Guidance

Bringing Business Tax into the Digital Age: legislation overview

Updated 20 March 2017

Primary legislation

For technical consultation

The government published on 31 January 2017 draft primary legislation for technical consultation covering the areas below:

a) Scope - details of which businesses (including sole traders and landlords) will be in scope of the new requirements.

b) Entity and activity-specific exemptions - details of exclusions and exemptions for specified businesses and business activities.

c) Periodic updates: regulation-making power - powers for the government to lay regulations requiring specified persons to provide specified information about their income and expenditure to HM Revenue and Customs (HMRC).

d) End of period statement: regulation-making power - powers for the government to lay regulations requiring specified persons to provide specified information in relation to specified periods relating to the calculation of profits or losses for those periods.

e) Digital record-keeping: regulation-making power - powers for the government to lay regulations requiring specified persons to keep specified records relating to their business in electronic form.

f) Electronic communications: supplementary powers - further details of the provision which regulations laid under these powers should be able to make in respect of electronic communications.

g) Digitally Excluded Exemption - details of who will be able to opt out of the new requirements because they are unable to engage digitally.

Further details of these provisions are provided in the draft explanatory notes also being published on 31 January 2017. The closing date for comments on the draft legislation is 28 February 2017.

Finance Bill 2017

Finance Bill 2017 will include final versions of the draft provisions set out above. It will also contain additional clauses covering the following areas:

a) Compliance powers - HMRC has a range of powers which allow it to check and investigate a person’s tax position. Consequential amendments are required to make HMRC’s existing compliance powers fit with the new processes described in Bringing Business Tax into the Digital Age.

b) Low Income Exemption - details of the initial exemption to the new requirements previously announced by the government for those with incomes below a defined level.

c) Insolvent Businesses Exemption – details of an exemption for those businesses (including sole traders and landlords) which are subject to insolvency proceedings.

d) Deferral for the largest partnerships – details of the deferral until 2020 for those partnerships which have a turnover above £10 million.

e) Consequential amendments - consequential amendments required to existing tax legislation in order to implement the policies set out in Bringing Business Tax into the Digital Age.

Secondary legislation

Application

Alongside Finance Bill 2017, the government will publish draft regulations for implementation of the Bringing Business Tax into the Digital Age requirements. The regulations will apply to persons and partnerships who fall within scope of draft Schedule A1 of TMA 1970.

The regulations will provide that these businesses (including sole traders and landlords) must use compatible software to meet the new requirements. The regulations will also allow the Commissioners of HM Revenue and Customs to set out details of compatible software in a published notice. This will enable the definition of software to be updated from time to time, for example, to keep up with changes in technology.

Digital record keeping

Keep and preserve

The regulations will provide details of businesses’ obligations to keep and preserve records digitally. Businesses (including sole traders and landlords) will need to keep digital records in software compatible with HMRC’s systems. The regulations will also set out the period for which the records must be preserved.

Content of digital records

The regulations will set out the information, including categories of income and expenditure, which will need to be kept and preserved digitally. The schedule provides an indicative list of which categories of income and expenditure might be covered.

These categories may differ depending on whether or not a business (including a sole trader or landlord) operates on the cash basis and depending on whether it is a property business or a partnership. Businesses which are retailers may record their daily gross takings instead of recording every transaction. The regulations will set out the process by which retailers may elect for these different record-keeping requirements to apply and how and when that election may be brought to an end.

Periodic updates

The regulations will require businesses (including sole traders and landlords) to provide HMRC with periodic updates of specified information every 3 months. For most businesses there will be 4 updates for each relevant period.

As with the record-keeping obligations, the regulations will set out the categories of summarised totals that will need to be submitted in each update (see Non-property businesses, Property businesses and Partnerships of the schedule for an indicative list). These categories may differ depending on whether a business operates on the cash basis, whether it’s currently eligible to submit ‘three line accounts’ and depending on whether it is a property business or a partnership. Most of the information required will consist of summary totals of the values for each category in Non-property businesses, Property businesses and Partnerships of the schedule (where relevant). Certain other information may also be required, as described in Non-property businesses, Property businesses and Partnerships of the schedule and as appropriate to the business.

Businesses (including sole traders and landlords) will also be required to provide corrected or updated information with their next update if the information submitted in a previous update has changed or is found by the business to be incorrect.

Updates for periods which are shorter than 3 months

The regulations will allow businesses (including sole traders and landlords) to submit updates in respect of periods that are shorter than 3 months (although there will be no requirement to do so). However, where a business chooses to do so, it will still be required to submit information in respect of the remaining part of the 3 month period.

Early updates

The regulations will allow businesses (including sole traders and landlords) to submit early updates for the whole of a period. The business will also need to confirm that the update covers the whole of the period.

End of period statement

The regulations will impose an obligation on businesses (including sole traders and landlords) to provide an end of period statement for a relevant period in order to finalise their taxable business profits or losses. The statement will need to be provided using compatible software by the earlier of:

  • 10 months after the end of the period to which the statement relates, or
  • the 31 January following the tax year in which the relevant period ends

The regulations will set out the categories and information that will need to be included in the end of period statement (see Partnerships – end of year information and End of year information of the schedule for an indicative list). As with the record-keeping and periodic update obligations, these categories may differ depending on whether a business operates on the cash basis and depending on whether it is a trade, property business or a partnership.

