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Update on Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA)  

Key developments in the roadmap for MTD.

 

The Government has announced in a Written Ministerial Statement (WMS) that MTD for Income Tax Self Assessment (ITSA) will be introduced a year later, in the tax year beginning April 2024. This is in recognition of the challenges faced by many UK businesses and their representatives, as the country emerges from the pandemic over the last year and having listened to stakeholder feedback.

 

General partnerships will not be required to join MTD for ITSA until the tax year beginning in April 2025. It will be confirmed at a later date when all other types of partnerships will be required to join.

 

The new system of penalties for the late filing and late payment of tax for ITSA, announced in March 2021, will accordingly be introduced for those mandated for MTD for ITSA in the tax year beginning from April 2024, and for all other ITSA customers in the tax year beginning in April 2025.

 

In addition, the Government has laid Regulations in Parliament setting out the design and scope of MTD for ITSA, in order to help those impacted by the changes to prepare, and for their representatives to develop their own support and guidance.

 

Alongside the Regulations, we have published a Tax Information and Impact Note (TIIN) setting out the projected benefit and cost impacts of MTD for ITSA, as well as a Policy Paper to help different businesses understand what their transition to MTD could look like in more detail.

 

Over the past year, we have worked closely with partners in the business, tax and software community on MTD. We are grateful for the significant stakeholder input we have received, and we look forward to continuing to work together with stakeholders to ensure taxpayers are well supported as they adopt MTD.

 

A News Release covering this announcement is available at:  Businesses get more time to prepare for digital tax changes – GOV.UK (www.gov.uk).

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Check Employment Status for Tax (CEST) Tool

HMRC’s regular Talking Points provide information, guidance and tips to help you to understand tax issues.

We have a Talking Points webinar coming up. There are a limited number of spaces, so save your place now.

Check Employment Status for Tax (CEST) Tool: This webinar is designed to help you understand how HMRC’s Check Employment Status for Tax tool, or CEST for short, can help you make robust and accurate status determinations. During this session we will walk you through a status determination using a mock engagement.

Register here

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Need To Know: Your Business Updates for August 2021

Welcome to the August 2021 ‘Need to Know’ update. You’ll find the latest key information on Fleet operations, the Government’s new National Disability Strategy, Scottish business concerns, and support and advice worries for SMEs.

Employers unite to encourage over a million staff to get the COVID-19 vaccine

The Department of Health and Social Care has launched a toolkit for employers to help ensure employees get reliable information about COVID-19 vaccines.

Leading businesses, employers and industry bodies across the UK have come together to support the COVID-19 vaccination programme and encourage their staff to get a jab when eligible.

Organisations have pledged to be as flexible as possible when it comes to staff getting the vaccine. Many companies, including IKEA, have also committed to giving paid time off work for employees, in addition to providing sick pay as standard for the minority who experience minor side effects like fever or a headache.

Employers will also use resources from the new national government campaign to run an internal awareness campaign consisting of key messages, vaccine fact sheets, informative question and answer videos, posters and many more resources to ensure their employees get access to reliable and accurate information about the COVID-19 vaccine.

The Government is calling on all UK organisations to join the campaign by introducing similar internal awareness campaigns to promote the benefits of vaccination.

Access the toolkit to get materials for you to run internal awareness campaigns, including key messages, posters, fact sheets and videos providing accurate, up-to-date information.

For more information click here.

Government encourages fleet operators to convert to battery-electric vehicles in the transition to zero emission road freight.

Funding to boost the UK’s transition to zero emission road freight has been announced.

Pioneering £20 million zero emission road freight trials, funded by the Department for Transport and delivered by Innovate UK, will help to develop innovative solutions to support the uptake of zero emission trucks.

Using learning from field testing battery-electric vehicles in a real-world environment, and from undertaking feasibility studies, these activities will help to design and develop cost-effective, zero emission heavy goods vehicles (HGVs) and their refuelling infrastructure right here in the UK.

