Draft Finance Bill 2017 hints at transition plans for quarterly reporting
The 700-plus page draft Finance Bill has been published confirming plans to go ahead with quarterly reporting from 2018 for unincorporated businesses over the VAT threshold and an indication that there could be scope for variable transition rules for different types of business, reports Sara White
20 Mar 2017
Despite promising a small Budget, the documentation in the draft Bill runs to 776 pages.
As announced in the Budget on 8 March, the Bill sets out plans to go ahead with quarterly reporting under Making Tax Digital for all unincorporated businesses over the VAT threshold (£85,000 from 2018/19 tax year) from April 2018. Initially this will affect sole traders, landlords and the self employed who are VAT registered.
Those who are not registered for VAT will have to start mandatory quarterly reporting from April 2019.
Partnerships with over £10m fee income will have a deferral from mandatory quarterly reporting until 2020.
There is also confirmation that HMRC will not require more frequent reporting of income levels, stating: ‘The regulations may not require financial information about the business to be provided more often than once every three months.’
The information required for the quarterly reporting return will include ‘any information relevant to calculating profits, losses or income of the business for the relevant period, including information about receipts and expenses’.
Partnerships will also have to report under Making Tax Digital with a designated or so-called ‘relevant’ partner required to make a return for the firm. Non-compliance penalties will be capped at £3,000.
A ‘relevant’ partner means any person who was a partner in the partnership at any time during the period in question.
There are no further details about any decision on the entry-level threshold for Making Tax Digital so it appears that this may still be up for debate. The government had aimed to set the entry criteria at £10,000, capturing all but the smallest taxpayers in the new quarterly reporting regime.
Likewise both groups will have to report VAT through the new system from 2019 as current arrangements will be superseded and any online and paper submissions outside the Making Tax Digital IT system will not be permissible.
The Bill also indicates that the maximum penalty for non-compliance will be no higher than £3,000 although details on the penalty regime are currently out for consultation.
End of period statement or partnership return
Taxpayers will be required to provide an end of period statement for a relevant period to finalise their taxable profits or losses. The end of period statement will need to be provided using compatible software by the earlier of:
- 10 months after the end of the relevant period;
- 31 January following the end of the tax year in which the relevant period ends.
There will also be possibility to submit quarterly returns 10 days early if a financial period is effectively closed for the entity as long as they inform HMRC that this is the case and that they will not be submitting further financial information for the period in question.
Who's in scope?
- April 2018 if they have profits chargeable to Income Tax and pay Class 4 National Insurance contributions (NICs) and their turnovers are in excess of the VAT threshold;
- April 2019 if they have profits chargeable to Income Tax and pay Class 4 NICs and their turnovers are below the VAT threshold.
It is expected the incorporated businesses will have to start reporting from April 2019 and those paying corporation tax from April 2020.
So far, there has been no consultation on these two groups and HMRC is still to issue detailed processes and guidance.
In line with other online reporting, there will be exclusions to allow those who are digitally excluded to opt out of the system.
The Bill states: ‘The digital exclusion condition is met in relation to a person or partner if—
(a) the person or partner is a practising member of a religious society or order whose beliefs are incompatible with using electronic communications or keeping electronic records, or
(b) for any reason (including age, disability or location) it is not reasonably practicable for the person or partner to use electronic communications or to keep electronic records.
Amendments to Making Tax Digital rules
There is some detail about the approach to future amendments, with confirmation that a statutory instrument could be used to amend the scope of the rules.
For instance, this could shape the transition rules, say for a particular sector where the standard Making Tax Digital regime does not match the accepted reporting periods. The farming community, for example, while in favour of the move to Making Tax Digital, has stated that the quarterly reporting requirement does not work for standard farming businesses, the majority of whom are VAT registered, but their annual financial activities and reporting is highly cyclical.
The draft Bill states:
‘Regulations under this Schedule may –
(a) make provision which applies generally or only for specified cases or purposes;
(b) make different provision for different cases or purposes;
(c) include incidental, supplemental, consequential, transitional or transitory provision;
(d) make provision for matters to be specified by the Commissioners in accordance with the regulations.’
Any change in the accounting period of a business would also be disregarded which means that companies could review their reporting period to defer mandatory reporting in certain instances.
Penalties for enablers of tax avoidance
Schedule 27 sets out the penalty regime for enablers of aggressive tax avoidance, confirming that both the taxpayer and the adviser will be liable for penalties. The rules capture schemes which have been outlawed in the courts or through tax tribunal hearings, where they are deemed to have been devised for the purposes of avoiding tax.
Under the new regime, penalties will be applied where (a) ‘a person (‘T’) has entered into abusive tax arrangements, and (b) T incurs a defeat in respect of the arrangements, a penalty is payable by each person who enabled the arrangements. This will capture the full range of participants in a scheme from the deviser and creator of the scheme, to marketers and tax advisers, as well as the taxpayer.
The penalties will be harsh, equating to the full amount of tax avoided under the scheme.
‘For each person who enabled the arrangements…, the penalty payable… is the total amount or value of all the relevant consideration received or receivable by that person (‘the person in question’).
The draft Finance Bill 2017 is available here