What is Making Tax Digital (MTD)?

Making Tax Digital (MTD) is a new and more efficient way of reporting your VAT and Income Tax information to the new HMRC MTD system. It replaces several older Tax Systems that do not communicate with each other.  For example, the PAYE and Self Assessment systems are currently not linked.

MTD for income tax will be mandated on 06/04/2023 (for tax year 2023/24) for the majority of sole trader businesses and landlords with business or property income above £10,000.

Background

The Government wants all taxpayers to communicate with HMRC digitally.

MTD has already been rolled out for compulsory VAT registered businesses and voluntary VAT registered businesses begin now.

Why MTD?

The Government believes that it will be cheaper and easier for sole trader businesses and landlords to submit their accounting data to HMRC on a quarterly basis. This is instead of just once a year on an annual tax return.

The reason HMRC wants each business to submit quarterly updates is:

• when transactions are recorded at or near the time the transaction occurred, fewer mistakes of omission or duplication are made.
• if accounting software is used to record transactions, and transmit the data to HMRC, human errors introduced during the accounts preparation process are minimised.

The core of MTD for business is thus based on these two requirements:

• to use accounting software to record transactions,
• and to submit the accounting data to HMRC with little or no human interaction, on a regular and frequent basis.

When MTD is fully in place, HMRC will be able to analyse the accounting data from each business more easily and seek out anomalies which may indicate that expenses have been overclaimed or sales have been under-declared.

Who is affected by MTD for income tax?

MTD for Income Tax will affect those who would normally declare more than £10,000 in the self-employment or property boxes of the Self-Assessment tax return. They will then need to use compatible software for their income tax accounting for the first full accounting period starting on or after 6 April 2023.

To fall under the MTD for Income Tax scope, all of the £10,000+ income will have to come from either self-employed business or property rents.

For example, if you have just £9,000 from property rental to declare for income tax, and £2,000 from savings interest income, you will not require them to sign up for MTD for Income Tax.

Note this is income (i.e., sales or rental) not profit.

The intention is that having made quarterly submissions of income and expenses, taxpayers will receive an estimated tax calculation based on the information provided to help them budget for their tax.

At the end of the year, they will be able to add any non-business information and finalise their tax affairs using MTD-compatible software. This includes information about employment income, bank and building society interest, dividends, pension contributions, student loan repayments etc, and the goal is for this to replace the need for a self-assessment tax return.

More frequent reporting may also lead to more frequent payment of tax in due course, but that is not the intention at this stage.

Summary

In reality, there will be 4 interim filings to be sent electronically to HMRC, plus a final filing detailing the non-rental, or non-self-employed income (such as benefits, savings, dividends, etc)

To make these filings easier, we suggest moving away from manual records to electronic records.

A separate business bank account used exclusively for the rental or self-employed income will be a start in segregating business income.

Exporting and analysing this in either excel or software such as Xero or QuickBooks would be the next obvious step.

For further information have a look at HMRC’s policy paper – https://www.gov.uk/government/publications/making-tax-digital/overview-of-making-tax-digital

This article is to make you aware of these future plans and not to scare you into making any changes at this stage!

Please have a think and consider what steps you can take to become more digital, and we can put a personalised plan together with you ready for 06/04/23.