2020 vision: the challenges and opportunities in the year ahead
Friday, November 22, 2019
We will enter 2020 hot on the heels of a general election and fast approaching another Brexit deadline; it is an era of many unknowns. As Warren Gradden, the CPAA’s representative in the North West, says: “With changes already in place for 2020 for various areas of tax, and the potential upheaval that a change of government and Brexit may bring, keeping clients informed of the evolving position is a challenge in itself.”
The CPAA team has pinpointed several key issues facing the accountancy community, looking at the potential opportunities for members, as well as flagging some emerging challenges on the horizon.
MTD, the next chapter
As the CPAA’s Alison Hale said this summer, “While MTD is very new now, guaranteed after the first year, we will never look back!” and this is hopefully the case for those who embraced MTD in 2019. However, it is forecast that the April 2020 phase may cause issues. It is the end of the ‘soft-landing’ and time for shifts in digital bookkeeping, the digital journey and penalties.
Small businesses will need to embrace digital recordkeeping, if they have not already. Out with records in Excel or on paper, and in with digital data. It may push some businesses to accounting software, or to accountants. Bigger businesses will need to ensure data is transferred via digital links, without inputting or amending manually. This could be painful for businesses with multiple systems or group accounts. They may need to integrate systems, invest in VAT reporting software, or use bridging software if it allows an interrupted digital journey.
This is the year that hefty penalties will kick in, including for late MTD filings. Cumulative fines will be based on the number of offences in the past 12 months, up to 15% of the VAT due, plus charges of up to 100% of undeclared VAT if there are careless or deliberate inaccuracies. Warren Gradden says of penalties in general, “I suspect if you spoke to most accountants, they would agree that the penalty regime is one that is expanding over time. It has been an evolving theme for HMRC and is increasing the pressure on us to make sure our clients do not fall foul of it.”
Also in the pipeline, MTD for income tax and corporation tax, but it seems unlikely this will kick-in until 2021. The opportunity for practitioners, in the year ahead, is to learn from bedding-in MTD in 2019; most will have got to grips with the requirements by now and have more confidence going into 2020. Ensure you communicate clearly with clients, recommend tools and reliable software that you know works, educate clients who need expert insight, add value and remain invaluable!
New anti-money laundering rules
January is already busy season for accountants, but EU regulations are about to make it even busier. The Fifth Money Laundering Directive (5MLD) has expanded to cover obliged entity firms and sole practitioners who directly or indirectly aid, assist or advise on tax affairs – this is on top of auditors, accountants and tax advisors, who sit within the scope of the previous money laundering directive.
The extension to the regulations includes enhanced checks on electronic money, due diligence on dealings with high-risk countries, ID verification of beneficial owners, and expansion of the scope of the Trust Registration Service. This skims the surface of the Directive, you can find out much more in the consultation document for the Fifth Money Laundering Directive here.
5MLD comes into force on the 10th January and most practitioners will be acquainted with it by now. The opportunity here is to stay a step ahead by ensuring all staff are trained up and a plan is in place to comply with the changes. Understand the elements covered by the extension, have adequate client risk assessments in place, tighten any procedures in line with the new regulations, get the right software in place to assist with enhanced checks, and share your knowledge with clients.
IR35 for the private sector
‘Off-payroll’ rules came in for contractors working for the public sector in 2017. In April 2020, IR35 legislation that currently only applies in the public sector will expand to cover the private sector, requiring medium to large-sized companies to determine whether a contractor falls inside or outside IR35 limitations. Research showed that contractors are “very concerned” about IR35 coming to the private sector and worry about the burden of compliance.
Currently in the public sector, it is up to the contractor’s client to determine whether IR35 applies, and if it does, they must include the contractor in their payroll and deduct income and National Insurance from their payment – and the same will apply in the private sector from April onwards.
IR35 could present an opportunity for businesses to review and improve systems and operating models. It could potentially enable firms to assess their workforce and develop clearer working relationships with contractors. An effective method is to audit contractor relations to determine if that role could be brought in-house or prepare a determination statement, if retaining external consultants is important.
