July 2022

Technical and Client Update

In this issue

MTD for income tax – Quarterly information to be reported by businesses

Childcare accounts can subsidise summer camp costs

Penalties for overclaimed SEISS grants

Reporting SEISS grants on 2021/22 Tax Returns

MTD for VAT - new guidance on penalties for non-compliance

R&D tax credit repayments delayed

ICO ransomware guide and checklist for businesses

MTD for income tax – Quarterly information to be reported by businesses

Making Tax Digital (MTD) for Income Tax will apply to sole traders, property landlords and certain other businesses with gross turnover and/or property income over £10,000 a year and will commence in April 2024. The system will then be extended to partners from April 2025 and LLPs and partnerships with corporate members from April 2026.

The Income Tax (Digital Requirements) Regulations 2021, set out the requirements that relevant persons must comply with under MTD for Income Tax. These include the use of MTD-compatible software to keep and preserve their business records (income and expenses) digitally, send quarterly updates of their records to HMRC and submit an end-of-period statement to HMRC.

HMRC has now published draft notices of the detailed provisions for consultation. The consultation invites views on these which provide additional information on the key requirements of MTD as they relate to:

  • The use of functional compatible software.
  • The information required when submitting quarterly updates and end-of-period statements.
  • Retail sales election.

The draft notices specify the proposed dataset requirement. Later in the year, HMRC will publish guidance to explain how customers can reflect any accounting and tax adjustments that may be required to reconcile the quarterly submissions to the final taxable profits for the year (The End of Period Statement). The consultation sets out the adjustments that are likely to be required, such as accruals, prepayments, private use adjustments, stock and capital allowances.

As expected, the breakdown of income and expenses broadly follows the headings on the self-employment and property income pages on the Self Assessment Tax Return.

The consultation document states that where the annual turnover is below the VAT registration threshold, the individual may choose to provide the total of all income and the total of all expenses, instead of a detailed breakdown of expenses. This is also consistent with the self-employment pages in the Self Assessment Tax Return.

Retail sales businesses may enter a single digital record of the daily gross takings for any retail sales made.

Please talk to us about making sure your business complies with MTD. We are here to help! For details, see: Tertiary legislation for Making Tax Digital for Income Tax - GOV.UK

Childcare accounts can subsidise summer camp costs

If you have children under 12 who attend a nursery, after school club, play scheme, childminder or you are considering sending them to a summer camp, you should think about setting up a tax-free childcare account. The government adds 25% to the amounts that you save in the account, contributing up to £2,000 for each child each year (a higher amount applies for disabled children). For example, if you save £8,000, this is topped up to £10,000.

The account is then used to pay approved childcare providers. It is worth noting that it doesn’t need to be the child’s parents paying into the account. Uncles, aunts, grandparents and others can also make payments, The government have noticed that many families who are eligible for this scheme are yet to set up their accounts.

Various factors affect eligibility but those with annual net income in excess of £100,000 are notably excluded.

The tax-free childcare account scheme will gradually replace childcare vouchers which many employers continue to provide to employees.

Childcare vouchers are free from tax and national insurance (within specified limits) and can be used to pay for childcare until the child is 16. Childcare voucher schemes can no longer be set up but employees already eligible can continue to benefit.

Penalties for overclaimed SEISS grants

HMRC are reminding sole traders and partners who have received Self-Employed Income Support Scheme (SEISS) grants that there are potentially penalties of up to 100% of amounts overclaimed in certain circumstances.

HMRC may apply the penalty where they believe that the trader knew that they were not entitled to the grant and did not tell HMRC within a 90-day notification period. The law treats the failure as ‘deliberate and concealed’. This means HMRC may charge a penalty of up to 100% of the amount of the SEISS grant that the trader was not entitled to receive or keep.

Traders are required to notify HMRC if there is an amendment to any of their tax returns on or after 3 March 2021 which either:

  • lowers the amount of the fourth or fifth grant they are eligible for
  • causes the trader to no longer be eligible for the fourth or fifth grant

If the tax return was amended before claiming the fourth or fifth grant, traders had to tell HMRC within 90 days of receiving the grant. If the tax return has been amended after receiving the fourth or fifth grant, traders must tell HMRC within 90 days of the amendment.

Reporting SEISS grants on 2021/22 Tax Returns

Where applicable, the fourth and fifth SEISS grants that a trader was entitled to need to be reported on the trader’s 2021/22 Self Assessment Tax Return, with any overclaimed amounts separately disclosed. 

The fifth grant claim was particularly complicated as it was dependant on the reduction in business turnover.

If you have any concerns, we can check that the amounts reported are correct and minimise any potential penalties.

MTD for VAT - new guidance on penalties for non-compliance

HMRC have also issued new guidance on the penalties that they impose for non-compliance with the Making Tax Digital (MTD) for VAT rules. In particular, there is a penalty of up to £400 for every VAT return a business files without using ‘functional compatible software’.

Functional compatible software means a software program, or set of software programs, products or applications that can:

  • record and store digital records
  • provide HMRC with information and VAT returns from the data held in those digital records
  • receive information from HMRC

There are additional penalties if the business does not keep their records digitally.

HMRC may charge the business a penalty of between £5 to £15 for every day on which the digital record keeping requirement is not met.

To meet the digital record keeping requirement, the business’ functional compatible software must contain:

  • the business name, address and VAT registration number
  • any adjustments from calculations made outside the functional compatible software for any VAT accounting schemes used
  • the VAT on goods and services supplied, meaning everything the business sold, leased, rented or hired (supplies made)
  • the VAT on goods and services received, meaning everything the business bought, leased, rented or hired (supplies received)
  • any adjustments made to a return
  • the ‘time of supply’ and ‘value of supply’ (value excluding VAT) for everything bought and sold
  • the rate of VAT charged on goods and services
  • details of any ‘reverse charge transactions’, where the business needs to record the VAT on the sale price and the purchase price of the goods and services bought
  • copies of documents that cover multiple transactions made on behalf of the business like those made by volunteers for charity fundraising, a third-party business or employees for expenses in petty cash

All transactions must be contained in the functional compatible software but there is not a requirement to scan or upload supporting documents like invoices and receipts.

R&D tax credit repayments delayed

The Research & Development (R&D) tax credit scheme for small and medium sized enterprise companies is particularly generous as there is currently 230% relief for qualifying expenditure and, where the company is loss making, this can result in a 14.5% repayable credit. This means that the company receives a £33,350 refund for every £100,000 spent on R&D.

This generous tax break has reportedly resulted in abuse of the system. HMRC have recently paused some repayments while they investigate an increase in irregular claims. Unfortunately, even for legitimate claims, this is going to increase processing times.

For the vast majority of claims, HMRC aims to either pay the payable tax credit or contact the claimant regarding the claim within 40 days instead of the previous 28 day response.

ICO ransomware guide and checklist for businesses

The Information Commissioner's Office (ICO) recommends that businesses and organisations establish incident response, disaster recovery and business continuity plans to address the heightened risk of ransomware attacks.

The recommendation accompanies ICO's new guidance and a checklist of actions businesses should review to assess their preparedness against potential ransomware attacks on their organisation.

Ransomware is an increasingly prevalent form of cyber-attack. Personal data breaches from the ICO's caseload during 2020/2021 have seen a steady increase in the number and severity of cases caused by ransomware. This guidance presents eight scenarios about the most common ransomware compliance issues the ICO has seen:

  • Scenario 1: Attacker sophistication
  • Scenario 2: Personal data breach
  • Scenario 3: Breach notification
  • Scenario 4: Law enforcement
  • Scenario 5: Attacker tactics, techniques and procedures
  • Scenario 6: Disaster recovery
  • Scenario 7: Ransomware payment
  • Scenario 8: Testing and assessing security controls

Ransomware payment and data protection compliance

In its guidance, the ICO supports the position of law enforcement in not encouraging, endorsing or condoning the payment of ransom demands to criminals by businesses who have lost access to their systems and data. The ICO also does not consider the payment of a ransom as an 'appropriate measure' to restore personal data in the event of a disaster.

Businesses that choose to pay the ransom to avoid the data being published should still presume that the data is compromised. They should take actions accordingly to mitigate the risks to individuals even though the ransom fee has been paid, where necessary, inform the ICO of the breach. See: Ransomware and data protection compliance | ICO