After multiple delays and postponements, the introduction of Making Tax Digital (MTD) for income tax finally looks set to go ahead, with sole traders, landlords and partnerships all to be impacted. This is despite continued warnings from professional institutes and professional advisers, including ourselves, that HMRC systems are not ready to deal with this yet.
For the moment therefore, we need to work on the understanding that HMRC will proceed with the existing timetable for introducing MTD, which is:
|6 April 2023||Basis period reform|
|6 April 2024||Making Tax Digital for sole traders and landlords|
|6 April 2025||MTD for general partnerships|
This represents the largest change to the income tax system since the introduction of Self Assessment over 20 years ago, and those affected will need to ensure that they are prepared for what is to come.
Details of the specifics for sole traders and landlords will be covered in more detail in separate articles in this series. Note that Limited companies are not impacted yet. Although the plan is that they will be brought under MTD at some point, there is no timeline for when this will be. The speculation is that it would be 6 April 2026 at the earliest, but we suspect this will depend on how well things go with MTD for income tax.
However, for the present we can only deal with what we know of and this article focuses on how the system will work, and the key points that you need to be aware of if you are one of those to whom this applies.
For those unaware of the basis period reform, you can find out more at MTD: moving to the tax year basis – what this means for sole traders and partnerships | M&S Accountancy and Taxation Ltd (msactax.co.uk)
Who will it impact?
Sole traders and landlords with turnover (not profit!) of more than £10,000 will be brought under MTD. For individuals that are both a landlord and a sole trader, it is the combined turnover that is looked at.
Once within MTD, to be removed, either all trade will need to cease, or turnover would need to drop below £10,000 for 3 consecutive years.
It will be possible for some to apply for a digital exclusion. This will be applicable if is not reasonable to expect you to comply due to your age, disability, location or religion. More details on exclusions are to be released in April 2023.
How will it start?
HMRC will use the tax returns submitted for the year ending 5 April 2023 to determine who Making Tax digital will apply to and contact those individuals to inform them.
Anyone that starts to trade or begins to let a property after 6 April 2023 will file their first tax return as normal. HMRC will then contact the individual if they are required to move over to the MTD system and provide a timescale for doing so.
And this represents one of the first practical problems. The submission deadline for the 5 April 2023 tax return is 31 January 2024. Given almost 50% of tax returns are filed in January, are we seriously to believe that HMRC will turn matters round within eight weeks to identify all taxpayers who should be within MTD? Given their current track record on dealing with anything submitted to them, we doubt it.
What records do I need to keep?
Once under MTD, digital records will be a requirement. For each transaction, the amount, date and category must be recorded, and you must be able to submit directly to HMRC from your records (i.e. you can’t keep your records in one place, and copy the figures onto a HMRC return).
Most major bookkeeping software will provide support for MTD, so those already using software to keep their records will not need to change. However, those that rely on spreadsheets, or only keep manual records and pull everything together at the end of the year, will need to take a new approach.
For many, the preferred option may be to switch to a complying software, such as Xero or FreeAgent. These come with the added benefit of helping you to track your profits, but there is a monthly fee for using these packages that can be off-putting.
As a low/no cost option, bridging software is to be made available (by third party software providers) to allow existing spreadsheets to meet the digital requirements and submit figures directly to HMRC. However, there are not a lot of details available yet about when such software will be available and how exactly this will work.
And for those who don’t want to deal with their own record keeping, there is always the option to pass this responsibility on to an accountant or bookkeeper for them to keep digitally. (Yes, this is certainly something we can help with if required).
What do I need to submit?
Under MTD, three types of submissions will be required:
At the end of each quarter, an ‘update’ will have to be submitted to HMRC that summarises the total income and expenses for the quarter. The figures for these updates will be pulled directly from an individual’s digital accounting records, and no manual entries are to be made.
For anyone who is both a sole trader and a landlord, separate submissions will need to be made for each business.
The ‘tax year quarters’ have been set as follows:
|Quarter 1||6 April to 5 July|
|Quarter 2||6 July to 5 October|
|Quarter 3||6 October to 5 January|
|Quarter 4||6 January to 5 April|
It is also possible to opt for ‘calendar quarters’ instead. These will end on 30 June, 30 September, 31 December and 31 March, and may make the record keeping easier for some.
Each quarterly update will be due for submission one month from the end of the tax year quarter. This is the case regardless of whether calendar quarters are used. For example, a submission for quarter 1 will always be due by 5 August. Penalties will be levied if these submission dates are missed, although there is likely to be an initial ‘grace’ period before these are applied.
HMRC are keen to express that these are ‘updates’ and not ‘returns’ (although this is not a view shared by professional advisers) and, as such, each update is only required to contain the summary totals for the income and expense categories for the period.
Those under the VAT threshold can also opt to make a 3-line submission, that only contains the total income, expenses and profit for the quarter.
Additionally, no accounting or tax adjustments (for example depreciation, prepayments, and accruals) need to be made, and any other sources of income (such as interest and dividends) don’t need to be included. However, those that wish to do so, can.
End of Period Statement and Final Declaration
After the end of the tax year, an ‘End of Period Statement’ is required.
This is to contain the total income and expenses for the year, along with any relevant accounting adjustments. In practice, it is expected that this will be submitted alongside the preparation of the business’s accounts for the period.
Following the End of Period Statement, a ‘Final Declaration’ is required. This will include any other sources of income the individual has, and any reliefs that they are eligible to claim.
Combined, these will replace Self-Assessment Tax Returns for individuals, (because of course they are not tax returns!) meaning that the last tax return many will submit will be for the tax year ending 5 April 2024.
The deadline for submitting these reports will remain at 31 January and there are currently no planned changes to when tax is due to be paid so this will still be in January and July.
What can I do now?
The first step we would recommend for anyone that expects to be within the scope of MTD, is to ensure they have a digital record keeping system in place that will comply with the new rules.
In addition to the major players in the market, there are more and more software packages being released that are aimed at smaller businesses and may prove to be more cost effective.
M&S Accountancy and Taxation will also be able to help by undertaking this work if required – please contact us for more details.
For those that are really keen(!), there is currently a pilot running that you can sign up to on the government website that will allow you to test keeping appropriate records and making submissions. However, we would stress that this is still in development stages and the final version of MTD is likely to look different.
Chris Leslie, Assistant Tax Manager, M&S Accountancy and Taxation Ltd