Making Tax Digital (MTD) for Income Tax
It has been confirmed that Making Tax Digital (MTD) for income tax will be phased in for self-employed individuals and landlords from April 2026.
What is MTD for Income Tax?
MTD is a mandatory requirement being introduced for eligible individuals (self-employed and landlords) to keep digital records and report their income and expenses to HMRC quarterly, instead of filing just a single Self-Assessment tax return each year.
From April 2026, if your gross turnover, rents or a combination of the two are greater than £50,000 then your income and expenses will need to be reported digitally to HMRC every quarter with an annual reconciliation also being completed (which we expect to be similar to the annual tax return).
From April 2027, the threshold will drop to £30,000 and it was confirmed in yesterday's Spring Statement that MTD for income tax will be made mandatory for the self-employed and landlords with gross income of more than £20,000 from April 2028.
Digital records
MTD for income tax will require self-employed businesses and landlords with qualifying income to keep digital records and file quarterly updates through an HMRC compatible software. HMRC have said that they will not be producing their own software and so individuals who will be affected by the new legislation need to choose a suitable commercial software package or use tailored spreadsheets and bridging software.
If you are not already using a software to maintain digital records or have any questions and would like some help, please get in touch with the office to discuss your particular circumstances, solutions, pricing and the support available well in advance. We have already partnered with providers such as Xero and Quickbooks (QBO) and have bridging software solutions to help manage the ongoing MTD transition, which started with VAT submissions several years ago.
What happens next?
From April 2025, HMRC will be writing to individuals whose 2023 / 2024 Self-Assessment tax returns reported gross income from self-employment and rental sources that was close to (or over) £50,000. Receipt of this letter will indicate that you are expected to comply with the new Making Tax Digital for Income Tax rules in the near future - Don’t panic but please speak with us asap if you receive an HMRC letter regarding MTD or expect your circumstances to meet the criteria described above, whether you receive a letter of not over the coming months!
Digital Tax Compliance Continues to Evolve
With most compulsory VAT registered businesses reporting under Making Tax Digital (MTD) for a few years now, HMRC are looking towards the next tranche of MTD compliance.
The following update may already be in hand or may not affect you directly but feel free to forward on to anyone that you think may benefit from the summary:-
Making Tax Digital for VAT – what’s next?
The Government is extending the requirement to operate (MTD) beyond compulsory VAT registered businesses to include voluntarily VAT registered businesses. For VAT periods starting on or after 1stApril 2022 voluntary VAT registered businesses will also be required to keep digital records and submit VAT returns through a compatible software. Manual returns will no longer be submitted through HMRC’s website. Affected businesses may have already received a letter from HMRC about these changes.
If you or anyone you know would like to discuss this with one of the team including the tailored solutions available, please feel free to call the office and speak to the team.
Making Tax Digital for Income Tax
From 6th April 2024, MTD will also apply to the self employed and landlords with aggregate turnover and / or gross rental income of greater than £10,000.
Affected taxpayers will be required to submit to HMRC quarterly returns on qualifying income and expenses via their personal digital tax account. For now this does not affect taxpayers who are taxed entirely via PAYE or trade only via a limited company. MTD for corporation tax is expected to be announced after MTD for income tax has been successfully rolled out.
Please note that if you have turnover from your self employment of lower than £10,000 and gross rental income of less than £10,000 but in aggregate they are over £10k, both will need to be reported quarterly under MTD as the gross aggregate is key.
We are currently awaiting further information from HMRC regarding the specific rules on MTD for income tax but in the meantime are already working with various software solutions to help meet your needs.
We will keep you posted with further updates as we receive them but please speak with us if you have any queries in the meantime.
Manage cashflow with superior tax planning
Jono Wilson of accountancy firm Barnett & Turner in Mansfield shows how tax and cashflow are closely inter-related and points out some opportunities you just might have missed.
With a downturn in the economy and some uncertainty surrounding the UK’s position after Brexit, many companies are turning their attention to tax planning – especially if cashflow is becoming an issue. Here are seven different areas that are worth thinking about and, of course, discussing with your professional advisers.
Research & Development
Companies involved in qualifying R&D activity, may qualify for tax relief on certain costs incurred as part of the process. If you’re a small or medium-sized enterprise, this result in additional relief of up 130% on costs incurred. Where a company has made a loss in the year the benefit of this relief allows Small and Medium enterprises to surrender tax losses generated by R&D tax relief for a cash repayment.
