Making Tax Digital: Extension to income tax self-assessment

Tax

Making Tax Digital: Extension to income tax self-assessment

Making Tax Digital (MTD) is HMRC’s programme to encourage businesses to manage their records and taxes digitally. HMRC believes this will make tax administration more efficient and simpler for the taxpayer.

The first phase of MTD went live 1 April 2019 for VAT registered businesses. The Business Toolkit is MTD compatible for VAT, for most businesses.

The next phase to roll out, MTD for income tax self-assessment, will cover all unincorporated businesses where total income from self-employment and property is in excess of £10,000 per year. It’s important to note that this limit is income and not profit, so some very small businesses will be affected.

This means that Making Tax Digital will include sole traders and landlords from April 2024 (a 12 month extension on the original deadline). The deadline for partnerships is April 2025.

The delay is partly in recognition of the challenges that businesses have faced during the pandemic.

What could this mean for you?

If you’re a sole trader with an income above £10,000, you’ll have to start keeping digital records and submitting quarterly tax information to HMRC from April 2024. This process is similar to submitting VAT.

Each quarterly submission needs to be made within 30 days of the quarter end, which is a shorter time period than the current equivalent requirement, to submit VAT returns within one month and one week of the period end.

HMRC has promised to share more information about the changes directly with business owners, so that those who prefer to do their own accounts and tax returns will not be neglected.

HMRC has estimated that the average cost of the changes will be £330 for the transition and £35 extra ongoing cost per year.

This average cost includes businesses’ time spent choosing software, familiarising themselves with new processes, as well as any direct financial costs such as paying for software. HMRC is hopeful that commercial software providers will offer some free software, but there is no sign of this yet.

Get on top of your finances

The old method of tax reporting meant that after 5 April, you had nine months to prepare your return before it was due on 31 January, the following year. MTD means you report 30 days after each quarter during the year. So for the first 10 months you will need to prepare information for both, if you don’t have your accounts for the previous year in order.

This means that it’s important to get on top of your finances now, before you have to handle two sets of tax submissions simultaneously.

This transitional ten month period will require work by the business owner and/or their accountant to be completed more regularly, so it’s best to start preparations early, so that you’re used to keeping your digital records up to date sooner rather than later.

The Starling Business Toolkit and other software is designed to make business admin and bookkeeping as painless as possible for small business owners.

What you need to do to prepare for MTD income tax self-assessment

  • Prepare your accounts for the tax year to April 2024 as soon as the period ends. This means you won’t need to juggle doing current MTD quarterly returns and finding receipts for the previous year.
  • Look into suitable bookkeeping software that will enable you to keep digital records in a simple, practical and cost effective way. The Starling Business Toolkit, available to customers for just £7 a month, could be one option.
  • The software used for MTD needs to be compatible with HMRC. Since the MTD is on a pilot, many software providers are working on this currently.
  • Introduce regular bookkeeping at least once a quarter but preferably daily, weekly or monthly.
  • If you do your own bookkeeping and tax submissions at the moment, consider whether you’ll need to consult a bookkeeper and/or an accountant

This article is intended as general information only and does not constitute advice in any way. For any specific questions, you may want to consult your legal advisor or accountant.

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