HMRC’s responses to the MTD consultations, which took place in 2016, were published on 31 January 2017. The responses set out HMRC’s mode of travel: fast paced and unveering. While making a few small but important concessions, HMRC’s approach has changed very little, despite having received over 3,000 responses, many of which expressed concern at the pace of change and early mandation. The updates to HMRC’s proposals are set out in a large combination of documents and web pages, stretching to almost 300 pages, including formal responses to the consultations, draft primary legislation, explanatory notes and impact assessments.
A few days after HMRC published on 31 January (of all dates in tax) the draft legislation and related responses to the MTD consultations, the House of Lords Economic Affairs Committee’s Finance Bill sub-committee held two hearings of evidence from tax professionals on the impact of HMRC’s latest proposals. Unusually for such a diverse group of tax professionals, they were unanimous on most points. In particular, while most of them supported the principle of MTD, they all had concerns about the route, the pace of change and the costs this would impose.
Before moving on to the detail of the latest draft legislation, let’s put this into context.
Ever since the first programmable computer, affectionately known as LEO 1, was first used by J Lyons & Co to handle logistics and company accounts in 1951, businesses have been trying to make their record keeping more efficient. Over half a century later, businesses are still travelling down this path, with an increasing number investing in cloud based accounting or record keeping apps.
Meanwhile, on the tax side, HMRC recently announced that the self-assessment tax returns for almost 10 million individuals were filed online by 31 January, with around 800,000 filed on paper. Over 90% of individual taxpayers (or their agents, in the majority of cases) are voluntarily submitting information to HMRC digitally once a year.
In comparison to many other jurisdictions, the UK already has an advanced and computerised tax system; for example, for self assessment, iXBRL, RTI and VAT. This works reasonably well for most people, most of the time.
One might wonder, therefore, why there is such controversy around MTD. Basically, despite this history of development, many businesses are not yet equipped for MTD and digital record keeping, as changes are only made when it makes business sense.
The main problems are:
Many of HMRC’s latest proposals are similar to the original proposals highlighted in my previous article (Tax Journal, 23 September 2016). The positive news, as summarised by Paul Aplin (Tax Journal, 9 February 2017), includes evidence that HMRC has listened to a few of the comments made by respondents. The key developments include:
Spreadsheets will have to be ‘linked’ to MTD compliant software. This may be achieved by using one of the spreadsheet import functions already available in some commercial accounting software. This can require the spreadsheet to be in a particular format, and require coding. These processes may not seem that difficult to an accountant (or someone with A-level maths), but they can be open to mistakes for others.
In addition, further clarifications and changes were included in the documents, which stretch to almost 300 pages. Unfortunately, these documents are also spread over a large number of gov.uk pages, with no single index. Will HMRC note that a single landing page with links to everything would be far more helpful in future?
The draft primary legislation (www.bit.ly/2l2Hupi) includes:
There is no draft legislation for other areas yet. In addition, the primary legislation is particularly short, vague and worryingly wide; it leaves much to secondary legislation and draft directions, neither of which have been published in draft. It all gives a feeling that this is far too rushed, especially for such a major change to the tax system.
These are the overriding MTD provisions. They cannot apply to tax years before 2018/19 or periods of account starting before that year. The key points include:
Entity inclusions and exclusions: Draft amendments to TMA 1970 include a new schedule covering unincorporated entities. The draft legislation clearly covers trusts, despite assurances to the contrary by HMRC during the informal consultation in 2016. There are exemptions for charitable trusts and certain unit trusts. Lloyds underwriting businesses, REITs and OEICs are also exempted.
Partnership nominations: Each partnership will need a nominated partner, details of whom must be notified to HMRC by a formal notice. HMRC will be able to make a nomination itself – presumably if the partnership fails to do so.
Periodic updates: The draft legislation includes little about updates, other than that HMRC’s commissioners will have wide powers to make regulations to set out the information they need. This is not limited to information that would be ‘reasonably required’, which is worrying. Some paragraphs seem to conflate the terms found in a profit and loss account with those in a cash statement. Of some comfort, HMRC cannot require the updates more often than once every three months.
End of period statement: MTD entities will have to provide a summary statement after the end of their accounting period. The response document indicated that in some cases, such as businesses with a 30 April year end, this will need to be within the tax year, meaning a further update may be required once other information is available; i.e. six sets of contact for one year. The detail of this is awaited, however.
