It all boils down to a lack of confidence

Brexit resource centre example website page

And as far as Mrs May is concerned, quite literally so.

There is a limit that you can ask any living organism to hold its breath and we have been holding our breath on Brexit issues for over two years.

From a business perspective, this manifests as an unwillingness to invest. Why would you, when the terms of our future trading relationship with the EU remain unclear?

What can we be confident about?

You don’t need to be an economist to figure out that Brexit of whatever shade will likely cause a downturn in business activity. In the case of a no-deal Brexit, the supply chain disruption, at least initially, will be significant.

Planning for a worst-case scenario is not only prudent, it will improve business fitness. Even if things work out to be better than expected any time spent increasing liquidity and financial efficiencies will not be wasted.

Time for accountants to stand out from the crowd

Whatever your preference, surely we have a duty to keep clients up-to-date with the worst-case scenario – probably a no-deal outcome – and help them prepare by taking a close look at supply chain issues. For example, are you preparing impact assessments for vulnerable clients and revising business plans for 2019-20 and beyond?

What should we be doing now?

Without interfering with your present obligations, primarily to meet the SA deadline next month, there are a few basic, inexpensive things we can do:

  1. Send your business clients an easy to read summary of the issues they may have to deal with.
  2. Send your non-business clients an easy to read summary that covers how Brexit may affect their  relationship with the EU after 29 March 2019.
  3. Add accessible information to your website and keep it up-to-date.
  4. Visit or call clients that you know will have supply chain issues and offer to help them plan for any possible disruption.

No time to deal with this?

Take a look at the material I am making available from the Landmark site – BREXIT RESOURCE CENTRE – simply identify the clients you want to contact and send them the material I have written. Likewise, send your developer the code to add a Brexit video, risk assessment tool and/or other copy to your website.

Bored with Brexit?

Be careful not to drift into a victim stance with this process. How can you be bored by an event that will likely change the trading dynamics of the UK for years to come?

There is no point in blaming anyone. We are not powerless. We know what the basic downside Brexit risks are and we are still the right side of the 29 March withdrawal date to plan for these issues.

All it will take is a couple of hours planning.

Accountants Brexit resources

Reminder for clients re MTD

I included copy this week in Landmark’s Online Copy service that reminds VAT traders that we are getting close to the MTD filing deadline, April 2019.

If you still have clients that are dragging their feet feel free to use the article, no copyright restrictions.

Brexit may be in limbo, but Making Tax Digital is not

As we have highlighted in many posts to this blog, from 1 April 2019, ALL VAT registered businesses with turnover above the £85,000 VAT registration threshold will have to submit their VAT returns from within software that can link with HMRC’s networks. In techno- speak, your data will need to be transferred using a designated API (HMRC’s application programming interface).

The fact that you have always prepared your VAT returns electronically, for example, by using a spreadsheet to record transactions and create the data for your VAT returns, will not be enough. Your spreadsheet will not have the functionality to link with HMRC’s API. In these circumstances you will need to acquire bridging software that will draw data from your spreadsheet and forward it the HMRC in the required format.

HMRC have now clarified that only businesses with taxable turnover that has never exceeded the VAT registration threshold (currently £85,000) will be exempt from Making Tax Digital (MTD). You will therefore need to keep an eye on your taxable turnover, especially if you think it is close to the VAT registration threshold.

Additionally, you may be excused from applying the MTD filing obligations if:

  • your business is run entirely by practicing members of a religious society whose beliefs are incompatible with the requirements of the regulations (for example, those religious beliefs prevent them from using computers);
  • it is not reasonably practicable for you to use digital tools to keep your business records or submit your returns, for reasons of age, disability, remoteness of location or for any other reason; or
  • you are subject to an insolvency procedure.

For the rest of us that are required to observe the MTD regulations, we should be using accounts software that will be MTD compliant come 1 April 2019. If you have consulted us on this issue you can be confident that any software that we have recommended will pass muster.

