Making Tax Digital (MTD) – the government’s plan to make the UK tax system one of the most digitally advanced in the world is well underway.
Since April 2019, all businesses with a turnover exceeding £85k (the threshold for compulsory VAT registration) have been required to keep digital records and file their VAT returns using MTD-compatible software.
In April 2022, MTD was extended to include all businesses voluntarily registered for VAT.
The next phase of the MTD roll-out is approaching fast. Originally planned to be introduced in April 2023, but delayed due to Covid, it will come into effect in just over a year.
The new legislation targets self-employed business owners and landlords with turnovers exceeding £10k (general partnerships will follow in April 2025) and is set to change how millions of people pay Income Tax.
Will the new MTD rules apply to you?
From April 2024, if you’re a self-employed business owner or a landlord with a turnover of £10k or more total gross income (not profit) from all your businesses and properties, instead of completing a Self Assessment tax return, you’ll have to comply with new MTD regulations and report your income in a different way.
If you receive less than £10k or more in total gross income, you can opt to continue completing Self Assessment tax returns.
How will things change?
HMRC has yet to announce final details of how the upcoming extension to MTD will work, but based on what we know, from April 2024, if you’re self-employed or a landlord and meet the criteria set out above, you’ll need to:
- Keep your accounting records digitally
You’ll need to record all your income and expenses using MTD-compatible software.
- Follow new Self Assessment rules
Under MTD, you’ll no longer have to file an annual Self Assessment tax return. Instead, at regular intervals throughout the year, you’ll be required to submit information online about your income using MTD-compatible software:
- Quarterly updates
At the end of each quarter (following the tax year rather than your accounting period if it’s different), you’ll need to submit an online update for income from each business and property you own.
These quarterly updates will give you a reasonably accurate idea of how much tax you owe as you move through the year. However, it’s important to remember that they won’t account for any adjustments you might make at the year-end.
- End-of-period statements
At the end of each tax year, you’ll need to submit an online end-of-period statement (EOPS) for income from each business and property you own, to include adjustments for any allowances or tax reliefs you’re able to claim.
- Final declaration
By 31st January following the end of the tax year, you will need to submit a final declaration agreeing with HMRCs estimate of how much tax you owe.
This final declaration is your opportunity to make any corrections or adjustments if you need to. You will only have to complete one final declaration, which will automatically bring together information from all the quarterly updates you’ve submitted.
Details of any income you receive from other sources, such as dividends, will also be automatically included to give a complete overview of your tax position
The benefits of Making Tax Digital
At first glance, it might seem that MTD will involve more work. But the new system has been designed to make life easier for you to manage your tax and stay up to date.
By submitting regular updates about your income and expenditure, you’ll be able to see how much tax you’re going to have to pay in near real-time. Having clarity on this will enable you to accurately set aside what you’ll need – far better than waiting until you file your tax return at the end of the tax year and receive a bill from HMRC.
And there are other benefits: using MTD software will mean you’ll spend less time on account admin, reduce the risk of human error by eliminating the need to enter data multiple times, give you more insight into your cash flow – and allow your accounts to integrate with your accountant’s system automatically.
Are you ready For Making Tax Digital?
If this next phase of MTD impacts you and you’ve not done so already, you need to make the switch to a digital accounting solution. There are plenty of budget-friendly, fixed-price software solutions to choose from.
If you’re already using a digital solution, you need to check with your software supplier that it is MTD-compatible. You’ll also need to have a conversation with your accountant to understand their capabilities and make sure they can work with the accounting software you’ve chosen.
April 2024 may still seem some way off, but for those self-employed business owners and landlords who are not already using a digital accounts solution, introducing MTD-compatible software and using it to report income will inevitably require investing time – something that’s in short supply for most business owners.
To avoid a last-minute scramble and potential disruption to your business, it makes sense to switch to digital accounting as soon as possible. By embedding a new system into your business ahead of the upcoming deadline, you’ll minimise any impact and be ready to move seamlessly to reporting and paying Income Tax digitally.
Inca can assist you with all aspects of transitioning to an MTD-compatible system, including helping you decide which solution is best for your business and providing bespoke training. In addition, we can support a wide range of HMRC-approved digital accounting products and have access to discounted subscriptions for Xero, QuickBooks and others.