Record keeping and other provisions: HMRC is also to have powers to specify in regulations the records that will have to be kept and the period they will have to be retained for, together with how electronic communications will occur. Again, it is concerning that so much detail is yet to be thrashed out and will not be subject to the scrutiny of a Finance Bill.
Intermediaries and other provisions: The draft clauses provide for HMRC to make regulations that ‘may allow or require use to be made of intermediaries’ in connection with ‘the provision of information by means of electronic communication’. This is one of the few references to tax agents. It will be important to ensure adequate wording in the regulations to permit us to act for clients, who under the HMRC charter have a right to appoint an agent to act for them.
Agents are not mentioned in connection with the maintaining of records, but they never have been. The fact that records have to be maintained in a digital format should not change a client’s right to ask an agent to maintain these.
There is a catch-all paragraph permitting any ‘authorisation or requirement’ to be given by an HMRC direction. It would be helpful if HMRC was required to obtain adequate external scrutiny of any draft directions and that these should be kept to a minimum.
Digitally excluded: There is an exemption for the digitally excluded, which covers practising members of certain religious societies and those for whom MTD will not be reasonably practicable, for any reason, including age, disability or location. This is similar to previous exemptions, but makes no acknowledgment of the additional skills required for MTD.
The draft legislation to amend the cash basis rules found in ITTOIA 2005 focuses on clarifying the rules around allowable capital expenditure. A new s 33A is to take effect for 2017/18 onwards, although for 2017/18 a business can use the old rules if it would be better off under those. This will replace the existing rules, based upon whether something would be allowable under the capital allowances rules.
It also provides slightly more detailed rules on what can and cannot be claimed, such as explicitly disallowing land, cars, assets that are not depreciating assets (defined as expected to last less than 20 years), capital items in respect of education or training (why?), capital expenditure to acquire or dispose of a business, certain intangible assets and financial assets.
The final piece of draft primary legislation, which amends ITTOIA 2005 Part 3, introduces the cash basis for unincorporated property businesses. It does not apply to companies, LLPs, partnerships with a corporate member, trustees or personal representatives. It is really not clear why LLPs, trusts and estates are excluded, other than a perpetual dislike in Parliament Street of the first two vehicles. Other exclusions include businesses with cash receipts over £150,000 and some businesses where business premises renovation allowances are available. In addition, the cash basis cannot be used by one spouse where the other uses GAAP to calculate profits, although this rule does not seem to extend to other joint owners.
Unlike under the existing cash basis, property business owners that are not obliged to use GAAP, due to the above exclusions, are treated as being in the cash basis unless they elect to opt out. Being required to opt in for the main cash basis and opt out for the property cash basis is likely to cause confusion. Let’s hope that HMRC reconsiders this swiftly, together with the burdensome need to make an election every year.
The provisions can be amended by secondary legislation. Unlike the main MTD provisions, however, it is good to see that this has to be by an affirmative statutory instrument, as opposed to a negative instrument.
In most other respects, the rules follow the current cash basis rules, as adapted by the new capital rules, apart from the restrictions set out in new s 272ZA, which effectively lists the current cash basis rules that naturally carry over to property businesses; and new rules in new ss 307C and D to refine the deduction for finance costs rules.
Choosing whether to use the cash or accruals basis for property businesses will have complications beyond the decisions for the existing cash basis because of the new finance costs restrictions, also commencing from April 2017, which pushes more people into higher rate tax. The cash basis, by assessing receipts as opposed to more evenly accrued income, may in the years of higher receipts push larger sums into the higher rate tax, while wasting the basic rate band in another year. This will need to be weighed up carefully before making the election, which seems to be irreversible once made for a year. This may encourage delaying making an election until after the quarterly updates have been made, devaluing the ‘provisional’ quarterly updates.
The draft legislation gives HMRC a wide ranging authority to make regulations. The profession needs to continue to seek sight of all the draft legislation, particularly the secondary legislation, together with the draft directions, as the devil will be in the detail.
Businesses and agents need to start preparing. Despite the deep concerns of many commentators about the pace and costs, it seems MTD is proceeding and quickly. However, exactly what they are preparing for and when is still unclear.
Let’s hope HMRC reconsiders the timetable, given the concern about costs, which seem to have been seriously underestimated, and allow time for MTD to come in efficiently.
