Archive for the ‘MTD (Making Tax Digital)’ Category

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Tax for creatives

April 8, 2018

At Follycon, the British Science Fiction convention (Eastercon) held at Harrogate over the Easter weekend, I was one of the panel in a session discussing business for creatives. Our brief was to look at finance, publicity, marketing and branding for writers, artists and other creative workers when they start to make money and have to think of themselves as a business, for example when they get their first sale.

It transpired that the people present were keen to hear about taxes  and I said I would expand a little on my breathless summary of “three rules, two numbers and a concept”.

Three rules: rule one – pay your taxes. As Oliver Wendell Holmes may have said, tax is the price we pay for civilisation, and I’d rather live in civilisation, thanks.

Rule two – don’t take the piss. Much of the tax avoidance industry would disappear if this simple rule were more widely followed. For a creative start up, I’d suggest you don’t spend your time trying to argue you *really* started in business when you started thinking about unicorns in 1982 so you should be able to subtract your cinema tickets for the entire Star Wars and Marvel series from the £250 advance for your fantasy novel… It annoys HMRC and makes you look like a smart arse, and nobody loves a smart arse.

Rule three – don’t let HMRC take the piss either. Know your rights and demand them. Remember the VAT MOSS fiasco and don’t assume you can’t make a difference. And don’t agree to let the state have your voiceprint on file!

Next: two numbers to remember. The first is £1000, which is the amount you can earn under the new rules on tax free allowances for property and trading income. So if you are on PAYE and don’t have to make a self-assessment return already, you don’t have to panic about tax when you sign the contract for your first novel or sell your first illustration. Provided the advance is less than £1000 you don’t have to pay tax on it. If it is more than £1000 you can choose, instead of claiming every piece of paper and trip to Eastercon against it, to claim a flat-rate £1000 instead. Yep. If your advance is £1005 you can pay tax on the £5 – although be aware that this is a new piece of legislation, that’s just my interpretation of it, and HMRC haven’t produced particularly good guidance on it yet. If you are already on self-assessment for some other reason you don’t seem to get this option, for example. And – see Rule Two – you can’t decide you have thirty seven different income streams (selling books with red covers, selling books with blue covers…) and hope they’re all exempt. The £1000 is a global total, so it includes your book advance AND your side business of dog walking AND the £300 your cousin paid you for typing their thesis.

The second number is, of course, £85,000 which is the point at which you have to start paying VAT. In general, if you suddenly start getting paid at that sort of rate I’d advise you to see an accountant anyway, but the reason the VAT limit is going to become increasingly important over the next few years is this thing called MTD – Making Tax Digital. HMRC has this theory that we’re all stashing cash down the back of our sofas and that if we all had to keep our records tidily on computers and share them with HMRC four times a year we’d stop doing it and they’d get more tax.  What would actually happen, of course, is that we’d carry on being careful to declare our turnover – because, see Rule One and Rule Two – but we’d all be much more fly about our expenses, and that fifty quid train fare that you couldn’t remember whether it was business or personal would be much more meticulously recorded so profits might, perversely, go DOWN.

If your turnover is less than £85k you can, at the moment, keep your records how you like. MTD cuts in at the VAT threshold – and, be warned, HMRC are taking “evidence” of whether the VAT threshold ought to come down. Watch this space.

Finally, a concept: “wholly and exclusively”. You can deduct expenses which are “wholly and exclusively” for business purposes from your business turnover to arrive at your business profit. This is a big conceptual leap from PAYE taxes, where you can only deduct expenses which are “wholly exclusively and necessarily” incurred in the performance of the duties – a much more restrictive concept.

So – I asked the audience – why are you at Eastercon? Wholly and exclusively for business purposes – to make contacts, to find an agent, publisher etc, to connect with your fans, to increase your professional reputation, to sell books or other creative work? Then the cost of the convention itself and the travel to and from it would be allowable expenses, incurred wholly and exclusively for business purposes. The fact that you might enjoy the convention doesn’t make it disallowable in and of itself: the test is why you came. The fact that you might not have found an agent/publisher/fan base at the con also doesn’t make the expense disallowable – you don’t have to be successful to have an allowable business expense.

What you DO have to have is a wholly business expense. Can you claim the cost of food and drink at the con?

That was when I referred people to the tax case of Mallalieu v Drummond. A barrister had to wear specific colours of clothes in court but wasn’t allowed to claim a deduction for them: you have to wear clothes anyway, so they weren’t “wholly and exclusively” for business purposes. We talked about the need to eat and drink anyway, and whether it would be reasonable to claim the extra cost of eating at the con. With strict adherence to Rule Two, you should be fine.

 

Creatives, if you have a question, feel free to post it in comments or ask it on #taxtwitter.  Tax mavens, if you’ve spotted anything I’ve forgotten or would like to add any other rules, numbers or precepts, please join in!

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Conspiracy theories R us

November 5, 2017

Bonus weekend conspiracy theory blog entry: try this out for size.

First datum: there’s a suggestion the OTS are going to put forward plans to “simplify” the tax system and get rid of the VAT threshold “cliff edge” by reducing the VAT threshold to a “hobby business” kind of level of £20k or so.  (Without the evidence of my own eyes I refuse to believe they’d suggest anything so peculiarly stupid, but let me say in advance that it would be a “brave decision, Minister” if they did).

Second datum: HMRC wanted us all to be compelled to keep digital records and show HMRC our workings four times a year.  After some pushbacks they have had to be content with compelling digital record-keeping only for VAT and for businesses above the VAT threshold.

Put these together, and you have a perfect storm of stupidity: a vast increase in administrative burden, AND an extension of MTD to everyone who runs a serious but not yet successful business.

It’s too stupid an idea to be true, right?  I mean, right??

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Dreary me

November 2, 2017

Dreary, dreary me. Well, not intrinsically me, you understand, but how I feel after the soul-sucking experience of looking at the Making Tax Digital (MTD) regulations.

Yes, we’re at that stage now. HMRC has given up trying to make us swallow the whole elephant of MTD and instead is pushing it at us one bite at a time. The primary legislation is in Finance Bill (No 2) 2017 (where the MTD section essentially says HMRC can make MTD regulations) and now the secondary and tertiary regulations are out for consultation here and in four attachments. Honestly, I wasn’t going to look, because it’s dreary. You know it is. Dreary, joyless, pettifogging and unnecessary. Look at this, from the Income Tax (Digital Requirements) Regulations

6.—(1) Subject to paragraph (3), “digital records” for a business means records of each of the transactions made in the course of the business, including—

  1. (a)  the amounts of the transactions;
  2. (b)  the dates of the transactions, according to the basis used by the relevant entity for recording transactions for the purposes of income tax; and
  3. (c)  the categories of transactions into which the transactions fall, to the extent those categories are specified.

Please. Get a life.

If this regulation is passed, businesses affected will have to keep records of the amounts, dates and categories of their transactions in “functional compatible software”. Lost the will to live yet?

Functional compatible software is defined in the regulations too:

“functional compatible software” means a software program or set of compatible software programs the functions of which include—

  1. (a)  recording and preserving digital records in a digital form;
  2. (b)  providing to HMRC quarterly updates and as applicable, end of period statements or Schedule A1 partnership returns in a digital form and by using the API platform; and
  3. (c)  receiving information from HMRC using the API platform in relation to a relevant entity’s compliance with obligations under these Regulations;

“The API platform” is nonsense: one might as well say “the language” or “the alphabet” without specifying which language (Greek? Mandarin?) or which alphabet (Cyrillic? Or Japanese – kanji or kana?)

So the Statutory Instrument will also have to define “the API”? Well, it defines “API platform”:

“API platform” means the application programming interface that enables electronic communication with HMRC, as specified by notice made by the Commissioners;

which I take to be drafters language for “HMRC haven’t written it yet but they’ll tell you when they have”?

Dreary, pettifogging stuff.

But I’m an impact assessment specialist, so of course I turned to the impact assessment, or at least I tried to. Where is the TIIN?

The Income Tax (Digital Requirement) regulations end with the words:

EXPLANATORY NOTE

(This note is not part of the Regulations)

The Regulations [ ].

but there IS no explanatory note attached, so there is no indication of whether a TIIN was completed or where it might be found, and there is no actual TIIN attached.

The Income and Corporation Taxes (Electronic Communications) (Amendment) Regulations  end with the words

Consent by the recipient is not required.

[TIIN]

Here’s what ought to happen. Governments say that they will not regulate unnecessarily, only where there is some “market failure” which means the government has to step in.

Does the government need to step in to force businesses to keep their records electronically in a way which will enable them to be sent to HMRC and for HMRC to read them? No Socrates, it does not: all that is required is for HMRC to build an electronic system which is demonstrably better than the current method of making returns of business profits and businesses will use it. Only then would it be reasonable to compel the last few recidivists to join in.

So, in a democracy, these regulations should be scrutinised by MPs before they are passed, and only passed into law if they are a reasonable way of achieving the policy objective.

MPs should do this by looking at the cost/benefit analysis in the TIINs and forming a view on whether the costs are justified by the benefits. They are hamstrung from doing this by the failure to publish a TIIN with the regulations. They should decline to rubber stamp something so… dreary. Joyless. Pettifogging. Unnecessary.

I challenge MPs to do their job. I will write to my MP and ask him to do his. I challenge you to do the same with yours.

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Good news, bad news?

July 14, 2017

Great news yesterday, with the announcement that Making Tax Digital has been postponed and that only businesses with a turnover over the VAT threshold will have to keep digital records until, well, this government has either gone or has consolidated itself enough to be able to get the legislation through.

This is the best of all possible worlds – or at least it is at first sight.  Because of course HMRC needs to have a modern computer system that isn’t held together with string, prayer and for all I know a couple of  floppy disks.  Of course we should be able to log on and see our tax returns already pre-populated with the information HMRC already knows about us, the stuff from our P60s and bank interest and what have you.  MTD is a customer service imperative.

The problem is that the Treasury won’t pay for that kind of thing: it had to be pitched as a project that would pay for itself, and that’s when you get into the ridiculousness of trying to make teeny tiny businesses that keep perfectly adequate paper records move online or perish, in the absurd belief they’ve all got seventeen grand or so stuffed down the back of the sofa.

So keep the good stuff, the modernisation of the online interface, and ditch the bad, the mandation/penalty routine?

I wish.  The HMRC annual report and accounts for 2016/17 came out yesterday.  I know it’s a couple of hundred pages so I can’t pretend to have done more than skimmed it so far, but for me the key question is this:

do they still get the money?

Does HMRC still get the funding to upgrade its computers to MTD and to do the necessary work on pre-population without the spurious promise of resultant tax gap closure?  I can’t tell from the accounts.  Did they get MTD funds in 16/17 and will they get the rest in 17/18 and beyond.  I can’t tell.

Anyone?

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The magic money tree!

June 13, 2017

I’ve found it!  You know, the famous Magic Money Tree that Theresa May was saying didn’t exist?  Well hurrah, the Times is reporting this morning that apparently she has found it; there’s to be no more austerity because £2.2 billion from #MTD (along with £4 billion on “corporation tax relief” and £1.4 billion from “scrapping permanent non-domicile status”) will sort it.  Hurrah!

Except…

…as I wrote in this article for accounting web, I’m not sure there’s really £2.2 billion down the back of small businesses’ sofas.

…and as I wrote in this blog post, I’m not at all convinced there’s a correlation between “austerity” and tax receipts in the first place.

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Diversity matters

April 18, 2017

Diversity matters.  It really does.  Look, I know all the arguments about asking the people with expertise (the “best” people) and you only look at what they know so how does including the legendary one-legged black lesbian help take the discussion forward, so please, don’t be a bore in the comments and go over them again.

Instead, look at this: the announcement of a Treasury Committee witness session this morning where they will be looking, inter alia, at Making Tax Digital.  It’s not about all the witnesses this time being male.  It’s not about them all representing accountancy and taxation bodies (because, who else would you ask).  But it IS about hearing the voices of small businesses.  Remember a few weeks ago when they couldn’t find anyone from the construction industry who knew about MTD?  The people I know who work for the construction industry advising them on tax were a bit vexed about that.

If your meeting doesn’t look like the nation but like a badly-organised golf-club AGM then maybe, just maybe, you need to up your game and talk to some of the people affected but outside of the magic circle of “stakeholders”.

After all, that’s what happened with VATMOSS, remember? No-one talked to the people affected, because no-one at HMRC and HMT realised they existed.  If they’d looked at their stakeholder groups and wondered why they kept seeing the same faces, well, who knows?

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Writing to your MP

April 12, 2017

My MP is Nick Clegg, the former Deputy Prime Minister.  He has a pretty good office set up, so that when constituents write to him there is usually some kind of action taken. I took my own advice and wrote to him about MTD, specifically about the TIIN not supporting the change and asking him to make this point in the debates on the legislation.

What his office actually did, of course, was send my email on to the Treasury and then send me the reply.

Here are some extracts from that reply:

I am pleased that your constituent agrees that the overall direction of travel towards a more digital tax system is the right one.

I have already written about that one: practically everyone who replied to the consultation used the tried and trusted formula of “yes, and, but-

The Government has listened carefully to the wide range of views put forward about the MTDfB proposals. Most commentators were positive about the vision of a fully digital tax system that matches what we are increasingly used to from interactions with other service providers.

Yes, that’s the “yes” part of the argument. Yes of course the UK should invest in a modern digital HMRC. Give HMRC the money to improve its service and we’ll applaud.

However the speed of implementation, and the capability of those in scope to adapt, alongside the costs of doing so, were all key areas of feedback.

This is the point at which the letter stops being a response to the points I actually raised and becomes a generic. I asked about the TIIN not providing evidence that the rewards of mandation justified the costs.

In response, the Chancellor announced at Spring Budget 2017 a significant change to the timetable, which will give unincorporated businesses (including landlords and the self-employed) more time to prepare for the changes. Those below the VAT threshold will not have to keep digital records and update HM Revenue and Customs (HMRC) quarterly until April 2019. As well as giving them (and their agents) more time to prepare, it will also ensure two full years of testing of the new system and services before they become mandatory for this group. The Government has already responded to other areas of feedback, such as exempting those with an annual turnover below £10,000 from mandatory use, making free software available for the smallest businesses with the most straightforward affairs, and accepting the continued use of spreadsheets (as long as they fully meet the key MTDfB requirements) as a form of digital record.

Sorry, but this is more boilerplate blah, not responding to the actual point at all.

Let me also set out why we are proceeding with these important reforms. The Government is investing significant sums to improve the tax system for all taxpayers, and deliver a modern digital service. There is a growing appetite for this, with millions already using their digital tax accounts to view their liabilities and payments, to claim back overpaid tax, or renew their tax credits.

Now we’re getting somewhere: we’ve had the “yes” and a bit of the “and” – now let’s see if there’s any response to the “but…”

While most businesses want to get their tax right, the amount of tax not collected due to taxpayer error and carelessness is now around £8 billion a year. This not only costs the Exchequer, but it also causes businesses cost, uncertainty and worry when HMRC has to intervene to put things right. MTDfB will reduce the tax gap caused by error by requiring businesses to keep a digital record of their income and expenditure, using software or an app, and to update HMRC quarterly with a summary of that data.

Will it, though? Will recording in an app or online actually cut down on errors and mistakes or will it add more and interesting ways to make errors? And where does the figure of £8 billion come from and how is it calculated? At the same time as Nick Clegg was sending on this correspondence, HMRC were responding directly to me on my FoI request for the underlying computations producing the figure for tax allegedly lost. In summary: they still say no.

Your constituent suggests that MTDfB should be a voluntary scheme. These reforms will deliver a better and more modern customer experience for businesses, where they can do everything they need to digitally. They will have greater certainty over their tax affairs, confidence that they have got things right, and a clearer in-year picture of their evolving tax position, allowing them to plan their cash flow more effectively. More timely digital record keeping will lead to fewer errors, thereby reducing the likelihood of an unwanted HMRC intervention. A voluntary scheme would deliver only a fraction of these benefits.

Would it, though?  If MTD is really going to be a better way, wouldn’t people want to gain the alleged benefits by joining it?Or are we not talking about benefits to the taxpayer at all, but this mythical seventeen grand all small businesses have lost down the back of the sofa?

I would like to reassure your constituent that quarterly updates do not amount to quarterly tax returns. The software will produce a summary of income and expenditure for the quarter using the information that the business has already recorded, and prompt them to send that to HMRC. The update process will be light touch, not at all equivalent to the current annual tax return. There is no requirement for the update to be done by an agent, no penalty for inaccuracy in the update, and no requirement to pay alongside the update.

Are you reassured? I’m not reassured, not even a little bit.

HMRC is introducing the changes gradually, and piloting them thoroughly before mandatory use begins in April 2018 for unincorporated businesses above the VAT threshold. HMRC is running a large-scale pilot and plans to test with several hundred thousand businesses by March 2018, including those who do not currently use software at all, or who may be less confident in moving to digital.

March 2018 is just next year. Where is the software? Where do people sign up? How long will the trial last and when will the results be out? How will success be measured and who will do the measuring? There just plain isn’t *time* to do a proper trial before mandation kicks in.

At Spring Budget 2017, HMRC published an updated impact note for Making Tax Digital (MTD). The changes will reduce error on an ongoing basis by around 10%. MTD will contribute an additional £1.9 billion to the public purse over the next 5 years and just under £1 billion per year thereafter.

They’re called TIINs. This one doesn’t show that the benefits justify the cost. (It really doesn’t. It shows them as the same, with the costs front loaded and the theoretical benefits off some time in the fuzzy future. You wouldn’t buy a fridge on that basis, let alone an intrusive system that will make digital slaves of half the nation.)

We recognise that there will be costs in the transitional period for some businesses, while also recognising that all businesses are different. Transitional costs may be lower for businesses already using digital tools, or where they are eligible to use free software. Businesses that have limited existing digital capability may need to purchase hardware and software, so initial costs may be higher, but net savings will start to be made from 2021-22 onwards. HMRC will ensure that the transition to digital is as smooth as possible and is committed to making MTDfB work for its customers, modernising its services for the benefit of all UK taxpayers.

Boilerplate blah, nothing to do with anything I had asked.

HMRC will start to ramp up its communication activity to raise awareness amongst the business community during the live trial. Agents and the software industry will be key partners in achieving this. As the different start dates for different sizes of business approach, HMRC will ensure those affected by the changes are aware of any new obligations. As with any change to the way people interact with the tax system, HMRC will focus on making sure customers have the right information well in advance of any changes coming into effect.

Because HMRC has a long history of being good at this kind of thing, right? I mean, right??

Please pass on my thanks to Ms Bradley for taking the trouble to make us aware of these concerns.

JANE ELLISON

*Clutches head in hands and weeps*