The end of period statement will include additional categories of information compared to the periodic updates, to enable businesses to finalise their taxable profits or losses and to make any necessary accounting and tax adjustments. It will also include a requirement to make a declaration that the end of period statement is correct and complete to the best of the knowledge of the person making it.

Excluded activities

The regulations will include details of how businesses which are not required to fulfil the new obligations can choose to provide details of their tax affairs to HMRC through the new processes.

Exemption for the digitally excluded

The regulations will include details of how customers can opt out of the new requirements where they fit the criteria for exemption set out in paragraph 12 (4) of draft Schedule A1 (digital exclusion).

The schedule: the likely categories of information

The categories of information listed below are being reviewed and have not yet been finalised. They have been included mainly for indicative purposes.

Non-property businesses

Income:

  • turnover, takings, fees, sales or money earned
  • any other business income

Expenses:

  • cost of goods bought for resale or goods used
  • construction industry – payments to subcontractors
  • wages, salaries and other staff costs
  • car, van and travel expenses
  • rent, rates, power and insurance costs
  • repairs and renewals of property and equipment
  • phone, fax, stationary and other office costs
  • advertising and business entertaining costs
  • interest on bank and other charges
  • bank, credit card and other financial charges
  • irrecoverable debts written off
  • accountancy, legal and other professional fees
  • depreciation and loss/profit on sale of assets
  • other business expenses
  • goods and services for your own use
  • income, receipts and other profits included in business income or expenses but not taxable as business profits
  • disallowable element for each category

Property businesses

Income – furnished holiday lettings:

  • rental income and any income for services provided to tenants

Expenses - furnished holiday lettings:

  • tax taken off income
  • rent paid, repairs, insurance and cost of services provided
  • loan interest and other financial costs
  • legal, management and other professional fees
  • other allowable property expenses
  • private use adjustment
  • premiums for the grant of a lease
  • reverse premiums and inducements
  • property repairs and maintenance
  • costs of services provided, including wages

Income – property:

  • rental income and other income from property

Expenses – property:

  • tax taken off any income from total rents
  • premiums for the grant of a lease
  • reverse premiums and inducements
  • rent, rates, insurance, ground rents etc.
  • property repairs and maintenance
  • loan interest for residential properties and other related financial costs
  • other loan interest and financial costs
  • legal, management and other professional fees
  • costs of services provided, including wages
  • other allowable property expenses
  • private use adjustment

Partnerships

Interest and alternative finance receipts without UK tax deducted:

  • interest and alternative finance receipts from UK banks and building societies paid without tax deducted
  • interest distributions from UK authorised unit trusts and UK open-ended investment companies and investment trusts
  • income from National Savings and Investments
  • other untaxed income from UK savings and investments (except dividends)

Interest and alternative finance receipts with UK tax deducted:

  • other taxed income from UK savings and investments (except dividends) (amount net of tax deducted)
  • tax deducted

Dividends:

  • dividends and other qualifying distributions from UK companies
  • tax credits attached to such dividends etc
  • dividend distributions from UK authorised unit trusts and open-ended investment companies
  • tax credits attached to such distributions
  • stock dividends from UK companies
  • tax credits attached to such stock dividends
  • non-qualifying distributions and loans written off
  • tax credits attached to such distributions etc

Other income received without UK tax deducted:

  • other income – profit
  • other income – loss

Other income received with UK tax deducted:

  • other income (amount net of tax deducted)
  • tax deducted

Partnerships – end of year information

Disposal of capital assets – partnerships:

  • description of assets
  • whether listed or unlisted shares or securities (if applicable)
  • name of partners who benefited from the disposal proceeds
  • total proceeds from disposal

End of year information

Tax adjustments and elections:

  • adjustment required where the basis period is not the same as the accounting period under section 203 of the Income Tax (Trading and Other Income) Act (ITTOIA) 2005
  • averaging adjustment applied to taxable profits where an election has been made for averaging under section 222 or 222A of ITTOIA 2005
  • adjustment required as a result of a change in basis under Chapter 17 of Part 2 of ITTOIA 2005
  • total of any construction industry scheme deductions taken from payments made to subcontractors under section 61 of Finance Act 2004
  • any other tax deducted from trading income (excluding deductions made by contractors on account of tax)
  • sums due to be charged under sections 277 to 285 of ITTOIA 2005
  • adjustments required under Chapter 7 of Part 3 of ITTOIA 2005
  • claims for loss relief under Chapter 2 of Part 4 of the Income Tax Act 2007 (Chapter 4 for property businesses)
  • disallowable expenditure
  • foreign tax deducted
  • any other tax adjustment
  • adjustment on change of basis
  • foreign tax deducted

Capital allowances – claims and balancing charges:

  • annual investment allowance
  • capital allowances at 18%
  • capital allowances at 8%
  • restricted capital allowances on cars costing more than £12,000 where bought before 6 April 2009
  • business premises renovation allowance
  • enhanced capital allowances: energy-saving relief
  • enhanced capital allowances: environmentally-beneficial relief
  • enhanced capital allowanced: electric charge-points
  • enhanced capital allowances: gas refuelling equipment
  • allowances on sale or cessation of businesses use (where an asset has been disposed of for less than its tax written down value)
  • total capital allowances
  • balancing charge on sale or cessation of business use (where business renovation allowance has been claimed)
  • balancing charge on sales of other assets or on the cessation of business use (where an asset has been disposed of for less than its tax written down value)