making tax digital

Making Tax Digital (MTD)

HMRC are making the move to get all businesses to file their accounts via third party software on a quarterly basis.

The first businesses affected by this are VAT registered businesses with turnover over the VAT registration threshold. They will need to file quarterly VAT returns via third party software from April 2019. The business books and records must be kept digitally.

The old government gateway will be closed to businesses that fall within the above so you may need to change how you file your VAT returns. If you use accounting software you will need to check that it is compatible with MTD and possibly upgrade to the latest version.

If you do not currently use software (i.e. you use Excel or a manual cashbook), please speak to us to discuss your best way forward. There are a number of products out there that will do the job – we recommend Xero – a cloud based package that can incorporate an automatic bank feed (so that all your bank transactions are automatically brought into the software). You can also use it to create invoices and run customer and supplier ledgers. If you’d like to try it out, please speak to Henry or David.

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Budget 2017

Below are the most pertinent posts announced by the Chancellor in his Budget speech yesterday:-

Dividend Allowance

From April 2016, HMRC introduced a tax-free dividend allowance of £ 5000 to compensate for the increased tax charge on dividends.

This allowance is now being reduced to £ 2,000 from April 2018. For a basic rate taxpayer, this would mean additional tax of £ 225; for a higher rate taxpayer, there would be additional tax of £ 975.

Those who are able to control the timing of their dividends should ensure that the full £ 5000 dividend allowance is utilised for 2016/17 and 2017/18.

National Insurance for the Self-Employed – UPDATED 15th March 2017

Self-employed persons currently pay 9% of their taxable profits as Class 4 National Insurance (on profits above £ 8060).

This rate drops to 2% on profits over £ 43,000.

In his original Budget announcement, The Chancellor announced the 9% rate increases to 10%, and then a further increase to 11% from 6 April 2019.

This increase has since been ‘scrapped’ as announced on 15th March 2017

Making Tax Digital (“MTD”)

HMRC are in the process of making businesses file their accounts online every three months (rather than just once a year).

In yesterday’s Budget, it was announced some delay to this being implemented:-

– unincorporated businesses (sole traders/partnerships/landlords) with annual turnover of more than £ 85,000 will need to comply with ‘MTD’ from April 2018.

– unincorporated businesses (sole traders/partnerships/landlords) with annual turnover of less than £ 85,000 will need to comply with ‘MTD’ from April 2019.

– unincorporated businesses (sole traders/partnerships/landlords) with annual turnover of less than £ 10,000 will not need to comply with ‘MTD’.

– incorporated businesses (limited companies) will need to comply with ‘MTD’ from April 2020.

Limited Companies working in the Public Sector

Individuals who currently work for a public sector body via their own company or other intermediary, are potentially within IR35 if, ignoring the intermediary they would be workers of the public sector body. Under existing rules the income tax/NICs risk remains with the intermediary who is responsible for deciding whether IR35 applies.

As previously announced, with effect for contracts entered into or payments made, on or after 6 April 2017, the responsibility for deciding whether IR35 applies is transferred to the public sector engaging entity.

The specific changes are as follows:

  • the public sector engager or agency is treated as an employer for the purposes of taxes and Class 1 NICs;
  • the amount paid to the worker’s intermediary for the worker’s services is deemed to be a payment of employment income, or of earnings for Class 1 NICs for that worker;
  • the public sector engager or the agency is liable for secondary Class 1 NICs and must deduct tax and NICs from the payments they make to the intermediary in respect of the services of the worker;
  • the public sector is defined using the definitions in the Freedom of Information Act 2000 and the Freedom of Information (Scotland) Acts;

the person deemed to be the employer for tax purposes is obliged to remit payments to HMRC and to send HMRC information about the payments using Real Time Information.

Contractors working within the public sector should be reviewing their contractual and working arrangements to gauge whether they are potentially caught within these new rules.

Other Points

Personal Allowance rises to £ 11,500 from 6 April 2017.

The taxable turnover threshold, which determines whether a person must be registered for VAT, will be increased from £83,000 to £85,000 – this is effective from 1 April 2017.


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Rent-a-room relief

With effect from 6 April 2016, the rent-a-room relief (the gross income you receive when renting out a room in your own house which is free of tax) rises from £4250 to £7500.

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New dividend tax

It’s not uncommon for directors/shareholders of small companies to pay themselves from their companies via a mixture of salary and dividends.

Up until now, if your total personal taxable income for the current tax year comprises of only monies taken from your company, then you could take £671 per month as salary, plus up to £30900 as net dividends, and pay no personal tax.

However, from 6 April 2016, this all changes.

From 2016/17, if you take the above amounts, the salary remains tax-free, but the dividends will be taxed differently.

Using the £30900 dividend as an example, the new rules state that of the £30900 dividends, the first £5000 will be tax-free, but the remainder, less any unused personal allowance,  will be taxed at 7.5%, meaning additional personal tax of about £1700.

For those who take dividends so that they go into higher rate tax, there will be the 7.5% tax charge up to basic rate limit, plus a further 32.5% on the excess that is in the higher rate tax threshold (rises to 38.1% for additional rate tax payers).

Not all is bad news – the company tax rate will be reduced from 20%, to 19% with effect from 1 April 2017, and to 18% from 1 April 2020.

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Buy to Let Landlords

Landlords paying higher rate income tax will no longer be able to deduct all of their mortgage interest/finance costs from their rental profits. Instead, they will effectively receive a basic rate reduction. This restriction will be phased in over four years starting from April 2017.

In addition to the above, the 10% ‘wear and tear allowance’ will be reformed and replaced with a new relief that allows residential landlords to deduct the actual costs of replacing furnishings.

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