If you are still unsure which way to jump, please call so that we can help. As far as we can tell HMRC are on track to convert to this new filing process and the clock is ticking.

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This week’s puzzle

A bit of light relief. See if you can solve this classic logic puzzle:

5 pirates of different ages have a treasure of 100 gold coins. On their ship, they decide to split the coins using this scheme:

  • The oldest pirate proposes how to share the coins, and ALL pirates (including the oldest) vote for or against it
  • If 50% or more of the pirates vote for it, then the coins will be shared that way. Otherwise, the pirate proposing the scheme will be thrown overboard, and the process is repeated with the pirates that remain.

As pirates tend to be a bloodthirsty bunch, if a pirate would get the same number of coins if he voted for or against a proposal, he will vote against so that the pirate who proposed the plan will be thrown overboard.

Assuming that all 5 pirates are intelligent, rational, greedy, and do not wish to die, (and are rather good at math for pirates) what will happen?

Answer to last published puzzle:

The man picks up a piece of wood and lights it from the fire on the west end of the island.

He then quickly carries it near the east end of he island and starts a new fire. The wind will cause that fire to burn out the eastern end and he can then shelter in the burnt area.

The man survives the fire, but unfortunately dies of starvation, with all the food in the forest burnt.

 

 

Less is more say HMRC

tax return preparation

I thought practitioners would find the following comments instructive. They arose from a recent exchange between me and the Let Property Campaign team this last week.

The story so far

We submitted a declaration on behalf of a client under the Let Property Campaign. HMRC wrote to me to query three items:

  1. That the interest calculations were incorrect,
  2. That the penalties offered were incorrect, and
  3. There was an error in the rate of income tax used in one year’s calculations.

I decided to call HMRC to resolve the issues

In like order the resolution of the various matters was:

  1. We had used HMRC’s online calculator to estimate interest due and were informed that this sometimes produced inaccurate results. The officer spoken to was helpful and with the use of a separate “special” calculator, that only he had access to, it was agreed that interest charges paid were marginally higher than they needed to be.
  2. Regarding penalties, I was prepared for a time-consuming appeals process, but my fears were groundless. The officer confirmed that penalties offered in year one of the disclosure were too high, and in years two and three required an upward adjustment of just 5%.
  3. For the tax year 2016-17, we had applied the higher 40% income tax rate to rents disclosed and deducted a small basic rate tax credit based on disallowed finance charges. Accordingly, if the tax offered was expressed as a percentage of income disclosed the percentage rate was marginally lower than 40%. HMRC’s algorithms were not happy. To move matters along I agree to adjust the numbers so they would pass muster.

The outcome

The upshot of the conversation was an agreement to resubmit the client’s offer at an amount that was £40 more than the tax initially offered.

It is difficult to estimate the cost to HMRC of this seemingly pointless process. If systems have been designed to check Let Property Campaign submissions, then surely it would have been a simple matter to quantify a de minimis limit, say a £200 error level, below which submissions should be accepted?

What this experience does highlight is how driven HMRC have become by online system checks, and how their staff are powerless in the face of these controls.

A business would not be run in this way. When and if human intervention becomes necessary, the costs of reaching agreement with taxpayers or their advisers can quickly outpace any recovery of additional revenue.

This does not bode well in my opinion for the roll-out of MTD.

 

Expanded VAT return or MTDfB?

Office-of-Tax-Simplification-logo

I wasn’t in my bath when I had this particular Eureka moment, I was actually discussing the MTDfB changes with HMRC’s implementation team. In a nut-shell, it occurred to me that with a few changes (inexpensive changes!) the humble VAT return, which is already filed online, could be changed to accommodate the requirements of MTDfB, and in particular, the quarterly upload of profit data. My report, which was sent to HMRC some time ago, is reproduced in full below.

Obviously, this seemingly inexpensive change to provide data required by MTD has not been taken up and we trundle along with HMRC’s plan. I say no more…

A report on an alternative approach to Making Tax Digital

Report written by Bob Edwards FCCA – 21 July 2017

Introduction

Last week, an announcement on the future roll-out of Making Tax Digital for Business (MTDfB) was posted on the Gov.uk website, it said:

Under the new timetable:

  • only businesses with a turnover above the VAT threshold (currently £85,000) will have to keep digital records and only for VAT purposes
  • they will only need to do so from 2019
  • businesses will not be asked to keep digital records, or to update HMRC quarterly, for other taxes until at least 2020

Making Tax Digital will be available on a voluntary basis for the smallest businesses, and for other taxes.

This means that businesses and landlords with a turnover below the VAT threshold will be able to choose when to move to the new digital system.

As VAT already requires quarterly returns, no business will need to provide information to HMRC more regularly during this initial phase than they do now.

Source: https://www.gov.uk/government/news/next-steps-on-the-finance-bill-and-making-tax-digital

Like many UK tax professionals, I greeted this announcement with a mixture of relief (previous implementation announcements had mandated that every business with turnover of more than £10,000 would need to comply with the MTDfB quarterly filing obligations, and the reporting process would start April 2018) and itchy feet, for goodness sake let’s get on with it.

But on reflection, the final part of the above announcement opened my eyes to other possibilities, and, as we have more time, are we not missing a trick or two? This paper discusses my ideas as a contribution to the wider debate on the scope and impact of MTDfB.

 

VAT, Income Tax, CGT, Corporation Tax place holders

At present, three labels are attached to these taxes:

  1. All VAT registered businesses have a VAT registration number.
  2. All self-employed Income Tax (IT) and CGT payers who file a tax return have a Unique Tax Reference number (UTR).
  3. All companies and other organisations subject to Corporation Tax (CT) have a CT UTR.

My first suggestion, is that VAT registration numbers are abolished and replaced by adding a “V” to businesses’ UTR.

There is an OECD convention that controls the use and changes to Tax Identification Numbers (TINs), see https://ec.europa.eu/taxation_customs/tin/pdf/en/TIN_-_subject_sheet_-_2_structure_and_specificities_en.pdf for a list of current TINs across Europe. However, Cyprus and Spain use TINs with a combination of numbers and letters so I am assuming there would be flexibility here to adopt my suggested approach.

Transforming the VAT return into an MTDfB Tax Return

There is already a collection system in place to file and pay a quarterly VAT return (unless Annual Accounting is adopted) in which case see later comments. For now, it is sufficient to say that the data collected does the job, and most accounting software suppliers (if not all) provide an adequate system for tagging accounting transactions to populate the form. The present Boxes 1-9 are:

Box 1 VAT due this period on sales and other outputs
Box 2 VAT due in this period on acquisitions from other EC Member States
Box 3 Total VAT due (the sum of boxes 1 and 2)
Box 4 VAT reclaimed in this period on purchases and other inputs (including acquisitions from EC)
Box 5 VAT to Pay Customs
Box 6 Total value of sales and all other outputs excluding VAT (including supplies to EC)
Box 7 Total value of purchases and all other inputs excluding VAT (including acquisitions from EC)
Box 8 Total value of all supplies of goods, excluding any VAT, to other EC Member States
Box 9 Total value of all acquisitions of goods, excluding any VAT, from EC Member States

Transforming these numbers into a profit statement is remarkably easy. In my opinion, it can be done by adding three new lines to the VAT return.

Most accounting software has a “No VAT” or “Outside the scope of VAT” or “Exempt” category. Transactions tagged with these codes would not be drawn into the VAT return, specifically, boxes 6 and 7. Obviously, income and revenue expenditure items that are subject to VAT are accumulated in boxes 6 and 7 together with sales and purchases of capital items that are subject to a VAT charge.

I propose adding a Box 10, 11 and 12 to the return, to complete the data required to produce a realistic, pre-tax profit figure:

Box 10 Sales and other outputs not subject to VAT
Box 11 Purchases of goods, services and other costs not subject to VAT
Box 12 Purchase of assets not subject to AIA or FYA

 

To facilitate the collection of the Box 10, 11 and 12 data, software producers would need to standardise the treatment of none VAT transactions. I suggest:

  1. All businesses should enter their UTR into their accounts software.
  2. If the UTR entered does not have the “V” suffix – 12345616780V – then all transactions that involve the sale or purchase of costs and services will automatically be treated as non-VAT and allocated to Box 10 or Box 11. This would include wages and other revenue costs not published to a VAT return, but would exclude non-revenue costs such as proprietors or partners’ drawings. Nominal coding tags in accounts software could easily be adapted to achieve this result.
  3. Any journal entries to introduce accounting only adjustments, depreciation, reserves for taxation and so on, would auto-generate a code that would not be added to Box 10 or Box 11. For the sake of this report, let’s call this code NP (Not taxable profit related).
  4. If posting capital acquisitions that do not qualify for the AIA or a FYA, then software suppliers would need to add a category that included the purchase in Box 7 and in Box 12.

This return is now primed to produce a realistic estimate of taxable profit. The calculations are simple enough:

Box 6

+

Box10

+

Box 12

Box 7

Box 11

No doubt there are further tweaks required to take more obscure transactions into account, but in my opinion this revamped MTDfB tax return would provide data for the quarterly VAT return and the quarterly upload for MTD purposes with very few changes to government or client software.

All that is required to remove any unwanted coding errors or other mistakes, is the ability for taxpayers or their agents to file a fifth return addressing add backs, capital allowance claims, or other matters before certifying that the return for a tax year is complete. This, I would suggest, is where tax practitioners can step to add value to the whole process and ensure that their clients only pay taxes to the limit imposed by legislation. There is a more wholistic feel to this annual audit as it will, of necessity, include a review of all taxes charged in the year: VAT, IT, NIC, CGT and/or CT.

VAT special scheme complications

But what about VAT traders registered for Cash Accounting, or the Flat Rate Scheme, or Annual Accounting, or special retailer schemes? My observations are set out below.

Cash Accounting (CA)

If HMRC are content that businesses who are registered for CA, pay VAT based on money received and expended, then why not simplify assessment of tax (IT/NIC/CT) to apply the same criteria. In this way, the data reported on the VAT return would also apply to the calculation of taxable profits on a cash basis.

Instead of having a separate Cash Basis for VAT and tax, why not use the same?

Flat Rate Scheme (FRS)

As far as I can tell, two changes are required:

  1. To show Box 6 as VAT exclusive, not inclusive, and
  2. To include all VATable purchases in Box 7 and not limit this to capital purchases.

Annual Accounting (AA)

As MTD for businesses over the VAT registration threshold will possibly be obligatory from April 2020, then I see no future for this scheme. Leaving matters as they are would mean AA traders having to report MTD data quarterly and VAT data annually.

Better to offer all VAT traders the option to pay by monthly DD for 9 months, with a balancing payment once a year (this balance, by the way, could be displayed in the business owners or company’s Personal Tax Account (PTA), so no surprises), and scrap the AA scheme.

Retailer schemes (RS)

Most retailer schemes concentrate on quantifying the amount of output VAT included in mixed rate sales, so the quarterly reporting should be acceptable for VAT and MTDfB purposes with no changes.

Advantages of the combined VAT and MTDfB tax return

I have summarised the advantages that I can see from adopting my suggestions set out in this paper. At this stage, they are purely speculative and obviously subjective, my opinion has, after all, shaped the narrative.

Benefits claimed are:

  1. Radical government cost savings.
  2. Simplification by merger of VAT and MTD reporting.
  3. Huge cost savings for the accounting software industry. For example, there is no need to adapt software to use an exclusive MTD API link, the present VAT API will do the trick.
  4. Easy to understand user changes, basically, the VAT return is being adapted to incorporate MTDfB reporting.
  5. Simplification and unification of VAT special schemes and assessment for other taxes.

I’ve no idea how much government have invested in MTD technology and systems changes. I have a sneaking suspicion that it will be £ millions.

 

 

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