Transport Secretary Grant Shapps said: “Through our bold and ambitious transport decarbonisation plan, we’re leading the way in the transition to zero emission vehicles by becoming the first country in the world to commit to ending the sale of all new fossil-fuelled road vehicles by 2040, subject to consultation.

“From Doncaster to Scotland, by working in partnership with industry, this funding will allow us to better understand the role of zero emission HGVs while levelling up the industry and boosting regional economies.”

Successful projects include an ‘Electric Road System’ feasibility study, led by Costain Ltd, considering a 20-kilometre stretch of road near Scunthorpe for a possible trial of electric road systems. Electric Road Systems supply battery-electric trucks with electricity from overhead catenaries via a pantograph enabling HGVs to charge dynamically.

 

Meanwhile, a hydrogen fuel cell feasibility study, led by Arcola Energy Ltd, will design a possible future trial of hydrogen fuel cell trucks and new refuelling infrastructure in Scotland.

These projects, along with 4 other successful feasibility studies, aim to prepare for a potential demonstration of zero emission freight technologies at scale on UK roads and will support the rollout of zero emission technologies to decarbonise heavy transport vehicles.

Commercial vehicle manufacturing company Leyland Trucks will be deploying 20 DAF battery-electric trucks for use by public sector organisations to support the uptake of battery-electric trucks, enabling learning to be gathered from field testing vehicles in a real-world, real-time logistics environment. The investment in an interactive tool will de-risk, aid and encourage fleet operators to convert to battery-electric vehicles. This is an important step in the transition to zero emission road freight.

This announcement follows the launch of government’s transport decarbonisation plan along with the consultation on a phase out date for new non-zero emission HGVs.

Rob Lawton, Project Manager, at Leyland Trucks, said: “We’re delighted to have been selected to play such a key role in the initiative and we’re proud to be leading the drive towards a cleaner, more sustainable future for the road transport industry.

“We believe our LF Electric and CF Electric vehicles offer the best solution for zero-emissions operation and we’re confident that the results from our NHS and local authority partners will support our own extensive and long-term testing programmes.

Richard Kemp-Harper, Strategy Director at Arcola Energy, said: “We’re pleased to be leading this initiative to decarbonise heavy-duty transport. The study will enable us to expand the application of Arcola Energy’s A-Drive fuel cell powertrain platform to a critical group of HGV operators that can benefit from Scotland’s strong potential for green hydrogen production.”

Read more here

Disabled plan draws mixed response

There has been a mixed response from charities and campaigners to the government’s £1.6bn strategy to improve the lives of disabled people.

Ministers have unveiled 100 pledges to tackle issues such as housing and inaccessible public transport, as well as barriers to education and work.

The Government says its National Disability Strategy – first announced by the prime minister at the last election – is a once in a generation transformative plan.

 

It promises £300m will be provided to support children with special educational needs and disabilities.

Other measures include a plan to pilot an Access to Work Adjustment Passport making it easier for disabled people to change jobs.

Responding, Federation of Small Businesses National Chair Mike Cherry said: “More needs to be done. The failure of our whole country to do more to support disabled people to prosper is a moral and economic disaster.

“We have been keen to work with Government to improve the situation for those with disabilities when they start a business, are at work or seeking employment. We value the engagement we’ve had with Government on this but believe that working with employers to make progress on these issues needs to be a higher priority.

“Small businesses already employ a disproportionally higher number of disabled people compared to the rest of the private sector – but we think far more could and should be done to increase disabled employment across all workplaces.

“In particular, there needs to be a push to improve when it comes to recruitment, retention and the resilience of small firms.

“There is a strong case for Government to update existing schemes such as Kickstart, so they can do more to help increase the number of disabled people in work as we move out of the pandemic. This is especially important as disabled people were far less likely than the population as a whole to be in work prior to Covid-19, and are more likely to have faced educational and employment disadvantage to date.”

For more information, click here.

Scottish business optimism rises but overheads spiral

Latest research from FSB Scotland shows that staff shortages are a problem for 1/3 of businesses with growth ambitions.

Business optimism amongst Scottish smaller firms is at its strongest since the summer of 2015, according to new research.

