Making Tax Digital (MTD) is part of HMRC’s drive to digitise the tax assessment and collection process. Initially introduced for VAT registered businesses, it is HMRC’s plan to roll out MTD to income taxpayers who file Self Assessment returns.
What is MTD?
The first phase of MTD focused on VAT registered businesses with an annual turnover of £85,000 or more (the current VAT threshold). Since April 2019 it has been mandatory for these businesses to file their VAT returns using MTD compatible software which digitally links from their accounting software to HMRC’s MTD for VAT digital platform. The same also applied to any VAT registered businesses that use Excel to log all their accounting information. In their situation, they could use MTD compatible bridging software that would enable their spreadsheets to digitally link to HMRC.
Businesses caught by these new rules are no longer able to file paper VAT returns or copy and paste their relevant VAT data from an accounts package or Excel spreadsheet into HMRC’s online VAT return portal.
Since April 2022, MTD was extended to VAT registered businesses with turnover below £85,000 and the same rules now apply to them.
HMRC has also confirmed that as of 1 November 2022 the 'old' VAT online portal is being deactivated and VAT registered businesses will have to use the MTD portal to file their VAT returns. Failure to do so could see these businesses incurring penalties.
However, more significantly, from April 2024 HMRC is making MTD mandatory for many people who pay income tax and file Self Assessment tax returns. The original implementation date had been set for April 2023. However, many professional bodies and business groups expressed their concerns that smaller businesses needed more time to prepare for this change and consequently, HMRC agreed to move the start date to April 2024.
Who is ‘caught’ under the MTD for Income Tax rules?
MTD for Income Tax will apply to unincorporated businesses, self-employed people and landlords.
If you fall into one or more of these categories, from 6 April 2024, if your gross income from trading or property income exceeds £10,000 during the tax year, you will have to keep digital records of your income and expenditure.
You will also have to provide digital quarterly updates and provide your Self Assessment/Income Tax information to HMRC through MTD compatible software.
However, the new rules do not affect partnerships with individuals as partners until April 2025. Limited Liability Partnerships and corporate partners will have to sign up for MTD for Income Tax at a later date, although HMRC has yet to announce when this will be.
The introduction of MTD for Income Tax is expected to impact nearly 4.2 million unincorporated businesses, individuals, and civil society organisations who have an annual trading income of over £10,000.
It is also thought that the likes of trusts, executors and administrators, non-resident companies and foreign businesses of non-UK domiciled individuals will be exempt from MTD for Income Tax.
Changes to filing the income tax returns
At the moment, those filing Self Assessment income tax returns file one return per year, with a filing and payment deadline of 31 January, although you can make a payment on account by 31 July.
Under MTD for Income Tax, those who are mandated to file digital income tax returns will have to do so on a quarterly basis, as well as making a fifth submission, called the end of period statement (EOPS).
The quarterly income tax returns will consist of stating your income and expenditure for that period, using what is likely to be similar categories as currently used on the self-employed section of the Self Assessment tax return. The EOPS will be used as a ‘mop-up’ return to identify any other income and expenditure which has not been claimed during the year but will also make accounting adjustments for the likes of capital allowances or losses. The EOPS will have to be submitted by 31 January following the end of the tax year, as per the current rules for Self Assessment filing.
Although you will be required to file quarterly income tax returns, you will only have to pay any tax liabilities owing to HMRC by 31 January. You will also be allowed to make payments on account by 31 July each year.
Changes to the tax year basis period
As part of its digitisation plan, HMRC is also making changes to the basis period from which trading income and tax are calculated.
To coincide with the introduction of MTD for Income Tax, their aim is to ensure all unincorporated businesses, self-employed traders and landlords have an accounting date that corresponds to the tax year, i.e. 31 March or 5 April, as opposed to say a 31 December accounting date. The aim is to simplify the process of calculating trading profits by having coterminous accounting and tax periods.
Those businesses who already have an accounting date of 31 March or 5 April will not be required to make any changes. However, if your business has a different accounting date you will have to change your systems so that your accounting period runs from April to April instead.
The new rules for MTD for Income Tax and the basis period reform are likely to have a major impact on smaller businesses, particularly sole traders and landlords. Not only will you need to ensure your accounting systems are MTD compatible, but you may also have to change your accounting date. If you don't currently use any form of accounts package or spreadsheet for logging your income and expenditure, the changes you will need to make in order to comply could be significant.
We therefore urge any clients who will be caught by the new MTD for income Tax rules to start the transition to digital processing and filing of Self Assessment returns now and not wait until 6 April 2024, when the new rules will apply.
If you are concerned about these new rule changes and the effect they could have on your income reporting and tax return filing, do get in touch. Please contact Rhoda Cooper at firstname.lastname@example.org or call us for a no-obligation discussion on 0116 216 7681.