Making Tax Digital (MTD)
One of George Osborne’s 2015 budget announcements was the ‘making tax digital’ initiative. It means all tax payers will have an online account of their tax affairs and a mechanism for communication between the taxpayer and HMRC.
From April 2018, businesses (partnerships and sole traders only at this stage – limited companies are currently not within the first wave of the initiative) with turnover greater than £10k per year, or property investment businesses, will also have to file quarterly reports of their income and expenses as well as the annual return. Each quarterly report will need to be filed within 30 days of the end of the quarter. The proposal is that online quarterly reporting will commence on the first accounting period ending after 5th April 2018.
Sole traders and partnerships that complete records on an annual basis in manual format will need to change the way they work, and need to produce quarterly figures in digital format. HMRC say the additional average cost will be of the order of £280 but other sources such as The Federation of Small Businesses put the cost much higher.
At the moment MTD is not proposed for companies, it only affects sole traders and partnerships. This may encourage some businesses to incorporate, thus simplifying personal income down to a salary and dividends, with an advantage of some tax flexibility on the timing of dividend payments.
In January 2017, MPs urged HMRC to delay the proposals until 2020 but HMRC are currently piloting the scheme and pressing ahead regardless.
The first payments of the new tax on dividends will fall due for payment in January 2018. The first £5,000 of dividends are free of tax and dividends falling within the basic rate band will be taxed at 7.5%. Higher rate and top rate taxpayers will pay tax at 32.5% and 38.1% respectively. Please remember you will also be required to make a first payment on account of your 2017/18 liability as well amounting to 50% of the tax due with the second payment on account in the same amount falling due on or by 31 July 2018. Please remember to start setting money aside now as this is a major increase in the rates of income tax due.
VAT Flat Rate Scheme Changes
In the Autumn Statement, Chancellor Philip Hammond announced changes which affect businesses which have a very low cost base. These businesses are now called “limited cost traders”. Limited cost traders can still use the Flat Rate Scheme, but their percentage will be 16.5%. A limited cost trader is defined as one that spends less than 2% of its sales on goods (not services) in an accounting period.
When working out the amount spent on goods, it cannot include purchases of:
- capital goods (such as new equipment used in a business)
- food and drink (such as lunches for staff)
- vehicles or parts for vehicles (unless running a vehicle hiring business)
A firm will also be a limited cost trader if it spends less than £1,000 a year, even if this is more than 2% of the firm’s turnover on goods.