The FSB figures show the average Scottish business is now more hopeful about prospects than its UK-wide equivalent for the first time since the third quarter of 2020.

FSB’s Scottish small business confidence index rose to +20.5 points this summer from +18.8 points in the first quarter of the year. The equivalent UK-wide figure fell to +18.6 points from +27.3 points in the first three months of 2021. The index measures whether firms believe trading conditions will improve or deteriorate over the next three months.

However, almost two thirds (64%) of Scottish firms reported an increase in running costs in comparison to this time last year, while only eight per cent said their overheads had decreased. Further, more Scottish firms believe their profits will fall over the next three months than increase.

According to the research, two fifths of Scottish businesses (38%) say they have plans to grow in the year ahead, while a fifth (20%) say they plan to downsize (12%), sell (3%), or close their business (5%).

Firms with expansion ambitions were asked to identify the biggest barriers to growth: three fifths of Scottish businesses cited the domestic economy (59%); just over a third highlighted consumer demand (36%); and just under a third warned of the problem of accessing skilled staff (32%).

 

Read more on this here.

Small firms call for better access to support and advice

The Government’s flagship levelling-up agenda will fall short of improving regional economies unless more is done to bolster business support for smaller firms, according to a new report from FSB.

Small businesses are more geographically spread than big companies, and in every single local community. This means they are crucial to balancing-up productivity, innovation, jobs and opportunities across towns and rural areas as well as cities. Improving support for this group will play huge dividends, both economically and socially, and must feature in the forthcoming Spending Review to revive local economies.

However, significant gaps in business support for small firms and the self-employed are identified in FSB’s new report, Open for Business.

It sheds light on how business support advice was used by small firms during the pandemic, drawing lessons from how while it supported some, others were left with little assistance.

FSB National Vice Chair Martin McTague said: “We’ve endured almost 18 months of this terrible pandemic which has wreaked economic chaos for small businesses all over the country. That’s why the support and advice available to them has never been more important.

“If small firms are to compete on fair terms with larger businesses, if regions are to step out of the shadows and if all businesses can thrive after the pandemic, then an element of levelling up is critical to success.

“Even when times are good, gaining access to the right support at the right time can be tricky.

“We’ve seen huge numbers of small firms, almost half in fact, state that their business is still standing today thanks in part to the economic advice they managed to access. And while this is excellent news, it means that almost half didn’t have the same levels of success.

“For too many, knowing where to look, who to speak to and what to do leads to a dead end and that needs to change. Every day, small firms ask themselves how can I manage my debt? How can we achieve Net Zero without breaking the bank? Or how can I attract more staff? It’s these sorts of questions where the right advice, can make huge differences.

“Our findings show that existing business support advice already helps small firms when it comes to taxation and regulation, but as our post-EU journey continues and while we continue to weather the economic COVID-19 storm, there is plenty more Government could be doing to help make things easier.

“At the outset, Ministers should recognise the centrality of small businesses to the levelling up agenda in every region and community. You can only level up local economies by backing small businesses.  They will succeed by improving the support they can access, which in turn will mean more small businesses, trading more, creating more jobs and wealth.

“Government needs to simplify and streamline how and where small firms can access critical business support advice, building on what currently works.

“It should also ensure that the level of funding for business support via UK Shared Prosperity Fund matches, or exceeds, those funds previously received under European Structural and Investment funding.

 

“If the right advice can be accessible to all, then small businesses can thrive, our economy can bounce back and everyone benefits.”

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MTD for Income Tax Self Assessment : What accountants and clients need to do

Making Tax Digital (MTD) is part of the government’s ongoing plan to ensure all taxpayers use software for accounting and reporting that relates to tax.

MTD for Income Tax Self Assessment (MTD for ITSA) follows the successful introduction of MTD for VAT in April 2019 and is the next step.

The government has said MTD for ITSA will be mandated on 6 April 2023. It will affect sole traders and landlords (or individuals who are both) that have an income above £10,000.

As happened with MTD for VAT, clients will turn to accountants for advice and guidance. More than this, the government is again likely to rely at least partially on accountants to educate their clients about the requirements.

