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BUSINESS IN FOCUS


MAKIng tAx DIgItAl foR BUSInESSES


folloWIng on fRoM lASt EDItIon’S ARtIClE on MAKIng tAx DIgItAl (MtD) tHE folloWIng RElAtES SPECIfICAllY to HM REVEnUE & CUStoMS (HMRC) PlAnS foR UnInCoRPoRAtED BUSInESSES IE, SolE tRADERS, AS PARt of tHEIR MtD PRoJECt.


A


s an overview, on 31 January 2017 HMRC provided a response to its consultations


that were issued in August 2016. the main responses are:


• Businesses will now be able to continue to use spreadsheets to record receipts and expenditures, which they can then link to software to automatically generate and send their updates to HMRC; • free software will be available to the majority of the smallest businesses; • All self-employed businesses and landlords with a turnover under £10,000 a year will not have to keep their records digitally or make quarterly updates, but may do so if they wish; • Certain businesses that cannot go digital will not be required to do so; • the option to account for income and expenditure on a simple ‘cash in, cash out’ basis will be extended, helping an extra 2.5 million self- employed businesses and unincorporated landlords; • Customers will have at least twelve months to become familiar with the changes before any late submission penalties will be applied; and • HMRC will pilot these digital systems with hundreds of thousands of businesses before rolling them out to ensure the software is user friendly, and to give businesses and landlords time to prepare and adapt.


olD AnD nEW DEADlInES the first businesses to experience the MtD reporting regime will be landlords and others with 5 April year-ends. Making tax Digital for Businesses (MtDfB) will apply to the first accounting period that begins after 5 April 2018, so these businesses will hit their first quarterly reporting date on 5 July 2018, and their first MtD deadline on 5 August


52 - PHARMACY In foCUS


2018. they will also be dealing with the 2017-18 tax year second payment on account due on 31 July 2018. the tax return for that year will still have to be submitted on 31 January 2019, with the third quarterly reporting deadline for the 2018-19 tax year falling on 5 february 2019.


the second and third years will be an equally complex mixture of old and new deadlines, particularly if the business involved is also making payroll Real time Information (RtI) filings and submitting VAt returns online in the lead-up to MtD for VAt in 2019.


BASIS PERIoDS to ACCoUntIng PERIoDS When a person starts to carry on a trade, there are specific rules which govern the calculation of profits and tax due. Individuals are free to choose an accounting date which suits their business but tax is paid for a tax year (ie, 6 April to 5 April) and so the profits from a chosen period of account must be translated to taxable profits for a tax year.


this is achieved by use of 'basis periods'. the basis period rules ensure that tax is calculated for all tax years in which the business trades and also make sure that there are no profits which fall between years and fail to be taxed.


for some businesses, the rules may result in part of their profits from the first year of trade or when an accounting year-end has been shortened being taxed twice. these 'overlap profits' are usually given tax relief when the business ceases or extends their accounting year-end.


An example of where overlap profits can arise is when a person


commences trade on 1 July 2014 and has a year-end of 30 June 2015. for the tax year ended 5 April 2015 the trader’s profits subject to tax are for the period 1 July 2014 to 5 April 2015. for the subsequent tax year ended 5 April 2016 the trader’s profits subject to tax are 1 July 2014 to 30 June 2015. therefore the profits being taxed twice i.e. overlap profits are for the period 1 July 2014 to 5 April 2015.


What HMRC were proposing, back in August 2016, moves away from basis periods to 'accounting periods'.


Such a rule would eliminate any overlap period (as accounting periods would not be able to overlap, and each period would only be taxed once) while ensuring that there is no gap in taxable status (as there can be no gap between accounting periods). Many businesses will have accumulated overlap profits from commencement under the current rules and under the proposed changes relief for these profits will only be available on cessation of the business.


ACCoUntIng PERIoDS DoWnSIDE the potential downside to the new accounting periods is that relief for accumulated overlap profits may never be achieved or a lower rate of tax relief is achieved.


If, for example a business was in decline in the four years leading up to


cessation and achieving taxable profits below the personal allowance, then there should be no income tax liability in these final years. Assuming the individual had no other income and has accumulated overlap profits then as the final year's profits were covered by the personal allowance, no tax relief should be available.


therefore, the overlap profits that were taxed twice in earlier years at say 20% or 40% have achieved no tax relief.


While it has not been confirmed that overlap relief will be restricted to the cessation of a business a review of your accounting year-end should be undertaken to ensure maximum relief for overlap profits is being achieved.


If any of the points noted above affect you - or somebody you know - please speak to Steven McVitty for independent professional advice.


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