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Maybe you’ve never heard the term Making Tax Digital for Income Tax?
Unless you’re a VAT registered business, Making Tax Digital might be something that has never crossed your path. But for many people who submit a self assessment tax return, it’s a name you’ll have to get familiar with very soon.
If you’re a sole trader or property owner, the decisions you make about your business in this tax year (2022-23), could affect whether or not Making Tax Digital will be looming on your horizon.
Making Tax Digital (MTD) is a government initiative and forms a key part of their plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs. HMRC’s ambition is to become one of the most digitally advanced tax agencies in the world and the Making Tax Digital programme is part of this transformation.
Stage One was Making Tax Digital for VAT (MTD VAT). After a few false starts and delays, the first part of MTD came into force on 1 April 2019 for VAT registered businesses with turnover above the VAT threshold (and any other VAT registered businesses who wanted to join the scheme voluntarily).
This year on 1 April 2022 the scheme was extended to cover all VAT registered businesses whether above or below the VAT threshold.
MTD for VAT involves submitting the quarterly VAT returns electronically via MTD compatible software. For many people this means using cloud software such as Xero or Quickbooks, but there are also many other software solutions.
But HMRC are not content to rest on their VAT laurels, despite some additional delays. They’re very busy working away to get things ready for the roll out of Making Tax Digital for Income Tax (MTD ITSA) on 6 April 2024.
“But that’s ages away”, I hear you say. It may feel that way now, but time has a nasty habit of ticking on very quickly. There are definitely some things that you need to think about now, the most important being, will you be affected?
If you’re a sole trader or a landlord then definitely read on. This is also useful for partnerships too, as you will be included in the next stage. If you just have employment or pension income and/or investment income without any self-employment or property, then MTD ITSA won’t apply to you.
MTD ITSA on 6 April 2024 will affect sole traders and landlords with business or property income over £10,000.
Before you decide that you are below this threshold, there are a few things that you need to bear in mind:
The £10,000 is income, not profit. It’s how much you make in sales or rent, whether or not you make a profit or a loss.
If you have self-employment and property then the £10,000 income is the combination of both. So if you have £6,000 self-employment as a sole trader and £5,000 property rental income then you will be under the threshold for the individual areas, but still in scope overall.
There are some exemptions: people with income under £10,000, trusts, estates, trustees of pension schemes and non-resident companies. Also individuals who can show it is not reasonable or practical for them to use computers or the internet.
Anyone else is in scope. If you are domiciled or resident outside the UK and complete a self-assessment then only the UK self-employment and UK property is in scope.
The initial income assessment to determine if you are over the £10,000 threshold will be made based on the tax year whose filing deadline falls immediately before the start date of MTD ITSA.
This means that if you are currently running a business or renting out property, then it’s this current tax year from April 2022 to March 2023 that will be used for the income assessment. The filing deadline for 2022-23 is 31 Jan 24, so this is the filing deadline immediately before the MTD start date of 6 April 2024.
So business and property decisions and performance in this tax year, will be what affects whether you are initially in scope of MTD ITSA in 2024-25.
The assessment will continue to be made each tax year and you would join in the tax year that starts immediately after the filing date for the year that you go over the threshold.
If you were out of scope initially in 2022-23 but your income grew over £10,000 in 2023-24, then the filing deadline for that year would be 31 Jan 2025 and you would have to join MTD ITSA from April 2025.
If you are in scope based on your income for the tax year 2022-23, from 6 April 2024 you’ll need to:
Keep digital records.
Use MTD compatible software for your submissions.
Send quarterly summary updates of the business income and expenditure to HMRC.
There will be an End of Period statement for each business (self employed and property) at the end of the fourth quarter in March.
There will be a Final Declaration submission for each individual by 31 Jan (similar to the existing self-assessment deadline).
The MTD ITSA quarters will be 5 July, 5 Oct, 5 Jan and 5 April (or can be 30 Jun, 30 Sept, 31 Dec and 31 Mar).
There are separate reports each quarter for each income type and tax. So if you have a VAT registered self employed business and a rental property, that is three quarterly submissions: one for self employed income, one for VAT and one for property income. The VAT quarter timing may be different to the income quarters.
Another thing to note is that different types of property count as different businesses. If you have UK rental property, that is considered to be a separate business to UK furnished holiday let. Other separate property businesses are EEA holiday let (European Economic Area) and overseas rental property.
If you have 3 rental properties and one holiday let then you would have two business to report. One rental property business with the total figures of the 3 rental properties and one holiday let business with the figures from the one holiday let property.
Well – yes and no.
A lot will depend on how organized you are with your business finances (or how organized you can get before your MTD ITSA start date) and whether you are already using compatible software.
Most of the larger accounting and bookkeeping software packages already have an MTD VAT solution in place and are currently trialing their MTD ITSA solutions in conjunction with the HMRC pilot scheme. You can check with your software provider or ask your accountant if you aren’t sure about the product you are using.
If you are already using compatible software and updating your records on a regular basis, then you’ve got a head start. At this stage there is not much more that you need to be doing. Just keep up to date with the latest MTD ITSA developments and software progression so that you’ll be able to learn how to use any relevant new features and how to make the submissions (if you plan to do them yourself).
If you’re used to doing your books annually (either yourself or with your accountant), then this is going to be a big change for you. It would be really beneficial to get into the habit of doing your books more regularly, at least quarterly but ideally monthly. This will set you up for Making Tax Digital and you’ll see other benefits, such as helping to manage cashflow and making more informed business decisions.
If you aren’t currently using any software for your business or property, then now is the time to start investigating your options. If you work with an accountant they’ll be able to help and advise on this and suggest what might be suitable for you. Ideally you want to be using a software solution from April 2023 so that you’re comfortable and familiar with everything well in advance of the roll out date in April 2024. It gives time to overcome any initial teething problems.
If your accountant does your bookkeeping then hopefully they will have plans in hand for the transition and will be able to give you more information.
HMRC is already running a pilot in conjunction with many software providers. Currently the only way to sign up for the pilot is through a software provider. So if you’re keen to get on board now and see what it’s all about, then check your software provider and talk to your accountant.
Partnerships where each individual has income over £10,000 need to sign up by 1 April 2025.
These will be further down the line with no specific date provided yet for Corporation tax.
MTD ITSA is still very much a work in progress with HMRC. The general scheme framework and deadlines have been set and the pilot is underway, but there are currently still some grey areas and finer details to be resolved. As the deadline approaches more and more of the detail will be clarified so it’s worth keeping up to date with MTD ITSA developments through your accountant or software provider. If you have a question that can’t be answered right now, there may be an answer in a few months time.
If this article has got you thinking that you might need to make some changes, then maybe we can help? We’re already working with our self assessment clients to prepare them and make sure they will be fully compliant for Making Tax Digital for Income tax. If you’re ready to take the first steps towards going digital, then we’re ready to support you. Just send us an email to firstname.lastname@example.org and we can chat further.
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