MTD for ITSA provides opportunities:

  • Clients can modernise their accounting processes, to get the benefits of reduced admin and a closer, more active relationship with their accountant.
  • Accountants have an opportunity to grow their service offerings via increased client touchpoints through quarterly updates, potentially multiple end of period statements (EOPS), and the final declaration – not to mention initial guidance on signing up, adjusting admin processes, and helping with software choices.

Although 2023 feels a long time away, accountancy practices with income tax clients that fall under the scope of MTD for ITSA need to start planning today. If client are to improve their accounting period then this must be done.

The government has published draft legislation for MTD for ITSA, but we still lack information on many finer points.

For this article, we’re able to gather the following from what’s been said so far, and from the MTD for ITSA pilot scheme.

Read on to find out what your accountancy practice needs to know. And here are the topics we cover in this article:

What is the MTD for ITSA digital start date for my client’s business?

Which clients will be affected by MTD for ITSA – and how?

What are MTD for ITSA accounting updates, EOPS and final declaration?

What information will clients submit for MTD for ITSA (EOPS, quarterly reports, etc)?

Can clients opt out of MTD for ITSA?

What software do clients require for MTD for ITSA?

Do clients signed up for MTD for VAT need to sign up for MTD for ITSA?

What does MTD for ITSA means for accountants?

Final thoughts on MTD for ITSA

Most businesses within the scope will be required to follow MTD for ITSA rules in their first full accounting period starting on or after 6 April 2023.

Their first day under MTD for ITSA will be known as the digital start date.

If a client has several businesses with different accounting start and end dates, they may find themselves with several different digital start dates to contend with.

As such, you may wish to help clients align their accounting periods in advance of MTD for ITSA. But it’s worth noting that the government is considering basis period reform for the tax year 2022 to 2023.

If enacted, this would force all sole traders or partnership basis periods to align with the tax year (6 April to 5 April), significantly simplifying MTD for ITSA accounting.

Notably, landlords within scope of MTD for ITSA will always have a digital start date of 6 April 2023.

For accounting periods prior to their digital start date, those within scope will continue to use the Self Assessment system for the business.

In other words, even after signing up for MTD for ITSA, your clients will still need to submit a Self Assessment return for the 2022/23 tax year by 31 January 2024, or 30 December 2023 if they want HMRC to collect taxes due from wages and pensions via PAYE (although if they’ve already signed up for the MTD for ITSA pilot, this will not be required).

Self Assessment will still be required for individuals outside of the scope of MTD for ITSA, and for other types of declarations for some of those within scope – for example, for claiming certain tax reliefs of benefits, or making charity donations outside of salaried employment.

The majority of businesses and landlords with business or property income above £10,000 will be required to sign up for MTD for ITSA, and then use compatible software for their income tax accounting for the first full accounting period starting on or after 6 April 2023.

In other words, MTD for ITSA will affect those who would normally declare more than £10,000 in the self-employment or property boxes of the Self Assessment tax return.

To fall under the MTD for ITSA scope, all of the £10,000+ income will have to come from either self-employed business or property rents.

For example, should one of your clients have just £9,000 from property rental to declare for income tax, and £2,000 from savings interest income, that will not require them to sign up for MTD for ITSA.

For those signed up to MTD for ITSA, there will no longer be a need to send a Self Assessment tax return with regard to income for the tax years occurring after their digital start date.

MTD infographic

Instead, periodic updates will be made to HMRC using compatible software, as follows:

Quarterly updates for clients for client businesses:

  • Defined as: “An electronic submission of summary totals for specified categories from the digital records of each business on a quarterly basis (obligation period) from the software to HMRC.”
  • Updates are due from 10 days before, to one month after the quarter end date.
  • The update doesn’t need to include a statement that the data is complete and accurate – no tax is paid at this point.
  • HMRC returns a calculation of the estimated tax liability based on the information sent. This should be discussed with clients, with potential inaccuracies notified (e.g. pending later adjustments).
  • Amendments to previously submitted updates can be made by resending the update for that period in the following period.

