Making Tax Digital: ICAEW responds to the simplification consultations

Our views on proposals on the cash basis and the reform of basis periods for unincorporated businesses and landlords

 

ICAEW has responded to the six Making Tax Digital consultation papers published on 15 August 2016.

 

Two of the consultations were aimed at simplification of the tax system. Below is a summary of our key messages on these proposals and links to our responses.

 

Our response to the main MTD consultation, Making Tax Digital: Bringing business tax into the digital age, is covered in ICAEW REP 171/16 – see the separate news item ICAEW response to Making Tax Digital: Bringing business tax into the digital age

 

Simplifying tax for unincorporated businesses

In ICAEW REP 172/16, our response to simplifying tax for unincorporated businesses, we recommend that the government refrains from making any non-essential changes to the system while MTD is being implemented. While we support tax simplification we suggest that tax rules in scope for change must be separated from digitalisation so that people have time to understand the changes without overloading the pace.

 

The consultation paper proposed changes to four areas of the tax system for unincorporated businesses. We expressed the following views in our response:

 

  • Increasing the cash basis entry threshold: when the cash basis was introduced we recommended an entry level of no more than £30,000 income in line with the recommendation of the Office of Tax Simplification. The government chose to legislate for the VAT registration threshold instead. While this may be appropriate for some larger businesses, it is unlikely to be suitable for any business with significant levels of stock, debtors and/or creditors or which has fixed assets. While we would not oppose an increase to the cash basis entry level we would not advocate it as an appropriate method for calculating taxable profits for businesses with any degree of complexity.
  • Reforming basis periods: we do not believe a reform of the basis period rules is critical at present. The current system is well understood and the creation of overlap profits can be avoided by choosing an appropriate year-end date or changing the accounting date in the future. We do not understand why the proposals do not apply to partnerships. If the basis period rules are reformed the rules must apply to both sole traders and partners trading in a partnership.
  • Simpler business reporting: in our view there is no appetite for a reduced version of UK GAAP. FRS 105 can be adopted by micro-entities, and small businesses with straightforward affairs may choose to adopt the cash basis. We do not support the introduction of more rules or further alternatives which will only lead to confusion and complexity.
  • Reforming the capital/revenue divide within the cash basis: legislating items of capital expenditure which are specifically disallowable within the cash basis rules is welcomed.

 

Cash basis for unincorporated property businesses

We responded to proposals to introduce the simplified cash basis to unincorporated property businesses in ICAEW REP 173/16.

 

The full cash basis does not lend itself well to property businesses as it will result in landlords paying their tax liabilities at the whim of their tenants and will not give the predicted certainty. Although the tax payable for the year would be based on rents received, it is the effect on the payments on account that causes concern.

 

The overriding theme in our responses is that while we support simplification measures, too much change at the same time is not welcomed.

 

We made the following points:

 

  • Digital quarterly reporting of rental income: this will place an unacceptable burden on many landlords with just one or two properties who receive rental income as a supplement to their other income. The rental income is often a very small proportion of their total income and this additional burden along with other recent changes to the taxation of rental income may cause landlords to withdraw the property from the rental market. They are unlikely to sell the property as many will have bought as part of their retirement planning and will continue to hold the property and let it increase in value.
  • Multiple properties: many landlords with a number of properties will not be able to report the rental income on a property by property basis because, for example, they may have a single insurance policy for all their properties or they may get a single monthly invoice from a handyman or gardener that covers all the properties. It should be possible to report global figures.
  • Jointly owned property: it is not appropriate for a taxpayer’s information to be updated by one of the other joint owners of the property particularly if the only way to correct it is by asking the original filer of the information. If one joint owner reports on the cash basis for all the joint owners but some of the joint owners choose an accruals basis, they will need additional information from the “reporting owner” and explanations will need to be given to HMRC as to why the amounts are different adding complexity rather than simplicity.
Anonymous
  • I have a number of non-UK resident landlords whose only UK income is rental income but who are entitled to the personal allowance. In many cases they are over the £10k income threshold but do not pay tax because their net income after expenses is less than the personal tax allowance. Quarterly reporting would therefore be an additional burden with no advantage to them or HMRC.