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Where Taxpayers and Advisers Meet

Making Tax Difficult

someone
Posts:478
Joined:Mon Feb 13, 2017 10:09 am
Making Tax Difficult

Postby someone » Sat Apr 17, 2021 1:44 pm

I'm trying to prepare for the 2023 introduction of Making Tax Difficult for rental income.

I realize this is very early days and perhaps the answers are just "we don't know yet"

But here's one conceptual problem that I'm having planning for the future.

How should you account for the quarterly submissions that have to be based on values you don't have yet? (I use accruals basis)

For example, my buildings insurance is due in October.

So
Q1 I'd assume that it doesn't change YoY so it would be 1/4 of last years premium.
Q2 ditto
Q3 I now have the new premium. So for Q3 should I calculate 1/4 of the weighted average (which is what all four should have been) or should I include a correction term for the Q1 and Q2 (probable) underestimate (since when did insurance get cheaper YoY?)
Q4 will be 1/4 of the weighted average, either I've ignored the errors in Q1 and Q2 or I've already corrected for it in Q3.


And do I need to retain the data for how I did the Q1 and Q2 calculations? What I do at the moment is copy the previous years spreadsheet, change the dates and then "correct" it as the year progresses. But as Q1 and Q2 MTD submissions depend on figures that I won't know, they're calculated based on values that I don't keep. (I could probably recreate it from the previous years spreadsheet but I also go through that and make changes where I find mistakes before I do my tax return. (and I often do find mistakes because although I try and keep the spreadsheet up to date, I don't check that it all balances until the year end so sometimes I find that "cash to the bank" doesn't match with "rent less costs paid to and by my agents" and I have to search through to find where I've made a transposition error or I've missed off a one off bill that I didn't have last year or left in a one off bill from the previous year)

One alternative I can see is just to submit the data for the previous years quarter. That way I'll have the calculation and it won't change. But what's the point in MTD if that's all everybody is going to do anyway?

Mortgage interest is another one where I keep a spreadsheet to estimate it and correct it once I get my statement (my mortgage year and the tax year are aligned - deliberately). For the 2020/21 tax year I'd underestimated the interest by about 20GBP based on my spreadsheet - it was actually while updating the spreadsheet from the annual statement that I thought about this problem. I have no way to go back to the calculation I had at the start of today. But if I used last years figures I'd have overestimated the interest by about 1200GBP as I'm making maximum capital repayments (so in the 2021-22 tax year I've already repaid 10% of the balance outstanding)


Up until now none of this has mattered - My spreadsheets to estimate my future tax liability has been of no interest to anybody at all except me - mostly I use them to make sure that when making those capital repayments I'm not going to run out of money to pay a tax bill but now they, or something like them, will need to form the basis of the MTD crap. (And my spreadsheet is very useful to spot where I've made mistakes entering values into my tax return. If HMRCs calculation doesn't agree to within a few pounds of what I calculate then it means there's a mistake somewhere - e.g. entering net instead of gross for pension or gross instead of net for gift aid or just a transposition error entering the data online.)

someone
Posts:478
Joined:Mon Feb 13, 2017 10:09 am

Re: Making Tax Difficult

Postby someone » Sat Apr 17, 2021 5:48 pm

Ha. I'm being silly on the insurance one. I only have to do apportioning in the quarter where the premium changes.

But I still don't know how to deal with the mortgage interest. ISTM that all I can do is 'best guess'

In some respects it's easier for me as all four quarters have to be guessed and then the real values go into the tax return. But for someone whose mortgage year doesn't align they might now know that Q1 and Q2 figures were wrong when it's time to do the Q3 figure.

Most people don't even try to understand a mortgage statement but just accept the numbers the bank gives them.

robbob
Posts:3099
Joined:Wed Aug 06, 2008 4:01 pm

Re: Making Tax Difficult

Postby robbob » Sun Apr 18, 2021 12:37 pm

Making tax difficult
:) - lol fairly apt really

The relevant detail will confirmed in time for this becoming mandatory (IF IT IVER HAPPENS)- being honest i wouldnt waste my time or energy thinking about this until it goes live and the full details are finalised for the masses.

