Who is affected and when
Schedule A1 starting on page 113 of the Bill confirms plans to go ahead with quarterly reporting under Making Tax Digital for all unincorporated businesses over the VAT threshold (£85,000 from 2018/19 tax year) from April 2018 as announced in the Budget on 8 March. Initially this will affect sole traders, landlords and the self-employed.
Those who are below the VAT threshold will have to start mandatory quarterly reporting from April 2019. Partnerships with fee income above £10m will have a deferral to April 2020, aligning them with limited companies who also begin quarterly filing from April 2020.
All VAT registered businesses irrespective of turnover levels will have to report VAT through the new system from April 2019 as current arrangements will be superseded and any online or paper submissions outside the Making Tax Digital IT system will not be permissible.
The £10,000 turnover entry limit is not mentioned in the bill so it appears that this may still be up for debate as part of the ongoing HMRC consultations.
Any change in the accounting period of a business will be disregarded which means that companies can review their reporting period (i.e. change it from 5 April to 31 March) to delay mandatory reporting. This is because MTD will impact accounting periods beginning on or after 6th April.
The information required for the ’periodic’ quarterly updates will include ‘financial information’ relevant to calculating profits, losses or income of the business including information about receipts and expenses for the relevant period. An end of period statement will also be required and for this, relevant period will be the basis period or tax year.
Partnerships will also have to report under Making Tax Digital with a designated or so-called ‘relevant’ partner required to make a return for the firm. A ‘relevant’ partner means any person who was a partner in the partnership at any time during the period in question.
It will be possible for businesses to submit quarterly returns up to 10 days before the financial period end if it is effectively closed, provided they have notified HMRC.
Businesses will also be required to provide corrected information with their next update if the information submitted in a previous update is found by the business to be incorrect.
The regulations will allow businesses to submit updates for periods shorter than 3 months however, where they do so, they will still be required to submit information in respect of the remaining part of the 3 month period.
End of period statement timings
As well as quarterly updates, taxpayers will be required to provide an end of period statement or partnership return for a relevant period to finalise their taxable profits or losses. The end of period statement needs to be provided using compatible software by the earlier of:
- 10 months after the end of the relevant period
- 31 January following the end of the tax year in which the relevant period ends
The end of period statement or partnership return needs to include additional information above that contained in the periodic updates, to enable businesses to finalise their taxable profits or losses and to make any necessary or required accounting and tax adjustments. A declaration that it is correct and complete will also need to be included.
The bill also confirmed that non-compliance penalties will be capped at £3,000.
It is important to note that HMRC have also issued a consultation document on sanctions for late submissions and late payment on Monday 20th March with a response cut off of 11 June. Our article on the consultation can be found here while the full consultation can be found here
In line with other online reporting, there will be exclusions allowing those who are digitally excluded to opt out of the system.
The Bill states: ‘The digital exclusion condition is met in relation to a person or partner if—
- the person or partner is a practising member of a religious society or order whose beliefs are incompatible with using electronic communications or keeping electronic records, or
- for any reason (including age, disability or location) it is not reasonably practicable for the person or partner to use electronic communications or to keep electronic records.
The full draft Finance Bill 2017 is available here.