3 Mins
HMRC have been introducing Making Tax Digital (MTD) gradually, with the initial ‘phased’ roll out starting with VAT on 1 April 2019 – following the end of the VAT ‘Phase 1 soft landing period’ on 1 April 2021, most VAT registered businesses in the UK are now required to file VAT returns in a ‘digitally linked’ format, with the final stage of the MTD for VAT roll out scheduled to commence from 1 April 2022. From this date, nearly all VAT registered businesses will be required to adopt MTD, as the current £85k ‘taxable turnover’ de-minimis (for MTD registration) will be removed.
Following this successful rollout for VAT (and as part of the 10-year strategy for digitisation), HMRC are now extending the requirement to other taxes, and from April 2023, Self Assessment taxpayers will need to comply with MTD for Income Tax.
Below are the main questions we get asked about MTD and which we will provide an update on.
Why is HMRC making tax digital?
HMRC says that MTD is how they are delivering on making it “easier for individuals and businesses to get their tax right and keep on top of their affairs.” The intention is that it will become a real time system letting you keep track of how much Income Tax you owe as you go through the year rather than waiting until the tax year has ended. The eventual aim is that the whole process will become paperless.
It is important to note here that this will not change the timing of when the payments are due. Although the frequency of reporting is to change, the timing of tax payments will not and the current system of payments on account and balancing payment by 31 January after the tax year is currently expected to remain in place.
Who does it apply to?
MTD for Income Tax will apply to both unincorporated business (sole traders and partnerships) and landlords who make over £10,000 annually. In partnerships, the rules will only apply where all partners are individuals. All other partnerships (e.g. those that have corporate partners and Limited Liability Partnerships) are not required to join MTD for Income Tax in April 2023, but will be required to join MTD at a future date (to be confirmed). Trusts, estates, trustees of registered pension schemes and non-resident companies will not be required to join MTD for Income Tax under the current proposals but again could be brought in at a later date.
When does it start?
On 21 July 2020, HMRC confirmed that MTD for Income tax will be introduced from April 2023. While it will not be compulsory until April 2023, there is currently a pilot scheme operating where if you fill in a Self Assessment tax return, you can sign up for a voluntary basis. The pilot lets you keep records digitally and send Income Tax updates to HMRC instead of filing a Self Assessment tax return. The government estimates that so far, around 30 per cent of businesses and landlords have signed up voluntarily to get used to the system before it becomes compulsory in 2023. Others are taking a more cautious approach and are waiting for the inevitable teething problems to be resolved and it is expected there will be a large uptake from the start of the next tax year in April 2022.
How does it work?
Under the requirements of MTD for Income Tax, individuals who are subject to Income Tax on the profits of their trade, profession, vocation or property business will be required to keep their accounting records electronically (either using suitable software or on spreadsheets) and file quarterly returns to HMRC with details of their income and expenditure together with any other information that HMRC specifies. A final end of period statement will then be submitted after the tax year to complete the individual’s tax affairs. The final end of year statement will include any personal details such as dividends, interest, pensions, etc and will be sent along with any reliefs that apply. The final tax position will be calculated and as mentioned above the tax will remain payable at the usual dates.
What can you do to prepare?
To prepare for MTD, it is worth starting to keep all records electronically or look into ways that this can be done. Once enrolled in MTD for Income Tax, you’ll need to use compatible software to keep records and send an income and expenses summary to HMRC every three months. There is compatible software already available and many others currently in development. For those already using software such as xero and other bookkeeping and accounting packages, these should all become compatible if they are not already. If you have questions about how to keep your records, please do get in touch.
While MTD for Income Tax is over a year away from becoming compulsory, it is worth starting now to consider what changes you might need to make to become compatible and we are happy to have those conversations with you. If you have any questions, please do not hesitate to ask us.