HMRC’s responses to the MTD consultations, which took place in 2016, were published on 31 January 2017. The responses set out HMRC’s mode of travel: fast paced and unveering. While making a few small but important concessions, HMRC’s approach has changed very little, despite having received over 3,000 responses, many of which expressed concern at the pace of change and early mandation. The updates to HMRC’s proposals are set out in a large combination of documents and web pages, stretching to almost 300 pages, including formal responses to the consultations, draft primary legislation, explanatory notes and impact assessments.
A few days after HMRC published on 31 January (of all dates in tax) the draft legislation and related responses to the MTD consultations, the House of Lords Economic Affairs Committee’s Finance Bill sub-committee held two hearings of evidence from tax professionals on the impact of HMRC’s latest proposals. Unusually for such a diverse group of tax professionals, they were unanimous on most points. In particular, while most of them supported the principle of MTD, they all had concerns about the route, the pace of change and the costs this would impose.
Before moving on to the detail of the latest draft legislation, let’s put this into context.
Ever since the first programmable computer, affectionately known as LEO 1, was first used by J Lyons & Co to handle logistics and company accounts in 1951, businesses have been trying to make their record keeping more efficient. Over half a century later, businesses are still travelling down this path, with an increasing number investing in cloud based accounting or record keeping apps.
Meanwhile, on the tax side, HMRC recently announced that the self-assessment tax returns for almost 10 million individuals were filed online by 31 January, with around 800,000 filed on paper. Over 90% of individual taxpayers (or their agents, in the majority of cases) are voluntarily submitting information to HMRC digitally once a year.
In comparison to many other jurisdictions, the UK already has an advanced and computerised tax system; for example, for self assessment, iXBRL, RTI and VAT. This works reasonably well for most people, most of the time.
One might wonder, therefore, why there is such controversy around MTD. Basically, despite this history of development, many businesses are not yet equipped for MTD and digital record keeping, as changes are only made when it makes business sense.
The main problems are:
Many of HMRC’s latest proposals are similar to the original proposals highlighted in my previous article (Tax Journal, 23 September 2016). The positive news, as summarised by Paul Aplin (Tax Journal, 9 February 2017), includes evidence that HMRC has listened to a few of the comments made by respondents. The key developments include:
Spreadsheets will have to be ‘linked’ to MTD compliant software. This may be achieved by using one of the spreadsheet import functions already available in some commercial accounting software. This can require the spreadsheet to be in a particular format, and require coding. These processes may not seem that difficult to an accountant (or someone with A-level maths), but they can be open to mistakes for others.
In addition, further clarifications and changes were included in the documents, which stretch to almost 300 pages. Unfortunately, these documents are also spread over a large number of gov.uk pages, with no single index. Will HMRC note that a single landing page with links to everything would be far more helpful in future?
The draft primary legislation (www.bit.ly/2l2Hupi) includes:
There is no draft legislation for other areas yet. In addition, the primary legislation is particularly short, vague and worryingly wide; it leaves much to secondary legislation and draft directions, neither of which have been published in draft. It all gives a feeling that this is far too rushed, especially for such a major change to the tax system.
These are the overriding MTD provisions. They cannot apply to tax years before 2018/19 or periods of account starting before that year. The key points include:
Entity inclusions and exclusions: Draft amendments to TMA 1970 include a new schedule covering unincorporated entities. The draft legislation clearly covers trusts, despite assurances to the contrary by HMRC during the informal consultation in 2016. There are exemptions for charitable trusts and certain unit trusts. Lloyds underwriting businesses, REITs and OEICs are also exempted.
Partnership nominations: Each partnership will need a nominated partner, details of whom must be notified to HMRC by a formal notice. HMRC will be able to make a nomination itself – presumably if the partnership fails to do so.
Periodic updates: The draft legislation includes little about updates, other than that HMRC’s commissioners will have wide powers to make regulations to set out the information they need. This is not limited to information that would be ‘reasonably required’, which is worrying. Some paragraphs seem to conflate the terms found in a profit and loss account with those in a cash statement. Of some comfort, HMRC cannot require the updates more often than once every three months.
End of period statement: MTD entities will have to provide a summary statement after the end of their accounting period. The response document indicated that in some cases, such as businesses with a 30 April year end, this will need to be within the tax year, meaning a further update may be required once other information is available; i.e. six sets of contact for one year. The detail of this is awaited, however.