Patent Box Relief
Innovating in your market place with new, patented technologies or inventions? Patent Box Relief allows you to access a lower rate of Corporation Tax on the profits derived from the exploitation of patented technologies and products. While the qualifying criteria are complex, the benefits to companies can see their Corporation Tax liabilities significantly reduced to as low as 10% on these profits where this relief is available.
Capital Allowances
Don’t overlook this advantageous relief, Capital Allowances are often a valuable relief assisting in reducing a company’s taxable profits, generating deductions of up to 100% of the qualifying capital expenditure incurred. If you have incurred significant expenditure on property renovations in the previous 2 years, a review of the expenditure should be undertaken to maximise any Capital Allowances available which could result in significant tax savings for companies.
Corporation Tax
With a downturn in the economy and some uncertainty surrounding the UK’s position after Brexit some companies are facing the prospect of making a current year tax losses. If a company has previously been profitable and paid Corporation Tax in the prior period there is the potential to utilise current year losses against prior year’s profits and generate a tax repayment.
Foreign Tax Credits
If you are undertaking work overseas, you may find that you suffer a withholding tax on payments received. What you may not realise is that you can claim relief against UK Corporation Tax on a pound-for-pound basis for any withholding taxes which have been suffered potentially generating a repayment. This claim can be made for a period of up to four years, in some cases allowing companies to access significant tax savings.
Tax-efficient remuneration and benefits
We always encourage our clients to think about what savings can be made in other areas of their business. Staff costs will typically be a significant cost to most company’s therefore any savings that can be access in this area are usually welcome. Simply changes like moving to an alternative provider for your Corporation Benefits package can result in significant cost savings for a company as well as great some tax efficiencies for your employees as well, for example moving to a salary sacrifice pension scheme.
If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk
2019: the year VAT goes digital
April onwards sees a major change in the way that businesses have to file VAT. It’s time to get prepared, says Jono Wilson of accountancy firm Barnett & Turner.
April 2019 is looming fast and that means a big change in the way in which we account for VAT.
From that date, any VAT-registered individual or business above the threshold will have to comply with the new Making Tax Digital regime. There may be some leeway for people who have registered for VAT voluntarily, but anyone else will have to file quarterly returns online.
It’s important you’re fully compliant and up and running by the deadline, so now’s the time to talk to your professional adviser. They’ll be able to help you select the most appropriate software, such as QuickBooks or Xero unless bridging software can do the job for you.
If you’re currently using Excel spreadsheets or keeping paper-based book-keeping records though, there’s no doubt the new system may come as a big change and you have some decisions to make. So the sooner you can make the transition, the better.
If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk
HMRC proposals signals cross-border tax change
Taxation has long been based around the physicalpresence of a business in a particular country.
The huge expansion of the digital sector has, however, challenged our preconceptions. Many people would argue that if a global tech firm, for example, makes profits in a particular country, they should be taxed there – regardless of whether they have offices, plants or facilities in the jurisdiction.
Governments and global tax authorities are currently working together on a more uniform and coherent approach to the digital economy. And as part of this process, HMRC are proposing a significant change.
Right now, if a UK company pays royalties for the exploitation of intellectual property and similar rights to overseas entities, they are subject to the deduction of UK tax at 20%. The only exception is if there’s an international agreement to reduce this amount.
The UK now proposes to include payments made by a non-UK entity to a fellow non-UK connected party in a jurisdiction (often with low or zero tax), with which the UK does not hold a suitable double tax treaty.
In the example below, Company A derives UK income, but has no UK taxable presence and pays no UK tax. It may obtain a tax deduction in its location of residence for the royalty it pays to B. If B is in a location which has low or zero tax, the structure is very efficient.
Under the proposed reform, a 20% UK tax could apply on the royalty paid from A to B. It closes a loophole, but may have a wider scope than imagined, as it signals a radical shift away from current principles on the taxation of cross-border payments.
If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk
Could changing your accounting date help reduce your tax bill?
If you’re an unincorporated business (a sole trader or partnership), you have free choice when it comes to your accounting date says Barnett & Turner’s Jono Wilson. Some choose a date for commercial reasons – for example to fit in with a cyclical trading pattern or to fall in a slack period – and for others the logical choice may be 5 April (or 31 March) to align with the tax year.
Choosing the right year end will not only make life administratively easier for a business, but choosing a year end other than 5 April (or 31 March) can also give you a cash-flow advantage and create outright tax savings, if the circumstances are right.
Depending on the choice of accounting date, new businesses and individuals joining existing partnerships may see some of their profits taxed twice because of special rules which dictate when – and to what extent – business profits are assessed. Profits taxed twice are known as “overlap profits”.
