Making Tax Digital: Cash accounting

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Philip McNeil By Philip McNeill, Head of Taxation (Tax Practice and Small Business Taxes)

19 September 2016

In the first of a series of articles on the Making Tax Digital consultations, Philip McNeill, ICAS Head of Taxation (Tax Practice and Small Business Taxes), outlines some of the implications of the consultation on Simplifying tax for unincorporated businesses for owner managed business.

Creating a digital tax administration is proving a key driver of fundamental change.  Some of this looks like real simplification, albeit that the transition for existing businesses could be tricky.

The Simplifying tax for unincorporated businesses consultation has two key strands, extending cash accounting and the reform of basis periods.

Cash accounting

The issues here are how far to extend cash accounting and how to simplify its use.  There are separate proposals for a cash basis for landlords. These will be considered in a later article.

What’s on offer?

In terms of making quarterly submissions to HMRC, cash accounting could look like a natural fit.  The suggestion is to increase the turnover limit for cash accounting – both at entry and exit levels.  A number of thresholds are considered, ranging from £100,000, to double the VAT limit (£166,000) or beyond.

This could potentially mean some businesses would remain in cash accounting until turnover reached £332,000 (four times the VAT registration threshold, and double the proposed entry limit).

From a quarterly updates angle, this level of cash accounting, when combined with making tax adjustments in the prime records in real-time, brings, from the HMRC viewpoint, the possibility of just four updates a year and no need for a fifth ‘year-end’ update.

Accounts: Who needs them?

This turns on a fundamental question: who needs accounts?  In the HMRC condoc view of life, accounts equals tax bill.  If you can work out your tax bill without accounts, dispense with accounts.  Now that’s all well and good, but it takes a limited and ill-informed view of what a set of accounts is there to do.  Accounts are not simply about tax.  They’re about profitability.

The business adviser’s role goes beyond tax.  After all, we want the business to exist next year, even to expand, and that requires accurate information for decision making.  Can cash accounting provide this?

There is a danger in viewing the proposed changes in tax-only terms.  Certainly there is simplification in cash accounting and cash basis submissions to HMRC.  It may even mean that a business pays less tax.  But looking to the wider picture, how high can we push cash basis turnover limits before we need accruals basis accounts as well in order to support loan applications, business decisions and profit allocation between partners, for example?

Non GAAP compliant accounts

Continuing the same theme, the consultation proposes that business too large for even a revised cash basis, could use non GAAP compliant accounts.  This would be achieved by accepting (for tax purposes) accounts prepared on modified rules with no requirement for a year-end stock take and simplified models for long term contracts, bad debts and accruals.

Bad debts could be written off once recovery action had failed (though leaving open the question of what happens if recovery action is not taken).  Accruals and work in progress adjustments would not be required where the ‘timing adjustment’ is under a year.

This is clearly quite fundamental change.

Reforming the capital/income divide

Continuing the same line of simplification, capital/revenue distinctions has often proved contentious.  The proposed levelling rule here would be to move toward a ‘use up in the business’ definition.

Cars, as always, would not be included.  Property too would be excluded, including any fixtures included in the price. Intangible assets with a life expectancy of over 20 years would be disallowable, as would financial instruments, purchase of a business and any non-depreciating asset.

Appendix C of the consultation paper has draft legislation and an explanatory note on how this could look.

Basis periods reformed

Starting with a clean slate in a digital age, one might not have opted for a system which results in complex opening and closing year rules, where the same profits are potentially assessed more than once.

The consultation considers the position afresh.  Could we have non-annual basis periods?  Quarterly? Monthly?  Abolish overlap relief?  There could be a move towards a model more like that for companies, with final returns due nine months after the chosen accounting date, and profits apportioned to tax years.

Managing transition

The consultation has little, if anything, to say about how the transition to a new model might impact existing businesses, beyond ‘the government believes that it would be beneficial to businesses for changes to be made in time for the introduction of Making Tax Digital in 2018’.

Getting involved – influencing the outcome

The impact of all these changes is likely to vary greatly between different businesses and accounting practices.  That is one reason why your view is vitally important.

HMRC is running two webinars  specifically for agents on Monday 19 September and Tuesday 25 October 2016.  Registration for these, as well as for face to face and other events is now open.

HMRC have a survey open to receive feedback on the consultations or you can contact them directly.

To be part of the ICAS response, please let us have your comments at icas-tax@icas.com and complete our short poll below.

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Topics

  • Tax

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