From April 2023, things are changing for individuals with ‘Turnover’ or ‘Rental income’ that exceeds £10,000. Continue to read this article to understand what MTD for Income Tax is and whether you are one of the millions affected.
If you are a Limited Company, MTD doesn’t apply to you yet. This is expected to come into legislation by April 2026, with the pilot scheme becoming available for voluntary sign up in April 2024.
What is Making Tax Digital?
Making Tax Digital is a key part of the government’s 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 administrations in the world. Making Tax Digital is making fundamental changes to the way the tax system works – transforming tax administration so that it is:
- more effective
- more efficient
- easier for taxpayers to get their tax right
How does this affect self-assessment?
From April 2023, the process of record keeping and reporting will become digital by law. You will need compatible software to make the submissions for MTD for Income Tax.
Those that fall within the MTD for Income Tax requirements, will be replacing their Tax Returns with additional filing duties throughout the tax year. It is proposed that there will be five new reporting obligations for each business you have. This will consist of quarterly reporting and an End of period statement (EOPS) submission to include any tax adjustments.
A personal training business could fall within MTD for Income Tax if you are a sole trade; which covers the majority of personal trainers. MTD for Income Tax also affects partners who’s share of turnover exceeds the £10,000 limit; for instance if you run your own gym in partnership with other personal trainers.
There are digital exclusions available for certain businesses, however, if you are reading this guide, you are probably online and therefore this might not apply.
The digital exclusions are for those that may not be able to handle the changes due to age, disability, location or religion. You will need to notify HMRC and they will need to be satisfied one of the aforementioned exclusions is met before they agree to an exemption.
Quarterly updates
These updates will consist of a summary of totals for specified categories from the digital records of each business and will be due on a quarterly basis, as the name suggests.
You will have to use MTD compatible software to submit the updates to HMRC. A list of compatible software will be released closer to the start date.
HMRC will calculate the estimated tax liability based off the submitted information. There is no obligation to pay the estimated tax HMRC calculate.
End Of Period Statements (EOPS)
This update is required once per year and will relate to the accounting period or basis period for the business.
The EOPS is the process of calculating the taxable profit (or loss) for the business. It will pull together all the previously submitted data from the quarterly reports and make adjustments to come to the taxable profit.
Adjustments expected to be included in the EOPS are; disallowable expenditure add backs, capital allowances, loss claims, allowances and reliefs.
The submission must include a declaration that the information included is complete and correct.
Final declaration (tax crystallisation)
The ‘Final declaration’ is the process to bring together all other data to finalise the tax position for that tax year. This will then ‘crystallise’ the tax liability for the client.
This submission effectively replaces the SA100 Tax Return.
The deadline for filing stays the same as the SA100 Tax Return and so does the tax payment due date.
Submission due dates in first year of MTD
The first tax year this affects is 2023/24.
Assuming your accounting period is co-terminus with the tax year, your first year of filing will be as follows:
- The first quarter update will be due August 2023
- The second quarter update will be due November 2023
- Your Self-Assessment tax return for 2022/23 will be due by its normal due date 31 January 2024
- The third quarter update will be due February 2024
- The fourth quarter update will be due May 2024
- The fifth update is known as the ‘End of period statement (EOPS)’ and will be due 31 January 2025 (normal self-assessment reporting deadline)
- A final declaration will also be due by 31 January 2025 which will include all other income of the taxpayer.
Between points 5 and 6 above, you will have further quarterly reporting for 2024/25.
Tax payments will stay the same and you will be due to make payment on the normal 31 January deadline. There has been talk that tax payments may eventually be made quarterly in line with the submissions, however, there has been no confirmation from HMRC that this will be the case.
Preparing for Making Tax Digital for income tax
As the format of MTD for Income Tax is vastly different to the current Self-Assessment reporting requirements, you will need to change your approach and attitude towards your tax filing requirements. Here are some tips to follow in order to get yourself ready ahead of time.
- Understand your responsibilities and changes
Understanding what is required from you is the first step in being prepared by April 2023, as you can no longer keep a bucket load of receipts and pass them to your accountant in January a few days before the deadline. Ensure you understand the changes detailed above and plan ahead.
- Cloud based software
More frequent submissions will mean keeping on top of your income and expenditure throughout the year, we suggest you sign up to a cloud based bookkeeping software, such as Xero, in order to keep on top of your accounts whilst on the go. This enables you to connect your business bank account to Xero and manage your transactions wherever you are. If you are struggling, you can invite another user, perhaps an accountant, to manage this for you.
- Sign up for the pilot scheme via the HMRC website
If your annual taxable turnover from your self-employed business or your property income exceeds £10,000, you will have to report under MTD from April 2023. Why not get ahead of the times and start early? If you are eligible, you can understand the process and adapt to your future reporting requirements.
- Contact a professional today
If you are feeling overwhelmed with the information contained in this post, then get in touch with us today. Rather than leaving it until the last minute and struggling to adapt, you can get in touch with us today and we can work together to build a working relationship prior to the legislation coming into play.
Here at Everyday Accountants, we have the facilities to manage all your MTD reporting needs. We have access to MTD compliant software and can take control of your submissions. Please get in touch if this is something you think you might need help with. The sooner you get in touch, the quicker we can begin working together to find the right balance.
That concludes our introduction to Making Tax Digital for Income Tax. Hopefully you find this guide helpful and if you wish to explore our services, get in touch by emailing us at creatept@everydayaccountants.co.uk or giving us a call on 0161 549 5354.
Information accurate at the time of writing.