Businesses trading when self-assessment was introduced in 1996/97 may be carrying overlap profits and changing a business’ accounting date can also cause profits to be doubly assessed.
The value of any doubly assessed or overlap profits is subsequently carried forward and given as a tax-reducer when a business ceases, when an individual leaves a partnership and on certain changes of accounting date.
The thought of profits being taxed twice naturally gives rise to a common misconception that overlap profits are bad. In reality, a change of accounting date can be used to your advantage, which is illustrated in the very simple case study below.
A partnership with a 30 April year end went from being highly profitable to being loss making, almost overnight. A 30 April year end is great, as it allows a lengthy period between making profits and paying tax on them, but, where a business falters as above, tax becomes payable when the business has no cash (unless it has a very prudent and very disciplined tax provision policy). In this case, changing the year end to 31 March enabled the partners to use their significant overlap profits and it also enabled earlier access to trading losses; this not only created significant cash-flow benefits for the business, but it also got rid of the overlap profits.
A few years later, the business returned to significant profitability, almost as spectacularly as it became loss making, resulting in significant tax bills made worse by the catch-up effect of a large self-assessment balancing payment plus payments on account. In the light of this, the partnership year end was returned to 30 April, which created some new overlap profits, but it also had two additional and significant benefits:
o It deferred payment of significant amounts of tax by 12 months, creating positive cash flow and allowing the business to get its tax provisioning in check; and
o It pushed profits into a later tax year, giving the opportunity to undertake some income tax planning and reduce the deferred tax liabilities.
So if you’re unincorporated and interested in finding out more about this specific issue of your accounting date, it’s certainly worth starting a conversation with your accountant.
If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk
How to handle termination payments correctly
Tracy Henson of Barnett & Turner tackles some frequently asked questions on the payments made when you terminate an employee’s contract.
With careful planning, you can save tax and national insurance when you make termination payments, but it’s important to bear a number of different factors in mind. Remember that the first £30,000 of any such payment can, in theory, be made tax free, but there are a number of conditions attached.
What are the current conditions which for the exemption to apply?
Currently, if you have a contractual right to make a payment in lieu of notice (‘PILON’), that payment is subject to income tax and national insurance contributions (‘NICs’).
If there is no PILON clause and the employer grants a termination payment to the employee at the end of the employment, the first £30,000 can be paid tax-free. Any amount above this threshold is taxable, however no NICs are due.
What are the conditions which must be met after 5 April 2018?
From 6 April 2018 all payments in lieu will be taxable. The intention of these reforms is to ensure that the basic pay an employee would have earned had the employee worked his or her notice in full will be subject to tax (any amount above this may benefit from the £30,000 exemption).
The reforms will therefore require employers to identify the amount of basic pay that the employee would have received if they had worked their notice period and to split a termination payment between (1) amounts treated as earnings and (2) amounts which are being paid in true compensation for loss of employment and which may benefit from the £30,000 threshold for tax exemption.
And from April 2019?
Currently, where the exemption is available no National Insurance (NI) will be due on the payment made. However, from April 2019, this rule will change with employer’s NI being payable on the balance over £30,000.
Can some payments qualify for a higher limit?
Yes. Some can even be paid tax free, where the payment relates to injury, disability or death. However, HMRC interpret the exemption for termination on injury or disability very narrowly.
What are the rules about non-cash benefits?
There is a requirement to include the cash equivalent of any non-cash benefits made, for example the provision of a company car. Any non-cash benefits are treated as income in the year in which the benefits are enjoyed.
Does the timing of the payment make a difference?
Where a qualifying termination payment is made to the employee before they leave, the excess over £30,000 is subject to deduction of tax under PAYE under the normal rules. If payments are made to an employee after they leave, and after a P45 has been issued, then the employer must deduct tax under PAYE at the basic rate. The employee is then liable for any additional tax charge on the termination payment received under the self-assessment system.
What planning opportunities do you have?
There are a few possibilities where the termination is to exceed the £30,000, such as:
making a contribution towards the employee’s legal fees, which may include, for example, the fees for their solicitor to review a compromise agreement;
deferring the tax point – there may be a saving to the employee by spreading the payment over two tax years, where the entitlement to deferred consideration should be specified in the settlement agreement;
making a contribution into the employee’s pension fund; and
considering whether any element of the payment made could be identified as compensation for discrimination, or injury/disability, which may be tax free.
Given the complex nature of the legislation, it’s always good to seek advice before a termination payment is made, to avoid any potential bear traps. Failure to take reasonable care in analysing the nature of the payment and describing it in the settlement agreement may result in the parties facing unnecessary or unexpected tax liabilities.
