In my previous blog post on Making Tax Digital for Business (MTDfB), I looked at how this would affect the self-employed but MTDfB also applies to the self-employed who are in partnerships. This blog post will guide you through what you need to consider.
Since this blog has been published, the government has listened to the concerns of businesses and financial experts and changed the way it is approaching MTD. Read my latest blog on Making Tax Digital for the most up-to-date news on the MTD plan and revised roll-out timetable.
At the moment, such businesses keep their accounting records in a variety of ways, from paper records, spreadsheets or accounting software. These records are then used to prepare a tax return for the business at a later date. Under MTDfB, businesses will be required to:
- maintain their records digitally, through software or apps;
- report summary information to HMRC quarterly through their ‘digital tax accounts’ (DTAs);
- make an ‘End of Year’ declaration through their DTAs.
DTAs are like on-line bank accounts – secure areas where a business can see all of their tax details in one place and interact with HMRC digitally.
When might MTDfB apply to your partnership?
In the Spring Budget, the government announced its proposed timetable for the introduction of MTDfB. Unincorporated businesses with annual turnover:
- above the VAT threshold (which has been set at £85,000 from 1 April 2017) will need to comply with the requirements of MTDfB from the start of accounting periods which begin after 5 April 2018;
- at or below the VAT threshold but above £10,000 will need to comply from the start of accounting periods which begin after 5 April 2019.
A business with annual turnover of less than £10,000 is exempt from MTDfB.
How do partners and partnerships fit into this scheme?
The principles of the proposed system for partners and partnerships are:
- the partnership, rather than each partner, will be responsible for the central requirements of MTDfB (i.e. keeping a record of each transaction, providing quarterly summary updates and End of Year information);
- a nominated partner will fulfil these obligations;
- the nominated partner will need to inform each partner of their share of profits by ‘pushing’ the information to each partner’s DTA. When and how this is done is covered in more detail later in this blog.
HMRC recognises that there are special problems in larger partnerships. The reporting of their business profits will not change until 2020 if they have a turnover of over £10 million. However such partnerships will have put their current (nine box) VAT returns through the partnership’s DTA from April 2019.
What are digital records for a partnership?
The requirements are identical to those for a sole trader. If you have read my previous blog you can skip this section apart from the last paragraph.
A digital record is a record of data for each transaction of the business. The proposed minimum required data will be:
- invoice date;
- invoice value;
- income or expense category;
- deducted amount / percentage for expenses.
Retailers with high volumes of low-value cash sales transactions will be able to just record the trading date, gross cash takings and income category.
The software that could be used may be a smartphone app or software on a tablet or a desk-based computer. This software would be able to scan paper invoices and receipts into the software, using a smartphone camera. The software will be available from third party suppliers and HMRC have confirmed they will ensure there will be some products which are free of charge.
Tax legislation contains a variety of rules on allowable and non-allowable expenses. So transactions will need to be categorised in the software into income and expense types – for example advertising or professional expenses.
The software will either store the records locally, for example on a computer, or in the cloud. HMRC expect that the software will, after an initial phase of manually assigning transactions to income or expense categories, start to recognise regular items and automatically assign them.
Under the original proposals, HMRC envisaged that a digital record would include not only a record of each item of income and expense but also evidence of each transaction such as copies of invoices and receipts. In the revised proposals the requirement to keep digital records will not include an obligation to store images of invoices and receipts digitally.
HMRC are aware that a lot of businesses use spreadsheets to currently record their data and have now confirmed that spreadsheets will be one of the options for maintaining digital records. But users will need to ensure that the spreadsheet is able to meet all the necessary requirements of MTDfB (i.e. not just keeping a record of each transaction but also providing quarterly summary updates and End of Year information).
Businesses will need to use software appropriate to their business requirements. For example, a business that is registered for VAT will need the software to cope with the VAT scheme it uses, and a partnership will need software that can record the partners’ details and profit shares.
Quarterly returns for the partnership
Once all the relevant data for a quarter has been compiled by the software, the business will then feed this data directly into HMRC systems. The information that will be sent to HMRC will be summary data for the quarter, not all income and expense items. It is envisaged that the analysis of the data will be similar to the existing categories in the Self-Assessment tax return. Smaller businesses will be able to prepare an update that contains only three lines of data – income, expenses and profit.
When the quarterly update is due, businesses will have one month to compile their records and complete the update.
What about a tax return for the partnership?
Throughout the year, businesses will have provided HMRC with regular updates, building a picture of their net income for the year. However, many businesses will need to make adjustments to that information, for example reconsidering which expenses are not allowable for tax and make claims to reliefs or allowances, such as capital allowances. Businesses will then make a declaration that everything is complete and correct as regards their business – an ‘End of Year’ declaration. The business will have 10 months from the end of their period of account (or 31 January following the tax year if sooner) to complete their End of Year declaration.
If a partnership has any other income such as interest received or property income, the partnership will need to record and report all this income as well. The intention is therefore that the End of Year declaration effectively becomes the Self-Assessment tax return for the partnership.
The astute reader will notice that the partnership will have to do five returns to HMRC; 4 quarterly returns and an ‘End of Year’ declaration.
How do partners obtain information about their share of profit?
There will be an option for the nominated partner to ‘push’ quarterly summary information of their share of the profit to each partner’s DTA. Each partner under this option would, therefore, have an estimate of their profit to date in the tax year.
When the End-of-Year declaration is made, the nominated partner will be obliged to ‘push’ each partner’s share of profits to the DTAs.
Will the individual partners have to do a Self-Assessment tax return?
Yes, if they have any other sources of income apart from their share of partnership profit. In addition, if they have a business or rental income then they will also have to do MTDfB (i.e. keeping a record of each transaction, providing quarterly summary updates and End-of-Year information).
When will digital record keeping first apply?
The examples are the same as for the self-employed example – so click here to see some example year-end dates and when records will be required by.
What do I need to do?
Please note that, at the moment, you do not have to do anything in respect of these developments. Keep following our blog for updates to see how this all pans out.
*** Note *** Since I initially put this post together a General Election has been called! As a result of this HMRC’s MTD plans have been dropped from the Finance Act to enable it to be rushed through Parliament. This raises the possibility there may be changes and/or delays to MTD. Watch this space; I will keep you informed as things develop.
If you need any clarification on how this might apply to you and your business email or call us on 01788 577613 (Rugby) or 01908 564701 (Stony) and we’ll answer any questions you may have.