Making Tax Digital for Income Tax
How to Prepare
Self-employed businesses and landlords with annual gross business or property income above £10,000 will need to follow the rules for MTD for Income Tax from their next accounting period starting on or after 6 April 2024. General partnerships are likely to be mandated into the regime from 6 April 2025, with more complex partnerships (LLPs and those with corporate partners) following at a later date. It is expected corporation tax will become digital in 2026.
Making Tax Digital (MTD) is a government initiative to modernise HMRC’s tax system, with the aim of making the whole process of administrating tax simpler and more efficient. All of your tax information will be in one place (your digital account) and you will be able to pay tax based on your business activity during the year. You can upload and update your tax account in real time.
If you own a business, you are self-employed and you pay income tax, national insurance, VAT or corporation tax, then it is quite likely you will be affected. This means you could be required to keep track of your tax affairs digitally using MTD compatible software, and to update HMRC at least quarterly via your digital tax account. Eventually this will abolish the annual tax return. This will be the law and there will be penalties for non-compliance.
MTD for income tax should become law from 6 April 2024. MTD for income tax will apply to self-employed, partnerships and to those who receive income from property, with gross income from these sources combined above a threshold of £10,000. Partnerships will need to be compliant by 2025.
The Government is running a pilot scheme where businesses can use the online service for Making Tax Digital for Income Tax. Click here if you would like to sign up.
The precise details of what needs to be reported each quarter have yet to be finalised, but the categories of income and expenditure are likely to be the same as currently reported for self-assessment.
The accounting software will need to record income and expenditure into the following main categories:
It is currently proposed that there will be 4 quarterly reports to HMRC followed by a finalisation return when end of year adjustments will be made. All businesses within MTD for Income Tax will have to provide quarterly updates of their income and expenses made up to:
Alternatively businesses can make a 'calendar quarter election' which allows them to draw up quarterly updates to the end of the previous month. Where this election is made, the quarterly updates will be as follows:
The first quarterly updates under MTD for ITSA will therefore be due for filing by 5 August 2024, and will cover either the quarter ended 5 July 2024, or 30 June 2024 (where a calendar quarter election is in place).
Alongside the quarterly reports, you'll need to send an End of Period Statement (EOPS) and a Final Declaration by January 31st following the tax year.
Your quarterly updates should contain details of your income and expenses.
In your EOPS, you need to make any final adjustments to your accounting, claim reliefs, and confirm all information is complete and correct. A separate EOPS will be required for each trade or property business carried on by an individual.
The Final Declaration is where you submit relief claims and declare any additional income such as savings and investment income.
We are awaiting further information on MTD from HMRC regarding the consultation to abolish basis periods for unincorporated businesses to simplify MTD reporting. These changes will not come into effect before April 2024, with a transition year not coming into effect earlier than 2023.
That change would apply to sole traders, partnerships, as well as trusts with trading and property rental income. There would also be complicated transitional rules which could result in a big tax bill that year for some traders.
The Treasury are also consulting on changing the tax year itself from the archaic 5 April year end to 31 March or even 31 December. A calendar tax year would bring the UK into line with most other countries at last!
We will keep you updated when more information comes available.
Talk to us - the good news is that you can reduce your running costs and streamline your accounting by complying with the new rules!
In the last two years we have worked with many other clients to help them comply with MTD and streamline the way they do things.
Just suppose you had a system where your bank feeds your data directly into your accounts on a DAILY basis, you take a photo on your phone of a purchase invoice and it is posted automatically, you can see your results, who owes you money, who you owe and your business bank balance 24/7, 365 days a year from your smart phone.
We have MTD compliant Cloud accounting packages that give you:
There are a number of MTD compliant accounting software packages that you might wish to consider and we can of course advise you on the one that is most appropriate for your business. There are even relatively cheap software packages specifically designed for property rental businesses.
There is still no set date for mandating Making Tax Digital (MTD) for corporation tax although it is not expected until 2026 at the earliest. HMRC have committed to providing sufficient notice of implementation following any decision to mandate MTD for corporation tax to allow businesses time to prepare.
Like MTD for corporation tax many of the proposed changes are several years away from implementation and we will keep you updated if and when the changes are introduced.
Please contact us about helping you to comply with the new rules. We are cloud accounting specialists, and we can train and support you with the right software.