Making Tax Digital

Extension of MTD for VAT

VAT-registered traders whose vatable turnover is over the VAT registration threshold of £85,000 must comply with the requirements of Making Tax Digital (MTD) for VAT. This means that they must keep digital records and file their VAT returns using MTD-compatible software.

Currently, VAT-registered businesses whose turnover is below the VAT registration threshold do not have to comply with MTD for VAT, but can do so if they wish. However, this will change from April 2022 as MTD for VAT is being extended to all VAT-registered businesses.

VAT-registered businesses whose turnover is below the VAT registration threshold and who have not joined MTD for VAT voluntarily, will need to join MTD for VAT from the start of their first VAT accounting period beginning on or after 1 April 2022.

MTD for income tax delayed

Self-employed businesses and landlords with annual business or property income of more than £10,000 were due to be brought within MTD for income tax from April 2023. To give businesses more time to recover from the pandemic and to prepare for MTD for income tax, this will now not come into effect until April 2024.

Under MTD for income tax, landlords and self-employed businesses within its scope will need to keep digital records. They will also be required to send quarterly summaries of income and expenditure to HMRC using MTD-compatible software and will receive an estimated tax calculation after each submission. The quarterly submissions will be followed by a final end of year submission to take account of necessary adjustments, and a final declaration. This will replace the annual self-assessment tax return.

Basis period reform

In preparation for the introduction of MTD for income tax, HMRC have consulted on proposals to reform the basis period rules. This entails replacing the current year basis, under which businesses are assessed for a tax year on the profits for the accounting period ending in that tax year, with a tax year basis, whereby profits for the tax year are assessed in that year.

It was originally proposed that the tax year basis would apply from 2023/24, with 2022/23 being a transitional year. However, the start date has now been delayed, and the reforms will apply no earlier than 2024/25, with transitional rules applying no earlier than 2023/24.

Capital allowances

End of AIA transitional limit

The Annual Investment Allowance (AIA) provides a deduction of 100% of the expenditure in the period in which it was incurred, up to the level of the available AIA limit. The AIA limit was increased from its permanent level of £200,000 to £1 million for a temporary period of three years, from 1 January 2019 to 31 December 2021. The limit reverts to £200,000 from 1 January 2022.

If you are planning capital expenditure in excess of £200,000, if funds permit, you may wish to incur the expenditure before 31 December 2021 to take advantage of the higher AIA limit.

It should be noted that transitional provisions apply where the accounting period spans 31 December 2021 – the AIA limit for the period reflects the proportion falling before 1 January 2022 for which the limit is £1,000,000 and the proportion falling after this date, for which the limit is £200,000. However, there is a trap in that an additional cap applies to limit the amount for which the AIA can be claimed in respect of expenditure incurred on or after 1 January 2022. This means that relief may not be available in full for post-31 December 2021 expenditure, even if the expenditure is less than the total AIA limit for the accounting period.

Super-deduction and new first-year allowance

Companies are able to benefit from two additional first-year allowances for qualifying expenditure incurred in the period from 1 April 2021 to 31 March 2023.

The first is a super-deduction available for most expenditure that would otherwise benefit from main rate writing down allowances at the rate of 18%, although cars are excluded. Where the expenditure qualifies for the super-deduction, the first-year allowance is given at the rate of 130% of the qualifying expenditure. A balancing charge may apply on the disposal of the asset.

Where available, the super-deduction is advantageous and will provide a better rate of relief than that given by the AIA.

The second temporary allowance is a 50% first-year allowance for qualifying expenditure that would otherwise qualify for a writing down allowance at the special rate of 6%. The first-year allowance is given at the rate of 50% of the qualifying expenditure. It is not available for expenditure on cars. As with the super-deduction, a balancing charge may apply on the disposal of the asset.