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Making Tax Digital For Income Tax - January 19th 2021

Making Tax Digital (MTD) for Income Tax

Self-employed businesses and landlords with annual 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.  (It is expected corporation tax will become digital in 2026.)

What is “Making Tax Digital”?

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.

Will it affect me?

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

When is all this happening?

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.  General partnerships will not be required to join MTD for ITSA until the tax year beginning in April 2025, while the date other types of partnerships will be required to join will be confirmed in the future.

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.

Information in Quarterly MTD for Income Tax Reports

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:

  • Turnover/gross rents
  • Costs of goods sold
  • Materials
  • Wages and salaries of employees
  • Sub-contractor costs
  • Rent, rates, power, insurance
  • Repairs and renewals
  • Professional fees
  • Telephone and other office costs
  • Interest on bank and other loans
  • Motor and travel expenses

It is unclear at this stage how loans to finance residential lettings will be reported as those costs are no longer deducted in arriving at rental profits as relief is now given by way of a basic rate tax deduction.

Timing of MTD for income Tax Reports

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. For a buy to let business that would mean quarterly returns made up to 5 July, 5 October, 5 January and 5 April. There would then be a MTD finalisation submission the following 31 January.

Abolition of Basis Periods and New Tax Year End

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.

What should I do about MTD?

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:

  • A clear picture of your current financial position, in real-time
  • Automatic updates that mean you can spend more time doing what you enjoy
  • Your accounts are 100% online, so there’s no software to install and everything is backed up automatically. Updates are free and instantly available

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.

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.