The obvious thing here is to swap to cash basis rather accruals.
But if I used last years figures I'd have overestimated the interest by about 1200GBP as I'm making maximum capital repayments (so in the 2021-22 tax year I've already repaid 10% of the balance outstanding)
This isn''t really an MTD problem - its up you to submit accurate figures whenever you do submisions - if you pay a huge chunk of your mortgage and need to recalculate figures but choose to rely on old figures ignoring material repayment obviously things will go pear shaped. You will simply need to up your estimates level if you donlt want to be caught out if you are forced to submit three monthly.

someone
Posts:478
Joined:Mon Feb 13, 2017 10:09 am

Re: Making Tax Difficult

Postby someone » Sun Apr 18, 2021 5:59 pm

being honest i wouldnt waste my time or energy thinking about this until it goes live and the full details are finalised for the masses.
Thanks. I just had this vision of about 3 months before finding that I've now got to pay someone to submit quarterly accounts because it's no longer possible to do it yourself. I'm a programmer and have this weekend had a look at the MTD API and started writing some bridging software - whether I can get something to the point where it's approved is anybody's guess at this point - obviously this is a spare time project so the primary problem is limited time to work on it.

If I can get something to work then it will be open source and freely available - but I would only want to cover the very simplest scenarios that I care about. Apart from anything else, I'd probably get anything more complicated wrong - although if I can get something started then if there's enough interest then it's the sort of thing that can take on a life of its own.
This isn''t really an MTD problem - its up you to submit accurate figures whenever you do submisions
Understood, but in my case it is explicitly an MTD problem. I quite deliberately have arranged such that my mortgage year aligns as closely as possible with the tax year so that my annual mortgage statement is available within a few weeks of the end of the tax year. So up until now I've never had to rely on anything other than bank supplied figures. My spreadsheet calculation always come out pretty close to the bank so I would guess my estimated figures would be "good enough" but it's something I've never had to deal with because I've structured my affairs to avoid having to deal with it. After I got married I waited until 6th April to put a let property into joint names. We submitted a Form 17 on another 6th April. These were not optimal decisions for tax purposes but were optimal for simplicity of affairs and the tax impact was small.

Way, way back in time, when dinosaurs roamed the Earth :-) I was self employed and I did have an accountant. But I really don't think it makes sense now. My affairs are simple and all of my time and effort is spent actually gathering the information together rather than doing the tax return. I already periodically update my spreadsheets so MTD isn't going to save me a mad scramble at the end of the year. (with the exception of my p11d and one service charge demand I should have already received but haven't yet[1], I've already got everything together for doing my tax return for 2020/21) But now HMRC will dictate my schedule for four afternoons a year rather than me deciding when it's convenient. An accountant cannot save me the effort of getting the information together. And the one event recently where I could have benefited from an accountant's advice and structured the transaction slightly differently - when I extended some leases - it wouldn't have occurred to me to mention it to the accountant in advance - I wouldn't have mentioned it until I was planning to sell! (My solicitor was brilliant when we did this but I do think he ought to have told us that there were potential CGT issues and we should seek advice. Fortunately no major harm done.)

[1] This is the sort of thing that will make life much harder under MTD. By middle of the year I've always got absolutely everything I need. But if MTD means that I have 30 days to submit then I'm often going to find myself in the situation where I'm missing something (and don't necessarily even know about it) - for example my rental properties are fully managed and it's not at all uncommon for the first I know about bills to be the tradesman's invoice attached to my statement from the agent and the payment deducted from the rent due to me. So I might not get bills that should go in a quarter until I've already submitted under MTD. Putting the bill into my spreadsheet will then change the calculation of that quarter so it no longer matches what I submitted.

robbob
Posts:3099
Joined:Wed Aug 06, 2008 4:01 pm

Re: Making Tax Difficult

Postby robbob » Mon Apr 19, 2021 8:27 am

I would think it highly likely there will be free software available when this comes out - almost certain but not quite.

[1] This is the sort of thing that will make life much harder under MTD.
Agreed for someone like yourself (boom) who makes every effort to comply anyway no one needs the extra hassle of super tight deadlines and sketchy new rules - i would say as long as you take reasonable care and pay reasonable attention to what you need to do it will be what it is if stuff need amedning later or has slight adjusting entries next peiod i wouldn't over stress yourself - if they force you to submit information in a hurry what do they expect.

