You may have already heard of HMRC’s initiative called Making Tax Digital (MTD), which came into effect for VAT registered businesses in April 2019.
However, did you know that MTD for VAT was just the first stage in a much broader rollout of this new digital tax system? There are three more milestones in HMRC’s current timetable:
From April 2022 – MTD becomes mandatory for businesses that are voluntarily registered for VAT. This means that all VAT registered businesses will have to comply by this date, regardless of whether they exceed the £85,000 turnover threshold.
From April 2023 – All self-employed businesses, and landlords with a business turnover above £10,000, will need to report their income under MTD for Income Tax Self Assessment.
From April 2026 – Companies will need to join MTD for Corporation Tax.
What is MTD for Income Tax Self Assessment?
The main aim of MTD for Income Tax Self Assessment is to enable HMRC to join up their internal systems, and create one account for each taxpayer for all their different taxes. HMRC has claimed that it wishes to become one of the ‘most digitally advanced tax administration systems in the world’.
If you’re self employed or a landlord with a total business or property income above £10,000 per year, then you are next on HMRC’s list to help them achieve this goal. You will be required to meet new quarterly filing obligations, and to report all your income digitally to HMRC using functional compatible software.
It won’t be possible for you to use manual books and records for administration purposes. Records will need to be held digitally in a software suite such as Xero or Quickbooks. If you use a spreadsheet it must be possible for the data to be transferred to HMRC’s software without any re-keying required, using an Application Programming Interface (API) platform.
The quarterly reports which you will need to submit to HMRC require totals to be entered under various headings, which follow the self employed pages of the self assessment tax return.
Instead of filing a self assessment tax return each year, you will need to make an annual declaration of year-end accounts to reconcile the quarterly reports. The difference between the year-end declaration and a tax return is that HMRC will pre-populate the declaration with some figures such as bank interest, pension income etc., as well as data already submitted from the quarterly return figures. It will then be your responsibility to check that all the pre-populated data is accurate.
Quarterly reports will be required for each individual business you own, including each property business and any rent-a-room businesses.
When is MTD for Income Tax Self Assessment starting?
MTD for Income Tax will come into effect for accounting periods which start on or after 6 April 2023. The first quarterly reports will be for the quarter from 6 April 2023 to 5 July 2023. This may sound like a long way off, but if you don’t yet keep digital records you will need to use this time to start thinking about moving your business onto MTD compatible software in order to make the transition as painless as possible.
Along with the introduction of Making Tax Digital is the introduction of a new penalty regime for the late submission of income tax. Rather than the existing default surcharge rules, the new penalties will be administered on a points basis. They will be used for all overdue taxes, and be triggered according to missed filing obligation dates.
Points will lead to fines much in the way that they do on a driving licence, but by the same token they will also drop away over time as you comply with future deadlines.
If you would like any help understanding MTD for Income Tax and how it may affect you, or you would like to move your business onto digitally compliant software, then please do get in touch and we’ll be happy to help.