Record keeping and other provisions: HMRC is also to have powers to specify in regulations the records that will have to be kept and the period they will have to be retained for, together with how electronic communications will occur. Again, it is concerning that so much detail is yet to be thrashed out and will not be subject to the scrutiny of a Finance Bill.
Intermediaries and other provisions: The draft clauses provide for HMRC to make regulations that ‘may allow or require use to be made of intermediaries’ in connection with ‘the provision of information by means of electronic communication’. This is one of the few references to tax agents. It will be important to ensure adequate wording in the regulations to permit us to act for clients, who under the HMRC charter have a right to appoint an agent to act for them.
Agents are not mentioned in connection with the maintaining of records, but they never have been. The fact that records have to be maintained in a digital format should not change a client’s right to ask an agent to maintain these.
There is a catch-all paragraph permitting any ‘authorisation or requirement’ to be given by an HMRC direction. It would be helpful if HMRC was required to obtain adequate external scrutiny of any draft directions and that these should be kept to a minimum.
Digitally excluded: There is an exemption for the digitally excluded, which covers practising members of certain religious societies and those for whom MTD will not be reasonably practicable, for any reason, including age, disability or location. This is similar to previous exemptions, but makes no acknowledgment of the additional skills required for MTD.
The draft legislation to amend the cash basis rules found in ITTOIA 2005 focuses on clarifying the rules around allowable capital expenditure. A new s 33A is to take effect for 2017/18 onwards, although for 2017/18 a business can use the old rules if it would be better off under those. This will replace the existing rules, based upon whether something would be allowable under the capital allowances rules.
It also provides slightly more detailed rules on what can and cannot be claimed, such as explicitly disallowing land, cars, assets that are not depreciating assets (defined as expected to last less than 20 years), capital items in respect of education or training (why?), capital expenditure to acquire or dispose of a business, certain intangible assets and financial assets.
The final piece of draft primary legislation, which amends ITTOIA 2005 Part 3, introduces the cash basis for unincorporated property businesses. It does not apply to companies, LLPs, partnerships with a corporate member, trustees or personal representatives. It is really not clear why LLPs, trusts and estates are excluded, other than a perpetual dislike in Parliament Street of the first two vehicles. Other exclusions include businesses with cash receipts over £150,000 and some businesses where business premises renovation allowances are available. In addition, the cash basis cannot be used by one spouse where the other uses GAAP to calculate profits, although this rule does not seem to extend to other joint owners.
Unlike under the existing cash basis, property business owners that are not obliged to use GAAP, due to the above exclusions, are treated as being in the cash basis unless they elect to opt out. Being required to opt in for the main cash basis and opt out for the property cash basis is likely to cause confusion. Let’s hope that HMRC reconsiders this swiftly, together with the burdensome need to make an election every year.
The provisions can be amended by secondary legislation. Unlike the main MTD provisions, however, it is good to see that this has to be by an affirmative statutory instrument, as opposed to a negative instrument.
In most other respects, the rules follow the current cash basis rules, as adapted by the new capital rules, apart from the restrictions set out in new s 272ZA, which effectively lists the current cash basis rules that naturally carry over to property businesses; and new rules in new ss 307C and D to refine the deduction for finance costs rules.
Choosing whether to use the cash or accruals basis for property businesses will have complications beyond the decisions for the existing cash basis because of the new finance costs restrictions, also commencing from April 2017, which pushes more people into higher rate tax. The cash basis, by assessing receipts as opposed to more evenly accrued income, may in the years of higher receipts push larger sums into the higher rate tax, while wasting the basic rate band in another year. This will need to be weighed up carefully before making the election, which seems to be irreversible once made for a year. This may encourage delaying making an election until after the quarterly updates have been made, devaluing the ‘provisional’ quarterly updates.
The draft legislation gives HMRC a wide ranging authority to make regulations. The profession needs to continue to seek sight of all the draft legislation, particularly the secondary legislation, together with the draft directions, as the devil will be in the detail.
Businesses and agents need to start preparing. Despite the deep concerns of many commentators about the pace and costs, it seems MTD is proceeding and quickly. However, exactly what they are preparing for and when is still unclear.
Let’s hope HMRC reconsiders the timetable, given the concern about costs, which seem to have been seriously underestimated, and allow time for MTD to come in efficiently.
