Making Tax Digital for Income Tax
Making Tax Digital is an initiative by HMRC which is designed to become one of the world's most advanced digital tax systems. Its goal is to make it easier for individuals and businesses to keep in control of their taxes. However, whilst we are in the transition phase, it might feel a little more chaotic than the end destination. Making Tax Digital for Income Tax becomes law in April 2024. In this blog, we're going to share the key information that impacts reporting business profits.
Any self-employed business and landlords with annual business or property income above £10,000 will be affected. Some types of partnerships won't yet have to sign up and there are exemptions including trusts and estates.
Making Tax Digital for Income Tax but be followed from 6 April 2024 and the following accounting period.
For tax purposes, the period ending 31st March 2024 will be assumed to have ended 5th April 2024 meaning everyone affected joins Maxing Tax Digital on 6 April 2024.
You probably already use HMRC's online portal to submit your tax return. However, Making Tax Digital will take things to the next level. It will require the use of approved software for your accounting that can report information directly to HMRC. This will include the following activities:
Keep digital records, and preserve them for the legal retention period
Submit quarterly updates per income source to HMRC
Submit an End of Period Statement (EOPS) per income source to HMRC
Submit a Final Declaration to HMRC (instead of the Self Assessment tax return)
This data can be inputted via a spreadsheet but once it's done, it can't be manually altered. The data will instead be moved using digital links.
Paper invoices can still be used, provided the information is digitally recorded within the accounting system.
Personal Tax Account
If you already file Self Assessment tax returns, you'll already have a Personal Tax Account. For those new, HMRC will set up a Personal Tax Account for each individual. This will act as a digital central record for income, expenses, tax claims and tax affairs.
There will be 3 types of submissions to be made throughout the tax year:
1. Quarterly updates
These are effectively a profit and loss account. It shows the total for the quarter of sales income for each income source and expenses in defined categories for each income source.
There isn't a requirement to submit a declaration of accuracy attached to the information so you can submit estimated figures in the quarterly submissions. The expenses are expected to match those in the existing Self Assessment tax return. Balance sheet statements at each quarter won't be required.
Deadlines will be 5th of August, November, February and May. This means your first submission will cover 6 April 2024 to 5 July 2024 and will need to be submitted by 5 August 2024. HMRC have stated that there will be no penalties for late quarterly submissions until four submissions have been filed late. However, some information must be submitted each quarter.
This won't impact the timings of tax payments.
2. An annual End of Period Statement (EOPS)
The EOPS will be submitted by January 31 following the end of the tax year and includes accounting adjustments.
A separate EOPS will be required for each trade of property business.
3. A Final Declaration (instead of the Self Assessment tax return)
This pulls together everything. You will be able to report any income not reported via the quarterly submissions or EOPS and claim and reliefs due.
This will effectively replace the Self Assessment tax return. This will be used to calculate the tax liability for the year.
How can we prepare?
It might feel like April 2024 is a while off but there's already plenty we can do to make the transition that little bit easier when it does arrive.
Steps to take now to help prepare for MTD
Sole traders or partnerships: ensure all your business income and expenses go through one bank account.
Landlords: ensure all your property income and expenses go through one bank account.
Have a separate bank account per income source. For example, if you have sole trader and property income ensure that they both run through separate bank accounts.
Personal expenses: keep these in your personal bank account and out of any business bank account(s).
Business expenses: pay these out of the business bank account that they relate to.
Property expenses: pay these out of the property bank account that they relate to.
Receipts: obtain and retain receipts for all business and property expenses.
Cash in and out:
Drawings for self: ideally take one monthly (or weekly) amount.
Capital introduced: if your business account is short of money, don’t pay business expenses from elsewhere. Instead, introduce money into the business or property account from a private account and then pay the expenses from the business bank account. Ensure your records cover this.
If you would like to chat in more detail about how MTD will impact you, get in touch today to book your FREE initial consultation. Give Catherine a call on 01423 431889 or email email@example.com.
Please note: all stats are accurate for the 2021/22 tax year.