MTD 3/7: Simplifying Tax for Unincorporated Businesses.

November 7, 2016

This consultation paper is less about the MTD proposals themselves and more about simplifying the underlying tax rules for small businesses.

Four themes emerge:

  • extending the cash basis
  • doing away with basis period mandation
  • easing reporting requirements
  • abolishing the capital/revenue divide

These are all good things, I think.*

The cash basis, well, I think the smallest unincorporated businesses pretty much use the cash basis without knowing there’s any other basis until they fall into the hands of accountants.

For accounting periods, the proposals seem sensible enough:

define an accounting period as:  beginning when the company starts to carry on business, or immediately after the end of the previous accounting period; and  ending on the earliest of: 12 months from the beginning of the accounting period; an accounting date of the company; or on the date the company ceases to trade.

The current rules are complicated and – although they can be manipulated to put your profits into a tax year later than they’re made – are definitely something I’d abolish, particularly the overlap and gap rules for the first and last periods of trading. However there is a lot of  hedging in the condoc about whether it’s affordable.  Personally I think if the government thinks it will make buckets out of moving to an on demand system they should just take the  hit of the one year adjustment for overlap profits etc.  Although I’d like to see figures!

Reporting requirements: this again is about moving from GAAP (“generally accepted accounting principles”) to cash basis but specifically the adjustments you’d make at year end and which you presumably won’t make under MTD.  It includes things like:

4.13 … adjustments to the closing stock figure;  adjustments for profits where contracts span the period end;  adjustments in respect of provisions for bad debts; and  adjustments for prepayments and accruals.

although to me it illustrates just how debased the national conversation about tax has become that the document then wanders into rules to prevent people mucking about with contracts that last for years (so they would never have to recognize the income)

Capital and revenue

It seems to me the people who wrote the MTD documents may not actually do a lot of hands-on tax work themselves.  Why else is there no recognition that many of the people affected by MTD in future will at present be the people completing three line accounts, and the reporting requirements of MTD are absurdly onerous in comparison?  Similarly there is no value in introducing rules to redefine capital and revenue expenditure when most of the smallest businesses never have to worry about it because their capital expenditure is covered by the Annual Investment Allowance.  A simpler method of dealing with capital/revenue for tax purposes would be to say the AIA is set at (say) half a million, and will go up with inflation.

Finally, I have serious doubts about the costings in the impact assessment: there’s no quantified benefit to companies and what appears to be a big hit for HMRC:

the extension of cash basis will depend on the threshold chosen. Some options are given in the table in 2.17, for which the estimated Exchequer costs range from £40m to £145m. The basis period proposal is estimated to cost about £50m per year.

£50 million on basis period changes, maybe.  But £50 million *a year*?

I would urge you to consider replying to the consultation if you have concerns about any of this: the email address is businessincometaxsimplification.consultation@hmrc.gsi.gov.uk and the consultation closes at quarter to midnight on 7 November – move quickly!

(I have included the full consultation question list below the cut in case they’re of interest, but this time I haven’t answered the detail and the paragraphs above represent my answer.)




*Although there’s a big question mark for me in how they would deal with authors’ averaging (I am working on a novel and on a non-fiction book.  When they both sell for millions of pounds ha ha ha I would quite like to be able to “average” the profits over the, currently quite lean, years when I’m actually working on them, rather than pay supertax on the amounts all in one go.  I wonder, also, what other quirks and technicalities of the current rules will need to be worked through for MTD, and just who is going to do that?)

Question 1a: What level do you consider to be an appropriate
turnover entry threshold?
Question 1b: For a threshold not linked to the VAT threshold, should it be
reviewed annually in the light of inflation or less frequently (please state
recommended interval)?

Question 2a: If the entry threshold were to be increased, do you agree
that the exit threshold should continue to be set at twice the entry
Question 2b: If the entry threshold were to be increased, do you agree
that the UC threshold should continue to be set at twice the entry

Question 3: Do you agree with the proposed approach of following
accounting periods? If not, what alternative approach would you
Question 4a: Are there any other events or situations which would
require additional rules?
Question 4b: Would it be helpful to make any changes to tax accounting
periods for any other types of income?

Question 5: Are there other end of year adjustments not listed in paragraph
4.13 which could be simplified within a reduced reporting framework?

Question 6: Would you welcome the four relaxations proposed?
Question 7: Do you think that the restrictions proposed are appropriate? If
not, what restrictions would you suggest?

Question 8: Do you believe that simplifying the capital/revenue distinction
as suggested in paragraphs 5.7 to 5.13 would simplify reporting for
businesses within the cash basis?

Question 9: Can you identify any specific caveats which might be needed to
ensure that the new rule operates as intended? Are there any potential tax
planning opportunities which the current draft rules would not prevent?

Question 10a: If the cash basis entry threshold is raised would you consider
using the cash basis, or advising your clients or members to use it? If so
please provide details of anticipated impacts, including both one-off and
ongoing benefits and costs.
Question 10b: If the proposed basis period reform is taken forward, how do
you think this would impact on business admin burdens? If possible, please
provide details of anticipated impacts, including both one-off and ongoing
benefits and costs.
Question 10c: If the reduced reporting framework is introduced, please
provide details of how this will affect your business or your clients or
members, including details of both the expected one-off and ongoing benefits
and costs for:
– Familiarisation with the new scheme and updating software or systems
– Having to make fewer adjustments than would be required under UK GAAP

Question 10d: If the revenue / capital divide is simplified as suggested do you
believe that this would simplify reporting for businesses within the cash
basis? If so please provide details of anticipated impacts, including both oneoff and ongoing benefits and costs.
Question 10e: Please tell us if you think there are any other impacts, benefits
or costs not covered above

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