It may force some laggards to up their game and thats not all bad but i for one think this mandated nightmare of sorting out possibly 5 times a year rather than one is plain ridiculous other than for those on means tested benefits where i do see the fairness of having to submit information more often.

someone
Posts:478
Joined:Mon Feb 13, 2017 10:09 am

Re: Making Tax Difficult

Postby someone » Thu Apr 29, 2021 5:40 pm

I would think it highly likely there will be free software available when this comes out - almost certain but not quite.
You're probably right that there will be free software - but almost certainly only at the cost of sharing detailed financial information with a third party. It is possible for software to submit direct to HMRC but I bet all the software goes via a "provider"

As I dig through the API I'm getting ideas on how to do this that might not be too arduous to implement. I've got a uk-property business with quarterly submissions working (the sandbox makes this harder than necessary)

I haven't tried to use it in the sandbox but the VAT (MTD) api looks trivial compared to the Income Tax (MTD) API. VAT scares me, it seems to be impossibly complicated to get right but based on my admittedly cursory glance, I reckon I could have put something together for VAT (MTD) even without understanding VAT. The Income tax API has stuff in it that I don't know how to pronounce (I exaggerate slightly)

robbob
Posts:3099
Joined:Wed Aug 06, 2008 4:01 pm

Re: Making Tax Difficult

Postby robbob » Fri Apr 30, 2021 11:11 am

VAT scares me, it seems to be impossibly complicated to get right but based on my admittedly cursory glance, I reckon I could have put something together for VAT (MTD) even without understanding VAT.
The technical bit is not probably hard - what is more complex is getting the relevant codings sorted so they are presented to the user in an acceptable format that makes sense - two or more separate types of transaction may have the same coding for submission purposes - so any coding really should do more than the basic minimum to work for users. Even large estblished players are tehnically weak in this field - eg sage cloud uses the same vat code for reverse charge sales and reverse charge expenses - this is stupid beyond belief as sage cloud defaults to money banked being sales and money paid out being expenses if psotings done on cash basis (no invoices) - even if you are posting to the sales code or subcontractors code ie it should be obvious that money going posted to sales is a sales refund - for vat purposes sage treats the sales refund payment as being a subcontractor payment. Obvioulsy sage are headtheballs for not getting the detail right in this regard - they used to have best vat coding options with the old sage 50/instant suite but sage cloud is proper pants.

someone
Posts:478
Joined:Mon Feb 13, 2017 10:09 am

Re: Making Tax Difficult

Postby someone » Fri Apr 30, 2021 12:47 pm

The technical bit is not probably hard - what is more complex is getting the relevant codings sorted so they are presented to the user in an acceptable format that makes sense
Yes, This exactly.

As far as I can see there are two different parts to MTD that HMRC have blurred together.

1. The accounting/book keeping/whatever you want to call it. For many landlords who will be impacted my MTD this part is easy. There's a single property, there's an agent managing it, they get a statement per month. And there will be a handful of expenses that might not go via the agent (such as buildings insurance). Keeping that together in a spreadsheet is amply sufficient for these cases.

2. Submitting the data to hmrc quarterly plus EoY crystallization. There is no accounting or book keeping involved at all here. All that's necessary is that your spreadsheet (or accounting software) can generate the required numbers and then somehow submit them.

AFAICT for VAT MTD that is all that is required. So if someone already was doing 1 then the effort to do 2 is (without having tried to do it...) bordering on trivial.

Income Tax MTD appears to be a little more complicated in that it appears that it's mandatory for the software to request a tax calculation and display it to the user each quarter. The fact that this calculation might be completely useless (for example only the landlord profit and expenses have to be submitted quarterly, gift aid, pension and goodness knows what else only have to be submitted to "crystalize"). I do wonder if HMRC are going to try to change tax codes on the fly for people with employment income too based on the MTD quarterly submissions. One of the fun things would be to put in a pension contribution of 40K at the start of the year and then change it before crystalization (similar to how I will sometimes put in a crazy number into a box where I don't have the correct number when I start doing my tax return rather than just leave the box blank for later.

Oh, and on my point about not having all the data in time, you can change a previous quarterly submission (presumably until crystalization which is like submitting a tax return) so I guess each quarter you can correct the previous quarter if you had things that didn't make the cutoff and the mortgage interest in particular that I was concerned about I can just correct up until when I need to submit.

