap’ by making back payments of class 2 for the past six years.
Please take professional advice before making any decisions. If you would like a copy of our Making Tax Digital guide, please email me at firstname.lastname@example.org or follow the link below: