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 email@example.com 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?)
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