End of period statements (EOPS) for client businesses:

  • One is required for each client business.
  • The EOPS relates to the accounting period or basis period for the business and can’t be completed before the end of that period. It can be completed and submitted at any point after this date and up to the following 31 January.
  • Process to finalise the taxable profit or allowable loss for any one source of business, or combined property income.
  • The process will pull the information already submitted in the quarterly updates and make adjustments/additional information, such as allowances and reliefs.
  • If not already included in quarterly updates, disallowable expenditure must be adjusted for.
  • The submission must include a declaration that the information is complete and correct.
  • Once submitted, HMRC returns a tax calculation.

Final declaration for clients (crystallisation):

  • This is the process to bring together all data needed to finalise the tax position and reach the final tax liability for the client.
  • It takes into account all sources of income, gains and losses whether business or otherwise.
  • It effectively replaces the SA100 tax return.
  • 31 January continues to be the deadline for filing.
  • Any income tax liability must also be paid by 31 January.
  • HMRC will provide a submission interface to allow filing without the need for software.
  • If any information that needs to be included in the final declaration isn’t supported via software submission then the client will also need to complete a Self Assessment tax return.

The following are non-exhaustive lists and subject to change and confirmation by HMRC.

For a self-employment business the data required is likely to include:

  • Business income (e.g. turnover).
  • Business expenses (total and disallowable by type of expense, such as travel costs).
  • Tax allowances for vehicles and equipment (e.g. capital allowances).
  • Adjustments (e.g. basis adjustment).
  • Balancing charges.
  • Goods and services for client’s own use.

For a property business, the data required is likely to include the following:

  • Property business income for both rentals and furnished holiday lettings (FHL).
  • Property business expenses (e.g. premises running costs).
  • Allowances (e.g. annual investment allowance).
  • Adjustments (e.g. loss brought forward).
  • Balancing charges.

For the final declaration, the individual is likely to be required to include the following among other things:

  • Total UK dividend income for a tax year.
  • Taxed UK savings interest.
  • Untaxed UK savings interest.

As with MTD for VAT, it won’t be possible for most clients to opt out of MTD for ITSA if they fall within its scope.

However, it’s likely that those who fall under the digital exclusion rules as defined by MTD for VAT will be able to apply to HMRC to be exempted from MTD for ITSA.

This includes people whose disabilities mean they can’t use software, for example, for people whose remote location means internet access is impossible.

HMRC says free software will be made available for clients. Notably, it adds that this will be for “the simplest tax affairs”.

Existing cloud accounting software will be updated in time, although this might not necessarily be true for desktop accounting software. You or your clients may need to consult the software vendor to ensure updates and patches are installed in time.

Older software packages that are no longer supported may not be updated, so might require the client migrate their accounting to a different package.

It will be possible to use spreadsheets for MTD for ITSA accounting through the use of either bridging software, or special spreadsheets/worksheets that facilitate digital linking with cloud services.

Remember that the digital linking rules say that copying and pasting is not allowed, and all transfer of MTD for ITSA data must be both digital and automated.

Because of this and other issues, using a spreadsheet is unlikely to be the most user-friendly solution.

The two MTD schemes for VAT and Income Tax operate independently, with their own sign up criteria.

It isn’t the case that MTD for ITSA applies only to those already using MTD for VAT – although many businesses already using MTD for VAT will find themselves having to sign up for MTD for ITSA too.

It’s hard to overstate the changes MTD for ITSA will bring for you. Here are two things to be aware of.

1. Your clients will have to use software

While this might be obvious, it requires exploration and clarity.

Your clients will be required to use compatible software to record their business and property income and expenditure, and send six updates/reports every year to HMRC.

There’s likely to be automation for each of these steps, minimising the administrative impact. But your clients will still need to be aware of the requirements expected of them.

This will require a substantial change in attitude from your clients in how they approach their accounting.

It’s certainly the case that the ‘shoebox’ client who dumps receipts on their accountant’s desk in January each year will have to change their ways.

It’s your role as their accountant to communicate this need for change, and to encourage it to happen.

