The View from No 50
K P Bonney & Co
Chartered Accountants and
Chartered Tax Advisers
Ilkley LS29 6JA
Tel: 01943 870933
Fax: 01943 870925
MAKING TAX DIGITAL
Right now the government is concerned that tax is going uncollected because we are not getting our tax returns right. Its solution is to make us keep our records (or at least make us submit our information) on a digital platform. Apparently this will turn us all into more accurate and compliant taxpayers.
The grand plan is called Making Tax Digital. The Chancellor spun it to public attention in July 2015 by announcing the abolition of the annual tax return. Perhaps you remember that. In actual fact, under MTD all businesses will have to submit information to HMRC four times a year instead of one as now.
Under MTD the government expects everybody to work digitally even if they lack the necessary skills to do so. If you can’t work digitally you will be provided with help by HMRC. Yes, HMRC, the organisation that directs you to its website for everything because it can’t answer the phone.
By digital we mean cloud based accounting systems operated from a computer or mobile device. HMRC suggests free apps will be available.
I am all in favour of a move to a digital. In the fullness of time it will prove beneficial to individual businesses and the wider economy. But it has to be managed sensibly. The switch should be voluntary. It shouldn’t be compulsory.
My other objections to MTD are:
Income tax is an annual tax. Whether we file one return or four, the tax is the same. Why impose more burdens on business?
People are creatures of habit. Those who struggle with accuracy and compliance under the current regime will be ones struggle under the new. Those whose affairs are chaotic now will be chaotic in future.
I have a handful of business clients who still keep manual records. Under MTD they will have to learn how to use a cloud based accounting
system and they will have to be ready to do this by April 2018. What will happen to these clients? Some will retire or close their businesses. Some will ask me to take on responsibility for maintaining their records. Some will grasp the nettle and learn how to do use a bookkeeping app. Each of these choices has significant implications for the livelihoods of the clients concerned. I foresee much anxiety for individual taxpayers and for accountants in complying with MTD.
I foresee taxpayers making more rather than fewer mistakes in their submissions. It follows from this they will pay too much or too little tax. Neither is good.
Our Advice: This likelihood is this is going to happen. We are promised a consultation in the Spring of 2016. Watch out for this. If, having read the consultation document, you think MTD is an unreasonable burden for your business to bear then do respond to it or contact your MP.
In recent times several people have informed me they are letting out their homes while they go on holiday. In a less than convinced voice they have added that their letting income is exempt from tax. It is covered by the Rent-a-Room exemption isn’t it?
For those not in the know here is a brief explanation of Airbnb and Rent-a-Room.
Airbnb is an online sharing service. It allows those who have property available for occupation to make contact with others who are looking for somewhere to stay. So while you go off on holiday you let your home out to someone who wants to spend some time in your manor. The occupier pays you a rent for the use of your home. Money for nothing!
Rent-a Room is an exemption from income tax for those who let out a room or rooms in their own home. At its simplest, the scheme allows the owner of the property to receive rent of up to £7,500 per annum, tax free.
So given the easy access to a pool of willing occupiers via Airbnb more and more people have started letting out their homes while they go on holiday.
On its website Airbnb points to the existence of Rent-a-Room but is careful not to say whether the exemption is available. Users are directed elsewhere for advice. Why so cautious when this could be such a big selling point for Airbnb? The answer is because it is complicated.
The law says Rent-a-Room relief is available in respect of a period of letting provided that during that period the property is the individual’s only or main residence.
How can a property be your only or main residence if you are not there? Indeed you are probably prevented from being there because the occupier has paid you good money for the right to exclusive use.
If we adopt the capital gains tax interpretation, an absence whilst away on holiday does not stop a home being the owner’s only or main residence. So Rent-a-Room relief should be available.
However, on a strict reading of the law Rent-a-Room can only be available if you live in the property at some time during the letting period. In other words there must be a period of simultaneous occupation by the owner and the tenant.
Until we have a case which goes to court the availability of the Rent-a-Room exemption in these circumstances remains uncertain.
Following the budget speech of March 2016 we can be certain that the first £1,000 of Airbnb income is tax free with effect from April 2017. Not under the Rent-a-Room provisions but under a brand new exemption introduced to encourage small internet-based businesses.
Our Advice: Don’t let the Rent-a-Room uncertainty prevent you from letting out your home whilst you go on holiday. And don’t be afraid to claim the Rent-a-Room exemption in your tax return. There is sufficient doubt to justify taking that approach. But to protect yourself from any accusation from HMRC of failure to report this kind of income, you should make a suitable disclosure in the white space of your tax return.
YOU DON’T KNOW WHAT YOU’RE DOING!
A few years ago the Chancellor brought in a fantastic measure to reduce the cost of employing people. He introduced the ‘Employment allowance’. This entitled employers to deduct up to £2,000 from their employer’s national insurance bill. Great!
‘One-man’ companies don’t pay employer’s national insurance. Why? Because it is more tax efficient for these individuals to take the profits out of their companies by drawing dividends. There is no national insurance on dividends. These companies do not therefore benefit from the (now £3,000) hand-out. And do you know what? They aren’t bothered.
In a sad demonstration that the Treasury really doesn’t know what it is doing, it has drafted legislation, effective from 6 April 2016, which excludes one-man companies from entitlement to the Employment allowance.
Firstly, as the professional bodies have kindly pointed out, the new measure can be side-stepped by simply admitting a second employee (such as a husband or wife) to the payroll. Secondly, the measure is redundant in any case because 99% of one-man companies don’t claim the Employment allowance in the first place!
We seem to have reached the point where the Treasury sees mischief where none exists and, when implementing its counter-measures, still contrives to miss its target.
His new house is almost complete but there are one or two problems so Alex has called a meeting with the builder and the sub-contractor.
On the ground floor Alex points out a leaking radiator. The builder makes a note. The sub-contractor goes over to the window and shouts “Green side up!”
On the first floor Alex points out exposed cables. The builder makes a note. The sub-contractor goes over to the window and shouts “Green side up!”
On the top floor Alex identifies some damaged woodwork. The builder makes a note. The sub-contractor goes over to the window and shouts “Green side up!”
This is too much. Alex turns to the sub-contractor and asks, “Every time I point out a fault you go to a window and shout “Green side up”. What on earth is going on?”
The sub-contractor shakes his head ruefully and says, “I have four blokes out there laying your lawn”.
Copyright: K P Bonney & Co LLP 2016. All rights reserved. No part of this publication may be produced, stored in a retrieval system, or transmitted in any form or by any means, electronic mechanical, photocopying, recording or otherwise without prior written permission of the publishers. Disclaimer: The publishers have taken all due care in the preparation of this publication. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the authors or the publisher.
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