Guidance

Update on the primary and secondary legislation for Making Tax Digital for Business

Updated 20 March 2017

Further to the Bringing Business Tax into the Digital Age: legislation overview which was published on 31 January 2017, this document provides an update on the primary and secondary legislation for Making Tax Digital for Business. It provides an accurate overview on the date of publication.

Primary legislation

Finance Bill 2017

On 20 March 2017, the government published primary legislation to begin its implementation of the Making Tax Digital for Business reforms. The government had previously undertaken a technical consultation on a partial draft version of the primary legislation from 31 January 2017 until 28 February 2017.

Finance Bill 2017 includes clauses and schedules covering the areas below of the Making Tax Digital for Business reforms.

Income Tax

a) Scope - details of which businesses (including sole traders and landlords) will be in scope of the new requirements.

b) Entity and activity-specific exemptions - details of exclusions and exemptions for certain businesses and business activities.

c) Periodic updates: regulation-making power - powers for HM Revenue and Customs (HMRC) to make regulations requiring persons and partnerships in scope of the new requirements to provide, at regular intervals, specified information about their income and expenditure.

d) End of period statement: regulation-making power - powers for HMRC to make regulations requiring persons to provide specified information in relation to relevant periods for the purpose of calculating their taxable profits or losses.

e) Partnership return: regulation-making power - powers for HMRC to make regulations requiring partnerships to provide specified information about their business in relation to a tax year, to facilitate the calculation of partners’ share of the taxable profits or losses.

f) Digital record-keeping: regulation-making power - powers for HMRC to make regulations requiring persons and partnerships to keep and preserve specified records relating to their business in electronic form.

g) Electronic communications: supplementary powers - further details of the provision which may be included in regulations in respect of electronic communications.

h) Digitally Excluded Exemption - details of who may be exempt from the new requirements because they are unable to engage digitally.

i) Further exemptions: regulation-making power - powers for HMRC to make regulations exempting persons and partnerships from the new requirements. This will include regulations providing for exemptions for businesses based on their annual income. It will be used to implement a one-year deferral of the requirements for businesses with annual incomes below the VAT threshold. It will also be used to implement a deferral of the requirements for partnerships with annual incomes of above £10 million. Furthermore, it will be used to provide for exemptions in relation to businesses subject to insolvency proceedings.

j) Final declaration - the Bill includes provisions through which persons, subject to the new requirements, will finalise their liability to Income Tax and Capital Gains Tax. They will be able to make a ‘final declaration’ using their digital tools, through which they can finalise their affairs for a tax year. This will replace the need to file a tax return, provided they have submitted details of all their chargeable income through the final declaration.

k) Compliance powers - HMRC has a range of powers which allow it to check and investigate a person’s or partnership’s tax affairs. The Bill includes amendments to make HMRC’s existing compliance powers fit with the new processes described in Bringing Business Tax into the Digital Age.

l) Appeal powers - amendments to the Taxes Management Act 1970 to provide a right to appeal against a decision of the Commissioners about the application of any provision of regulations under schedule A1.

m) Consequential amendments - consequential amendments required to existing tax legislation in order to implement the policies set out in Bringing Business Tax into the Digital Age. This includes amendments to the Taxes Management Act 1970 to ensure it continues to operate effectively after implementation of these reforms.

VAT

The Finance Bill also amends the existing powers to make regulations about the administration of VAT. This will enable HMRC to make regulations requiring businesses to keep digital records and provide information digitally for VAT purposes (in addition to existing powers which require returns to be filed online).

Secondary legislation

Application

The government has previously committed to publishing draft regulations for the new requirements alongside Finance Bill 2017. In line with this commitment - and in accordance with best practice - the government will provide the Finance Bill committee with a working draft of the regulations before the Making Tax Digital for Business primary clauses are debated. The draft regulations will apply to persons and partnerships who fall within scope of draft schedule A1 of TMA 1970.

The government is keen to ensure that stakeholders have an opportunity to comment on the draft regulations. Therefore, the government will also publish a full version of the draft regulations in the summer of 2017 for technical consultation.

Phasing in and out of the new requirements

The regulations will provide for the process by which new and existing businesses (including sole traders and landlords) will start and stop their record keeping and update requirements.

Digital record keeping

Content of digital records

The regulations will provide for HMRC to make notices setting out the information, including categories of income and expenditure, which will need to be kept and preserved digitally.

The digital information recorded may differ depending on whether or not a business operates on a cash or accruals basis or depending on whether it is a property business or a partnership. Retailers may record their daily gross takings (as defined in a notice published by HMRC) instead of recording every transaction. The regulations will set out the process by which retailers may elect for these different record-keeping requirements to apply and how and when that election may be brought to an end.

Periodic updates

The regulations will require businesses (including sole traders and landlords) to provide HMRC with specified information every 3 months. For most businesses there will be 4 updates for a year.

The regulations will provide for HMRC to make notices setting out the categories of summarised totals which will need to be submitted in each update. Most of the information required will consist of summary totals for each category. Businesses eligible to submit ‘3 line accounts’ (as defined in notices published by HMRC) will be able to submit total figures of their incomes and expenses.

Businesses (including sole traders and landlords) 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.

Updates for periods which are shorter than 3 months

The regulations will allow businesses (including sole traders and landlords) to submit updates in respect of periods which are shorter than 3 months (although there will be no requirement to do so). However, where a business chooses to do so, it will still be required to submit information in respect of the remaining part of the 3 month period.

Early updates

The regulations will allow businesses (including sole traders and landlords) to submit updates for the whole of a period, 10 days before that period ends, if no information is expected for the rest of the period. The business will also need to confirm that the update covers the whole of the period.

End of period statement or partnership return

The regulations will place an obligation on persons to whom schedule A1 applies. They will be required to provide an end of period statement for a relevant period to finalise their taxable profits or losses. The end of period statement will need 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

They will also place an obligation on partnerships to whom schedule A1 applies. They will be required to provide a partnership return for a tax year to establish the partners’ share of taxable profit or losses from the partnership and finalise their taxable business profits or losses. The partnership return will need to be provided using compatible software by 31 January following the end of the tax year in which the relevant period ends.

The regulations will provide for HMRC to make notices setting out the categories of summarised totals and information that will need to be included in the end of period statement or partnership return. As with the record-keeping and periodic update obligations, these categories of summarised totals may differ depending on whether it is a trade, property business or a partnership.

The end of period statement or partnership return will include additional information compared to 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 the end of period statement or partnership return is correct and complete to the best of the knowledge of the person making it, will also need to be included.

Excluded activities

The regulations will include details of how businesses which are not required to fulfil the new obligations can choose to provide details of their tax affairs to HMRC through the new processes.

Exemption for the digitally excluded

The regulations will include details of the process by which persons and partnerships meeting the definition of ‘digitally excluded’ set out in the Bill, can apply for exemption from the new requirements.

Exemption based on gross annual income

The regulations will include details of the one-year deferral of these requirements for businesses whose gross annual income is below the VAT threshold. The regulations will also provide for an exemption in respect of partnerships with turnover over £10 million.

Appeal Processes

The regulations will include details of how persons and partnerships can appeal against decisions by HMRC that they are outside the criteria for a published exemption to the new requirements.