In return, you are given significant privilege to guide your clients towards the best solution for their needs – and to bring positive changes to their clients’ businesses.

This presents additional opportunities.

Not partnering with a software vendor to sell solutions to your clients, for example, is to discard a potentially large income source.

Needless to say, an MTD for ITSA-compatible cloud accounting solution that ties into your own systems is best for both you and your client.

You can offer training in the software, perhaps as part of the sales package, or as a separate service offering.

At the very least, every UK accountant will need to be proficient in the free software package the government will probably offer, because accountants will be facing client enquiries about this on a very regular basis.

2. You have the opportunity to offer additional advisory services

Although MTD for ITSA should mean clients are more aware of their accounting, it doesn’t mean your fundamental role will change.

You’ll still be required to help your clients be compliant, and to help them with fundamentals such as making deductions and calculating a final income tax bill.

While it’s possible some small business owners may have an epiphany moment when they get to grips with accounting software, and realise the power it delivers, the fundamental fact that many people hate dealing with figures and the ensuing admin burden isn’t going to change.

You have nothing to fear from technology and, in fact, lots to gain.

But this is only scratching the surface of the potential that MTD for ITSA will deliver.

You’ll go from having a single point of contact each year to potentially having at least six situations where your clients may need help with their accounting when they make those quarterly reports, EOPS and the final declaration.

These situations can be used to forge stronger relationships where you’re not viewed as just a number cruncher but more of a business partner.

Using cloud software that ties in with your clients’ accounting gives you the ability to monitor for problems or opportunities, and to provide advice based on this.

MTD for ITSA delivers the potential to take on more of an advisory role. It would certainly be worth taking advantage of this in order to create a practice that’s fit for the 21st century.

 

If your practice dealt with the implementation of MTD for VAT ahead of it being mandated in April 2019, you’ll be well aware that starting early with preparations will put you and your clients in good stead.

If it didn’t, the best advice is to start now.

Look at your processes, start talking to your clients and take the steps now to not only meet the requirements for MTD for ITSA but use it as an opportunity to help your practice and your clients really flourish.

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business

Transition Update

The Brexit transition period ends in 20 days. If your business trades goods with Europe or you represent businesses who do, you’ll need to be prepared for changes that will come into effect from 1‌‌‌‌‌‌ ‌January 2021.

We understand these are challenging times, but it is important to make sure that your business is ready for these new rules. At the time of writing, talks are ongoing about our future trading arrangements with Europe. These rules will not change or go away, and the steps that you need to take to prepare, are needed in any scenario before you can trade from 1‌‌‌ ‌January.

If you’re new to customs processes it will help you to watch our series of short videos on HMRC’s YouTube channel which introduce importing and exporting:

We also have a HMRC Trader checklist to help you prepare for the end of the Brexit transition period.

In addition, HMRC are running live webinars where you can hear the latest information and ask questions to help you prepare for these new rules:

Exporting: Actions you need to take to prepare for 1‌‌‌ ‌January 2021

The webinar explains what actions you need to take to export goods from Great Britain to the EU and move goods between Great Britain and Northern Ireland. We’ll provide a run-through of the key export processes – staged border controls, zero-rated VAT, customs declaration, using an intermediary as well as licences, certificates and authorisations that you’ll need.

Exporting: Actions you need to take to prepare for 1‌‌‌ ‌January 2021

The webinar explains what actions you need to take to export goods from Great Britain to the EU and move goods between Great Britain and Northern Ireland. We’ll provide a run-through of the key export processes – staged border controls, zero-rated VAT, customs declaration, using an intermediary as well as licences, certificates and authorisations that you’ll need.

Please register to take part if you’re planning to export.

What are customs import declarations?

If you import goods, you’ll need to prepare for making customs import declarations on controlled goods from 1‌‌‌ ‌January, and by the end of June on all goods. This webinar will help you to understand what they are in more detail. This includes what is needed for simplified declarations, supplementary declarations, making import declarations without authorisation and delayed import declarations.

Please register to take part if you’re planning to import.

HMRC webinars are constantly updated  to provide you with the latest government guidance and information as it develops.

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