Making Tax Digital (MTD) is the biggest tax overhaul to date, but with all the shifting deadlines one thing is for sure, MTD isn’t going anywhere.
HMRC’s overall goal with MTD is to create a more effective and efficient tax system in the UK. Unfortunately, these changes put a burden on both individuals and companies
In this article, we’ll go over the details about whom MTD affects, important dates, and how everyone can prepare for these changes.
What is Making Tax Digital?
Let’s get back to the basics. Making Tax Digital is part of the government’s plans to make it easier for individuals and businesses to stay on top of their tax and keep their affairs in order. Essentially, HMRC’s goal is to “become one of the most digitally advanced tax administrations in the world.”
What this means for taxpayers is that they will be giving HMRC details of their revenue and costs using accounting software on a quarterly basis, rather than completing a tax return once a year.
There are numerous benefits to using accounting software to file taxes including spending less time on admin, and having improved cash flow since you have a good idea throughout the year of how much tax you owe.
Luckily, the HMRC has introduced MTD in stages, giving everyone a chance to keep up with these changes.
MTD for VAT
VAT-registered businesses with a taxable turnover over the VAT threshold (£85,000) are required by law (since 1 April 2019) to follow MTD rules by keeping digital records and filing their VAT returns electronically, using accounting software.
Those below that threshold can voluntarily join the MTD service now, which would be good practice since after April 2022, those with a taxable turnover below the VAT threshold will be required to follow MTD rules too.
Bottom line: all VAT-registered businesses will need to comply with MTD by next year, but you can start sooner than that.
MTD for Income Tax
MTD for Income Tax Self Assessment (also known as MTD for Income Tax) commences on 6 April 2024.
This will impact individuals who have a personal income above £10,000 across their businesses or properties. Those whose income is £10,000 or less will continue using the existing Self Assessment system.
Rental income from property you own also contributes to this threshold. The MTD for Income Tax affects individuals like sole traders and landlords.
General partnerships with more than £10,000 in annual turnover will need to follow the MTD for Income Tax starting April 2025.
MTD for Sole Traders
Sole trader is a description of a business type for tax purposes. This includes all kinds of people and businesses – from freelancers (e.g. designers, copywriters, and photographers) to self-employed tradespeople (e.g. builders, plumbers, and electricians), and gig economy workers (e.g. taxi drivers, tutors, and nannies).
Sole traders will have an MTD for Income Tax “digital start date” for their business. That means it will be the same date as the start of their first full accounting period following 6 April 2024. If you use the tax year for your accounting period (6 April to 5 April), once the new tax year begins is when you’ll need to use MTD for Income Tax.
The £10,000 income threshold applies to the individual and could come from just one business, or multiple entities. For example, if you owned and operated five businesses and each had an income of £5,000 you would need to register for MTD for Income Tax and follow its legislation for all of the businesses.
MTD for Landlords
Whether you consider yourself a professional landlord (e.g. you pay Class 2 National Insurance contributions) or not, anyone receiving more than £10,000 from rental income must follow the MTD rules.
Commercial property, furnished holiday lettings (FHL) and non-UK properties fall within the scope of MTD as well.
Even individuals who have inherited a single property that they rent out may not be aware that they’re running a business in the eyes of HMRC and that MTD for Income Tax may be applicable to their situation.
The important thing is that if you’re a landlord, you need to register for MTD and keep digital records relating to your property rentals.
Let’s say you have property that brings in rental income of £12,000 per year. This is above the £10,000 threshold, so you will need to use MTD for Income Tax for the accounting relating to your property. Moreover, if you’re a sole trader, you’ll need to use MTD for Income Tax for the accounting relating to this aspect as well.
Who Doesn’t Need to Use MTD for Income Tax
The following persons and entities are not currently required to join MTD for Income Tax:
- Other types of partnerships that are not general partnerships with only individuals as partners, such as Limited Liability Partnerships (LLPs)
- Trusts and estates
- Trustees of registered pension schemes
- Non-resident companies
MTD for Corporation Tax
While MTD for Income Tax is quickly approaching, companies won’t need to report under MTD for Corporation Tax until at least April 2026. However, HMRC aims to start a pilot scheme for companies from April 2024 to start filing using MTD for Corporation Tax.
Currently, HMRC hasn’t proposed a minimum turnover threshold for MTD for Corporation Tax, and it’s not yet defined what kind of businesses will be included in this phase of Making Tax Digital.
MTD for Corporation Tax requires companies to: keep digital records, provide quarterly summary updates of income and expenditure to HMRC (which will show expected Corporation Tax liability), and provide a digital submission of a Corporation Tax Return.
This will be a learning experience for both small, incorporated businesses that don’t currently utilize digital accounting (who will have to implement this) and large businesses that have separate systems for recording accounting data (who will need to ensure they’re digitally linked).
What You Can Do to Prepare for These Changes
While all of this can feel overwhelming, it’s important that you use this information to better prepare yourself and abide by MTD rules. When submission deadlines are missed, points are allocated to the business or individual (after a certain amount has been reached), and a financial penalty of £200 is automatically applied.
The best way to prepare for these upcoming changes is to start using cloud accounting software. Take the time to adapt your systems and policies to the new software ahead of your relevant MTD implementation dates. If you need assistance with this, talk to your software vendor or your accountant.
If you’re already using such software, ensure you upgrade to the latest version, especially since your accounting software will need to provide regular, timely data to HMRC.
Like any change to the tax system, MTD might seem complex at first. But if you identify the dates that apply to your situation, talk to your accountant, and find the right software for your needs, you’ll be able to make the change smoothly.
If you’re looking for help and need an accountant in the Greater London area our team has deep expertise on all matters of Making Tax Digital. Request a free consultation right here and we’ll be happy to discuss your specific situation and needs.