If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk
Your shares are worthless? Things may not be as bad as you thought...
It’s a nightmare scenario. You’ve invested in a company and then discover that it has collapsed and that its shares have become worthless.
Imagine, for example, owning a slice of Carillion – which went from being one of the UK’s largest construction businesses to a company revealed to have £1.5bn in debt and whose shares were suspended.
If HMRC declares shares to have ‘negligible value’ (as they have in the Carillion case), you’re entitled to capital gains relief, which will help you to reduce your tax liability.
Here are some commonly asked questions:
How does it work in practice?
In effect, you can set the original cost of the asset against other capital gains in the current tax year or even carry it forward against gains in future years.
Can I backdate a claim?
Yes. You can treat it as a loss arising in either of the two preceding tax years.
Can I claim loss from unlisted, negligible-value shares against income?
In theory, yes, but you’ll need to consult your accountant as you’ll need to meet a significant number of conditions.
If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk
A grand idea for would-be business people writes Tracy Henson of Barnett & Turner
Are you a budding entrepreneur who’s selling products over the web from your back bedroom? Or perhaps you’re renting out one of your rooms via Airbnb?
From the start of the 2017/18 tax year, it’s been possible to claim annual tax-free allowances – one related to trading and the other to property. These provide an exemption from income tax and an excellent opportunity to test the water with a business idea without having to worry about tax compliance issues. There’s no need to register with HMRC if you are generating income of a thousand pounds per annum or less.
Property Allowance
This applies to both commercial and residential lettings and gives you full relief from tax if your annual income before tax is less than £1,000. If the property is jointly owned, each individual can claim the allowance against their share of the gross rental income. If you’re earning more than £1,000, partial relief is available.
Trading Allowance
This is designed for people who are trading in small amounts or receiving miscellaneous income from goods, services or assets. You might, for instance, be selling items on a website such as eBay. Again, with some exceptions, you can claim the allowance where total income is less than £1,000 and partial relief is available for sums under this amount.
If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk
HOW TO AVOID A POST-PARTY HANGOVER
Jono Wilson of Barnett & Turner looks at the tax implications of the Summer or Christmas bash you hold at your workplace. If you’re looking to the summer and planning a party for your employees, it’s worth bearing in mind the potential tax implications. The good news is that, unlike entertaining customers, the costs of entertaining employees are generally allowable against the profits of the business.
But what about the consequences for the employees themselves? Will they have to pay tax on the benefit?
The general rule is that as long as the total costs of all employee annual functions in a tax year are less than £150 per head (VAT inclusive), there will be no tax implications for the employees themselves. In considering this limit, it is necessary to include all the costs of an event including any food, drinks, entertainment, transport and accommodation that you provide.
If the total costs are above the limit of £150, the employee will have to pay tax on the full cost of the benefit. In that scenario, it should be reported on each employee’s P11D or, alternatively, you may choose to enter into a PAYE Settlement Agreement with HMRC to cover the tax.
It is also worth noting that a new exemption in relation to employee entertainment was introduced on 6th April 2016. From this date, a benefit provided by an employer to an employee was made exempt from tax and need not be reported to HMRC on a P11D if all of the following conditions are satisfied:
- The cost of providing the benefit does not exceed £50;
- The benefit is not cash or cash vouchers;
- The employee is not entitled to the benefit as part of any contractual obligation; and
Where the employer is a close company and the benefit is provided to an individual who is a director or other office holder of the company (or a member of their family), the exemption is capped at a total of £300 in the tax year.
Example
A company holds two annual functions open to all its employees in the tax year – a summer party and a Christmas party.
The total costs of the summer party, including transport and accommodation, are £10,000 including VAT. The total number of attendees was 100, so the cost per head was therefore £100.
The Christmas party cost £8,000 including VAT, and 100 people attended this. The cost per head is therefore £80.
The total cost per head for both functions is £180, so they cannot both qualify for an exemption. As the cost per head of each party is not more than £150, either event can qualify on its own, however it is more beneficial overall for the costlier summer party to be exempted.
If an employee attends both events, they will be taxed only on the benefit of £80 for the Christmas party. If they only attend the summer party, there will be no taxable benefit because that event is exempt. If they only attend the Christmas party, they will be taxed on the benefit of £80.
Both functions would be taxable if the average cost per head of each of the events exceeded £150. This limit is not an allowance to be set against an amount that exceeds that figure.
It’s worth talking to your accountant if you have any concerns about the tax implications of the summer party season ahead. That way, everyone can enjoy the event without a financial hangover.
If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk