Despite all of the so-called consultation over recent months, the Budget speech and subsequent publication of the Finance Bill illustrate that HMRC have not really listened or moved their position materially from their original starting point.
Budget Day information contained two clarifications:
- Businesses, self-employed people and landlords with turnovers under £10,000 will exempt from the requirements to keep records digitally and submit that information quarterly with an end of year update. It is not clear whether this limit will apply per business or in total.
- Businesses, self-employed people and landlords will be required to start using the new digital service from April 2018 if they have profits chargeable to income tax (possibly deferred to April 2019 where turnover is below the VAT registration limit of £85,000). Once again, it is not clear whether this limit will apply per business or in total.
However, the Finance Bill does not contain any further clarification regarding either of these points.
In addition, the Finance Bill gives no detail on how the rules will really work. In terms of the start date, regulations may not impose requirements on a person or partnership in respect of any tax year before 2018/19 or in respect of any period of account beginning before 2018/19.
Who is caught?
Broadly, the new rules apply to a person within the charge to income tax who, other than in partnership, carries on (or has carried on) a trade, profession or vocation the profits of which are chargeable to income tax or, similarly, a property business.
However, the new rules do not apply to the trustees of a charitable trust (interestingly, they do apply to a trading subsidiary of a charity) unless they elect for them to do so.
In addition, the new rules do not apply to person in respect of an excluded activity unless the person elects. Excluded activities are the underwriting business of a member of Lloyd’s, holding shares in respect of which a distribution may be made which is chargeable to income tax under Part 3 ITTOIA 2005 by virtue of s548(6) CTA 2010 (distributions to shareholders in real estate investment trusts) and participating in an open-ended investment company which may make distributions chargeable to income tax under Part 3 ITTOIA 2005.
The new rules apply to a partnership if one or more of the partners is within the charge to income tax unless all the activities are excluded activities as above. The partnership requirements have to be met by the nominated partner.
What is required?
The digital reporting and record-keeping rules will require a person or partnership to provide to HMRC, by electronic communications, specified information about the business of the person or partnership. The information includes any information (‘financial information’) relevant to calculating profits, losses or income of the business, including information about receipts and expenses. The regulations may require information to be provided at or for specified intervals, times or periods but they may not require financial information about the business to be provided more often than once every three months.
The legislation also introduces an ‘end of year statement’ which must be provided electronically for a period of account or a tax year.
Regulations may be introduced to exempt the ‘digitally excluded’, namely
- the person or partner is a practising member of a religious society or order whose beliefs are incompatible with using electronic communications or keeping electronic records; or
- for any reason (including age, disability or location) it is not reasonably practicable for the person or partner to use electronic communications or to keep electronic records.
All of the detail is to be introduced by Statutory Instrument, which is rather underhand as such instruments receive far less parliamentary scrutiny.
‘Simplifying’ tax for unincorporated property
The majority of the Finance Bill relates to the introduction of a cash basis for unincorporated property businesses. The maximum entry limit for the trading cash basis will already increase from the VAT registration threshold (currently £83,000) to £150,000 from April 2017 and this figure will also be used as the entry limit for a property business to use the new property cash basis. Therefore, only property businesses which have receipts not in excess of this limit will be eligible to use the property cash basis.
What is clear from the Finance Bill is that the rules are not simple!