Changes for landlords
Landlords are on the hitlist for tax changes in 2020, as the withdrawal of letting relief and the curtailment of final period exemption comes into effect in April. The loss of the relief is worth up to £40,000 per person and will almost certainly result in higher CGT bills for any ‘accidental’ landlord that has seen the value of their property increase. Lettings relief will only be available to homeowners in shared occupancy with a tenant. The CGT-free letting period will reduce from 18 to nine months, except for the elderly moving to care homes or those with disabilities.
“At the same time, real time reporting and payment of capital gains tax on residential properties is becoming mandatory, with 30 days to report and pay,” Warren Gradden says. “There are penalties for failing to do so, which means we need to make sure our clients are aware of their obligations. The direction of travel for landlords certainly appears to be one that is imposing more tax restrictions, tax relief on finance charges etc.”
He adds, “It is not a giant leap to expect more punitive measures on the horizon and they are certainly a category of client that will need a considerable amount of assistance to guide them through all the changes to the legislation, and clearly there is an opportunity here, as we are best placed to offer such assistance.”
All change in Parliament?
Just days from a general election, it would be remiss not to consider the impact of the outcome on the business landscape in 2020. As Warren Gradden says of the uncertainty this brings, “Whilst one may prefer to be prepared for forthcoming changes, it may prove a waste of resources if the measure in question is ultimately never introduced.
“A good example of this is the proposed legislation to introduce a VAT domestic reverse charge on building and construction. Scheduled to come into effect on 1st October, it has been delayed by a year. If there is a change of government, will this be implemented at all, or possible kicked into the long grass? There may be an opportunity to provide support to businesses that this will impact, but time will need to be invested up front in researching and understanding the new measures.”
With no clear outcome until 12th December’s votes are counted, here is a summary of the forerunners’ manifesto pledges when it comes to tax and business – all coming with various opportunities and challenges, depending on your circumstances and outlook.
- The Conservatives are big spenders for this election – and austerity is over according to Sajid Javid. He pledges a £13.8bn rise in spending across by 2021 but is staying quiet on plans to raise the higher income tax threshold. They aim to cut business rate, R&D tax, construction tax and employers' NICs. Corporation tax will remain at 19%, with the planned 2% cut dropped to raise funds for the NHS. They also intend to cut business rates for smaller pubs, shops and cinemas to help boost the nation’s high streets.
- Labour intends to “rewrite the rules of the economy” by taxing higher earners to help raise an extra £83 billion, predominantly for public services. Those earning over £125,000 would face a new levy of 50% and the threshold for the additional income tax rate of 45% would decrease to £80,000. Labour would tax CGT at the same level as income tax and abolish the lower income tax rate for dividend income. British holiday homeowners would face a new tax, and the IHT tax cut would be reversed. Companies would be hit by a 2% rise in corporation tax from 19% to 21% in April, rising to 24% in 2021 and 26% in 2022. Part-nationalisation of BT would deliver free broadband for all by 2030.
- The Liberal Democrats have said corporation tax would increase to 20%, raising almost £10 billion, while CGT-free allowance would be scrapped to generate £5.66 billion. They would abolish the marriage tax allowance and want to raise £5.7 billion by cracking down on tax avoidance and evasion. They have also announced they would scrap business rates. Additionally, their ‘Remain bonus’ would generate £50 billion by avoiding Brexit and a 1p increase in income tax, ring-fenced to raise £7 billion a year for the NHS and social care.
Warren Gradden concludes, “Whilst 2020 is often associated with the concept of clear vision, the outlook for the forthcoming year is anything but. The election is looming, and the outcome could change the landscape of the tax regime dramatically. The conclusion of Brexit remains elusive and the fallout from it remains an unknown quantity. There are challenges facing the small practitioner in 2020 and it is difficult to identify which areas we are best investing our time and resources. Although difficult, it is about finding the balance between being proactive and reactive.”