What is Making Tax Digital for Income Tax?
Making Tax Digital for Income Tax, also known as Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) Is the next step in the journey to digitalise UK Tax, which began with MTD for VAT. The First stage of 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.
MTD ITSA is now due to come into force in April 2024 and 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.
How will MTD for ITSA affect businesses?
They will be required to maintain digital records of business transactions and make several digital submissions to HMRC. These submissions can be made by the individuals or delegated to an accountant or other agent. This will Increase compliance for the businesses within this category because 6 returns will be due each year rather than just the annual return that we are all used to.
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 annual 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 further 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.
How does my Business become MTD for ITSA compliant?
There will be many options on the market for software that will be compatible to make these submissions however as it currently stands HMRC only recognises that there are 9 bits of software currently available to make submissions, with a further 17 software packages in development from other major names. It is clear that by the time the first submission will be due the market for software will be much broader. There will be a lot of different products available to choose from, the question is how do you make this right choice?
Even with a market flooded with software it’s unlikely that there will be a one size fits all solution. Software needs to be carefully considered by each business as the wrong choice can result in a costly software transfer later on down the road. Choosing the right software can be a balancing act between of many things including useability, integrations with other software programs and price.
Software for MTD can be split into two categories: –
- End to end accounting packages like Xero, Sage and QuickBooks Etc. these are typical accounts packages that are common in the marketplace.
- Bridging software – which allows businesses to digitally link their records from Excel direct into HMRC’s MTD platform. The rules around this are quite strict though so its important that all of the rules here are considered prior to opting for this as a solution.
The first starting point is if your current software is compatible? If it is then this could be an easy solution. If your software doesn’t appear on the HMRC approved list, then it worth speaking to your software provider directly to ask when their compatibility will become available.
HMRC approved software list
The second point should be to contact your accounting representative if you have one as they may have access to software at discounted rates or may be able to help with software recommendations that suit your specific business needs.
The third step is to ensure that more than one software solution is reviewed, by going to market you ensure that you get an idea of service levels and cost and that you make the right choice for your business.
Of course, once you have the software it will need to be used correctly to make sure that the numbers you are creating for your quarterly returns are reasonable so this may require some help from your accountant or some training on how to get the most out of your chosen solution.
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.