Making Tax Digital (MTD) For Income Tax

Introduction

Self-employed businesses and landlords with annual business or property income above £10,000 will need to follow the rules for MTD for Income Tax from their next accounting period starting on or after 6 April 2023.

What is “Making Tax Digital”?

Making Tax Digital (MTD) is a government initiative to modernise HMRC’s tax system, with the aim of making the whole process of administrating tax simpler and more efficient. All of your tax information will be in one place (your digital account) and you will be able to pay tax based on your business activity during the year. You can upload and update your tax account in real time.

Will it affect me?

If you own a business, you are self-employed and you pay income tax, national insurance, VAT or corporation tax, then it is quite likely you will be affected. This means you could be required to keep track of your tax affairs digitally using MTD compatible software, and to update HMRC via your digital tax account. Eventually this will abolish the annual tax return. This will be the law and there will be penalties for non-compliance. 

The precise details of what needs to be reported each quarter have yet to be finalised, but the categories of income and expenditure are likely to be the same as currently reported for self-assessment.

The accounting software will need to record income and expenditure into the following main categories:

·         Turnover/gross rents

·         Costs of goods sold

·         Materials

·         Wages and salaries of employees

·         Sub-contractor costs

·         Rent, rates, power, insurance

·         Repairs and renewals

·         Professional fees

·         Telephone and other office costs

·         Interest on bank and other loans

·         Motor and travel expenses

It is unclear at this stage how loans to finance residential lettings will be reported as those costs are no longer deducted in arriving at rental profits as relief is now given by way of a basic rate tax deduction.

It is currently proposed that there will be 4 quarterly reports to HMRC followed by a finalisation return when end of year adjustments will be made. For a buy to let business that would mean quarterly returns made up to 5 July, 5 October, 5 January and 5 April. There would then be a MTD finalisation submission the following 31 January.

We are awaiting further information on MTD from HMRC this summer but one significant announcement on 20 July was draft legislation to abolish basis periods for unincorporated businesses for the 2023/24 tax year to simplify MTD reporting.

That change would apply to sole traders, partnerships, as well as trusts with trading and property rental income. There would also be complicated transitional rules for 2022/23 which could result in a big tax bill that year for some traders.

The Treasury are also consulting on changing the tax year itself from the archaic 5 April year end to 31 March or even 31 December. A calendar tax year would bring the UK into line with most other countries at last!

When is all this happening?

MTD for income tax should become law from 6 April 2023. MTD for income tax will apply to the self-employed, partnerships and to those who receive income from property, with gross income from these sources combined above a threshold of £10,000.

The Government is running a pilot scheme where businesses can use the online service for Making Tax Digital for Income Tax.

See: https://www.gov.uk/guidance/sign-up-your-business-for-making-tax-digital-for-income-tax

What should I do about MTD?

Talk to us - the good news is that you can reduce your running costs and streamline your accounting by complying with the new rules!

In the last two years we have worked with many other clients to help them comply with MTD and streamline the way they do things.

Just suppose you had a system where your bank feeds your data directly into your accounts on a DAILY basis, you take a photo on your phone of a purchase invoice and it is posted automatically, you can see your results, who owes you money, who you owe and your business bank balance 24/7, 365 from your smart phone.

Rawcliffe & Co were the Fylde Coast’s FIRST Xero Cloud Accounting Platinum Partner!

For the unconverted Xero is a cloud-based accounting platform that allows you to look at your accounts at any time from any device. It facilitates the accessing of real-time data and the streamlining and automation of processes. This allows you to focus on developing your business and your Accountant to interpret important financial data and really drive growth. ,

Visit the Xero Cloud Accounting Page on our blog to read more about why we are experts.

Please contact us about helping you to comply with the new rules. We are cloud accounting specialists, and we can train and support you with the right software. 

The Rawcliffe & Co team is available via phone or email Monday to Thursday 9-5pm and 9 – 4:30pm on Fridays.

Tel: 01253 798812
Email: info@rawcliffeco.com