‘MTDfIT’ or Making Tax Digital for Income Tax is the next step in the journey to digitalise UK Tax, which began with MTD for VAT. This required VAT registered businesses with an annual turnover over £85,000 to maintain digital records and file returns through MTD compatible software, with the smaller VAT-registered businesses joining MTD from April 2022.
MTDfIT, due to come into force in April 2024, will bring the requirement for sole-traders and those with property income, with a combined turnover of £10,000 or over, into the realm of MTD. They will be required to maintain digital records of business transactions and make a number of digital submissions to HMRC. These submissions can be made by the individuals or delegated to an accountant or other agent.
The first such submission is a quarterly update, which will contain a summary of income & expenses by category, rather like currently reported on a tax return. If an individual has more than one business, such as being both self-employed and a landlord, separate records & submissions will be required for both.
An estimated tax bill will be calculated from the updates, although given that at this stage no accounting or tax adjustments are required, it remains to be seen how accurate or otherwise that figure might be.
Once all quarterly updates have been submitted for the year, an end of period statement is required for each business. This confirms the final totals of income and expenses as well as those all-important accounting & tax adjustments and claiming reliefs such as capital allowances.
A Final Declaration will then be required to provide details of other income, such as savings or dividend income, and to confirm all information provided is correct & complete. This will replace the need to submit a Self-Assessment tax return in its current form. The deadline for both the end of period statement and final declarations, will be 31st January after the end of the tax year.
The key lesson from MTD for VAT is that early preparation is the key to a smooth transition. For those businesses currently maintaining manual records, perhaps even only written up once a year, this will be a significant change; planning ahead will give you the time to consider your options & put efficient processes in place without the pressure of a looming deadline.
By Liz Lockwood, Manager, Ensors Accountants LLP
This information is given by way of general guidance only, and no action should be taken based solely on the information contained herein. No liability is accepted by the firm for any actions taken without seeking appropriate professional advice.