Making Tax Digital (which some have dubbed ‘Making Tax Difficult’) is coming.
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 6th April 2023. However, its expected that HMRC will encourage businesses to start from 6th April 2022 to gain experience in the process before it becomes compulsory.
Its compulsory! failure to comply will result in penalties – you will have 30 days from the end of the quarter in which to file
When it starts the key issues will be
- You will basically have 2 returns to file at the same time one for the previous year and new quarterly reporting
- The basis periods are expected to be re-aligned so that all the self employed and landlords start at the same time – 6th April 2023
- A single annual self assessment will become at least 6 new filings – 4 quarters, end of period and a new self assessment return
The primary legislation for Making Tax Digital relating to VAT and Income Tax is contained in the Finance (No.2) Act 2017.
Business will have to use HMRC approved accounting software, for example
Xero
Sage
Freeagent – free if your business banks with NatWest/RBS
Quickbooks
When we refer to MTD-compatible software, we mean software that can integrate with HMRC systems to send updates to HMRC.
HMRC is not offering its own software products but has provided the Application Programming Interfaces (APIs) that commercial software developers are using to develop a range of applications that enable businesses to keep their records digitally and integrate with HMRC systems. An API is software that links 2 or more software programmes together, allowing them to exchange data.
So there won’t be a Government Gateway where you can enter the information, you have to use commercial software approved by HMRC.
You have to have all your self employed and property businesses in a single piece of software but be able to report the information separately for each business in the following formats
Furnished Holiday Lets
| Income |
| Accounting Basis (Traditional or Cash) |
| Rent paid, repairs, insurance and costs of services provided |
| Loan Interest and other financial costs |
| Legal, management and other professional fees |
| Other allowable property expenses |
| Private use adjustment |
| Profit or Loss |
Residential Property Income
| Total Rents and other income from property |
| Accounting Basis (Traditional or Cash) |
| Rent, rates, insurance and ground rents |
| Property repairs and maintenance |
| Non-residential property finance costs |
| Legal, management and other professional fees |
| Costs of services provided, including wages |
| Other allowable property expenses |
| Profit or Loss |
| Private use adjustment |
| Residential property finance costs |
Self Employed
If the turnover is below £85,000 only Turnover and Total Expenses need to be reported otherwise you will need
| Turnover | |||||||||
| Accounting Basis (Traditional or Cash) | |||||||||
| Costs of goods bought for re-sale | |||||||||
| Car, van and travel expenses | |||||||||
| Wages, salaries and other staff costs | |||||||||
| Rent, rates, power and insurance costs | |||||||||
| Repairs and maintenance of property and equipment | |||||||||
| Accountancy, legal and other professional fees | |||||||||
| Interest and bank and credit card etc financial charges | |||||||||
| Telephone, fax, stationery and other office costs | |||||||||
| Other allowable business expenses | |||||||||
| Profit or Loss |
What is the process?
Stage One – Sign Up and Software
- Business that fall within the scope of MTD ITSA (Income Tax Self Assessment ) will need to be signed up before April 2023
- ‘Digital Records’ need to kept on approved HMRC software
- The minimum amount of information will be Date, Amount and Tax Category
- The information needs to be summarised in the format noted above
- Each property and business activity will need its own reports
Stage Two – Quarterly Reporting
- An electronic submission of summary totals for specified categories from digital records of each business on a quarterly basis (obligation period) from software to HMRC needs to be made
- The first submission will include designatory data
- Updates are due from 10 days before to one month after the quarter end date
- The update does not need to include a statement that the data is complete and accurate
- HMRC will return a calculation of the tax liability based on the information sent but payment will due on the current pre-MTD dates (or at least for now)
Stage Three – End of Period Statement
- Process to finalise the taxable profit or allowable loss for any one source of business income
- The process will pull together the quarterly submissions and allow you to claim allowances and reliefs
- You will be able to exclude disallowable expenses
- This submission does require a declaration that the information is complete and correct
- HMRC will then calculate the tax due
Stage Four – Final Declaration (New Self Assessment Return)
- Referred to as crystallisation
- It will take into account all sources of income and gains not just those from Self Employment or Property
- Its a replacement for the SA100 tax return
- The deadline will be 31st January
- HMRC will provide a Submission Interface
