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How Will Making Tax Digital (MTD) for Income Tax Effect You?

Making Tax Digital (MTD) is coming to you soon………… 6 April 2024 to be exact.

Honestly 2022 is flying by, so 2024 will be here before we know it!

Making Tax Digital is part of the government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs.

So, what does Making Tax Digital mean?

MTD, is part of the Governments goal to make tax admin more effective, more efficient, and simpler for taxpayers.

Digital records will need to be kept and submitted to HMRC using MTD compatible software. This can either be compatible accounting software or spreadsheets. If you are thinking of going down the spreadsheet route just keep in mind that it means having to use HMRC approved bridging software to submit your information. So round about now you may think that the accounting software is definitely the easier and better option…

Accounting software providers such as Xero and Quickbooks are currently developing their software to accommodate the changes MTD will bring for Income Tax.

Who does MTD for Income Tax effect?

It effects unincorporated businesses. So sole traders and landlords, whose gross income exceeds £10,000 in a tax year. This threshold applies to you as the individual. This means that you may run one business which exceeds the £10k or you may have multiple business, which when the gross income is added together, exceeds the threshold.

Partnerships are only effected from 6 April 2025.

What are the changes to the self-assessment process?

Now that we know what MTD for Income Tax is, and who it effects, we can then work through the changes this brings to self-assessment process.

The biggest change is that the self-assessment tax return is effectively “done away with” and is replaced by quarterly submissions throughout the tax year.

Quarterly submissions will be due for each unincorporated business you may run as well as an end of period statement.

So yes, that does look like a lot more work for you and your bookkeepers or accountants. This process can definitely be made quicker and easier when partnering with the correct people and software though!

What submissions need to be sent to HMRC?

  1. Four quarterly statements are due to HMRC during the tax year. These are due every quarter and should be submitted through approved MTD software. At the moment there is no legal requirement for any adjustments to be passed in the accounts at this point. It would help you if there were adjustments passed as you would then be able to estimate your tax liability at the end of each quarter. The first quarterly submission is due by 5 August 2024.
  2. An end of period statement (EOPS) will need to be submitted for each unincorporated business you may run. This will be due by 31 Jan following the tax year. This is when you will include any accounting or tax adjustments to determine your tax liability. The EOPS will cover the tax year regardless of when the accounting period ends. This basically means that all unincorporated businesses will need to use the tax year as their basis period. Any unincorporated businesses which currently have a different accounting period to the tax year may need to use the 2023/24 tax year as the year they transition from their current accounting period to following the tax year using the basis period reform.
    P.S The submission dates may have changed but the payments dates of 31 Jan and 31 Jul remain the same.
  3. A final declaration, also known as crystallisation, is then due on 31 Jan after the tax year it relates to. This will bring all the information from each EOPS together for each business and any of your non-MTD information, such as dividends or interest earned, to determine your final tax liability.

What will your journey for MTD for Income Tax look like?

  1. Sign up to Making Tax Digital for Income Tax ahead of time. If you have an accountant or bookkeeper, they can do this for you if you appoint them as your agent.
  2. Move on to compatible accounting software, if you aren’t already keeping your records digitally. This will also save you so much time when it comes to the submissions.
  3. Quarterly submissions will be due throughout the tax year.
  4. An EOPS will be due per unincorporated business by 31 Jan following the tax year.
  5. A final declaration will be due by 31 Jan following the tax year. This includes all the information submission on the EOPS’s as well as all non-MTD information such as interest and dividends.

Love,
Kimmy

As always just a reminder that I am an accountant but I am not your accountant, this blog is for information purposes and should not be taken as advice.