I can see where HMRC are trying to go with this - in particular I think they're trying to avoid the people who get to January and discover they've got a tax bill and no money to pay it. But I cannot help thinking that telling people in April that they've got a tax bill that will be due in January will only help a tiny fraction of the problem cases as the sort of people who aren't already budgeting for their tax bill are the sort of people who are going to ignore the message from the software too.

IMO, a far better solution for landlords at least would have been to get (rental) agents to withhold basic rate tax on the money paid to their clients. With something like the R85 (have I remembered that right - the old form to get interest gross?) for those landlords who don't need to pay tax. Then only the self managed ones need something like MTD.

One other point that might impact you as a tax agent. AFAICT landlord quarters are tax year quarters, so 06/04 to 05/07 etc (I cannot see anything in the API to specify your property business year - not sure if that ever made sense anyway, I've always used the tax year) but self employment year is the business year. So a self employed person with rental income might have 9 deadlines per year (add 4 for each self employment business with a different year end)

It's a long time ago now but I'm pretty sure when I was a sole trader my business year didn't align with the tax year but my accountant dealt with it for me. I vaguely recall asking him if I should make them align and I think he said I could but it didn't really make any difference. Assuming that I've remembered correctly and things haven't changed in 25 years then it might now make sense for all self employed businesses to have a year end on one of the tax quarter ends so that MTD deadlines don't multiply!

someone
Posts:478
Joined:Mon Feb 13, 2017 10:09 am

Re: Making Tax Difficult

Postby someone » Tue May 11, 2021 5:15 pm

I've made some progress in working through the API and put together a proof of concept for how some bridging software could work.

Unfortunately, the HMRC sandbox is very limited and doesn't behave at all like the production system would work so understanding exactly how the API should be used is tricky.

If anyone wants to play with what I have so far it's here There are links to download all of the source - It's LAMP (but the P is Python instead of PHP :-). Eventually my goal would be to have a self hosted solution (that wouldn't need either apache or mysql but I'm doing it like this for now because it's quicker to make progress on understanding the API.)

https://making-tax-difficult.uk/

Username is "mtd" and password is "access" (without the quotes)
(This is hosted on a low power vm with limited internet access so don't expect whizzy performance. Also there's a deliberate delay of 1 second before each request is made to hmrc.)

Only self-employment and uk-property both under self-assessment are (mostly) working. Everything else is "todo"

Quirks I've found so far:
For self employment if you have multiple businesses, you submit an annual income summary for each tax year for each business and you submit an end of period confirmation statement for each business.

For uk-property you have to submit the annual summary separately for FHL and "other" (non fhl) separately but the end of period confirmation statement is submitted for the property business, you cannot, and do not confirm the FHL and "other" separately.

The MTD obligations are also listed for the "property business" but the periodic updates are submitted for "other" and FHL separately. I'm not sure how the API is supposed to know whether an obligation has been met if someone has both FHL and "other".

If it had been me, I'd have made FHL and "other" synonymous with the self employment businesses where the obligations and confirmation statements are separate. (It would also have made coding to the API easier). I realise that the dates will be the same for both but it doesn't seem unreasonable for me that someone with both might be ready to submit one but waiting for the other. Most obviously, a FHL business might be completely quiescent during the winter months and so people might want to submit well ahead if the only costs are fixed costs.

Or perhaps the answer is that landlords without FHL have to submit an empty expenses for each quarter. The API sandbox returns canned data so it's not possible to "try and see"


oh, and just in case someone finds a security flaw that lets you run arbitrary SQL against the database (for example) then please let me know but there's absolutely nothing on the machine that is hosting this except test data.

someone
Posts:478
Joined:Mon Feb 13, 2017 10:09 am

Re: Making Tax Difficult

Postby someone » Tue May 11, 2021 5:30 pm

Oh, and one other quirk that I've noticed,

You can enter details of all of your savings accounts and then enter the interest that each receives separately. (I'm guessing that you can have one account called "everything" that has consolidated data instead) but you cannot enter details per property under uk-property.

I guess the theory is that savings interest will get populated automatically but trying to deal with joint accounts is going to be a nightmare!


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