tax is going DIGITAL UPDATE

In December 2022 HMRC announced a delay to their planned rollout of digital tax returns for LANDLORDS AND THE SELF-EMPLOYED

Making Tax Digital (or MTD) is an HMRC initiative that requires businesses to keep digital records and file returns using compatible software. Currently mandated for VAT, HMRC plans to extend MTD to cover the self-employed and landlords. 

On the 19 December 2022, the UK Government announces a phased mandation of Making Tax Digital for self-employed individuals and landlords providing more time to prepare for Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA).

Partly in response to the challenging economic environment and partly in recognition of the still low levels of MTD adoption across the UK’s SME’s, the government is giving a longer period to prepare for MTD with mandatory use of software phased in from April 2026, rather than April 2024.

From April 2026, self-employed individuals and landlords with an income of more than a newly raised threshold of £50,000 will be required to keep digital records and provide quarterly updates on their income and expenditure to HMRC through MTD-compatible software.

Those with an income of between £30,000 and £50,000 will need to do this from April 2027 while a government review into the needs of smaller businesses, especially those under the £30,000 income threshold.

Mandation of MTD for ITSA will not be extended to general partnerships in 2025 as previously announced, however, the government remains ‘committed to introducing MTD for ITSA to partnerships in line with its vision set out in the government’s tax administration strategy’.

WHAT THIS MEANS FOR YOUR BUSINESS

For both VAT and income tax, Making Tax Digital will require digital records to be kept in a format that  can be imported digitally into the software used to send a summary of either VAT or of income and expenses to HMRC. 

In the case of income and expense data, these are to be submitted to HMRC every three months to provide a basis for an estimate of the tax liability.

WHEN WILL THIS AFFECT ME?

In September 2021 HMRC announced that businesses will have an extra year to prepare for the digitalisation of Income Tax.

As announced on 19 December 2022, the deadline for Making Tax Digital for self-employed individuals and landlords has been changed to:

digitalisation  CHALLENGES & OPPORTUNITIES

Making Tax Digital digital records can be collated using a wide variety of tools including Excel when combined with a 3rd party addon software used to submit these records to HMRC.  To avoid this cumbersome dual software approach, many cloud-hosted accountancy software solutions are MTD compatible, allowing businesses to submit returns directly to HMRC.

In addition to seamless MTD HMRC integration, cloud-hosted accountancy systems offer benefits including improved efficiency, greater control and the automation of key accountancy tasks.

CLOUD EFFICIENCIES

At KAG we work with a range of leading cloud-based accountancy systems.  We are a  leading XERO Silver Champion Partner.

Specicfically designed for small businesses, XERO is a leading global accountancy platform with over 2 million subscribers.  In addition to automating MTD submissions, Xero offers a wide range of cost-effective business efficiencies including:

XERO puts you in control of your business finances, payroll and projects.  With KAG’S turnkey migration, data import and onboarding support, XERO adoption couldn’t be simpler.

MTD FOR INCOME TAX

Self-employed businesses and landlords with annual business or property income above £50,000 will need to follow the rules of MRD for Income Tax for their next accounting period starting 6th April 2026.  Where the annual business or property income is between £30,000 and £50,000 MTD applies from 6th April 2027.  For the self-employed and landlord with an incpome of less that £30,000, the government is reviewing MTD rollout options and timing. 

Some businesses and agents are already keeping digital records and providing updates to HMRC as part of a live pilot to test and develop the service for income tax.

As with MTD for VAT, one of the main requirements of MTD for Income Tax is the necessity to keep a digital record of income and expenses. This can still be via a spreadsheet, as long as the data is imported digitally into the software used to send a summary of income and expenses to HMRC.

A summary of income and expenses must be sent to HMRC every three months. Using the information that has been sent, HMRC can then provide an estimate of the tax that might be owed at the end of the accounting year.

Once the accounting year-end has been reached, a final report needs to be sent to HMRC which confirms the income and expenses of the accounting year. At this point, a claim for allowances and reliefs can also be made and a final tax calculation obtained.

Although there is an obligation to send income and expense information every three months, it is possible to send an update to HMRC more often, for example, if a more up-to-date tax estimate is required.

Summary of Rules for Making Tax Digital for Income Tax

1. Keep digital records
2. Get compatible software
3. Sign up
4. Send business income & expenditure updates – quarterly
5. Finalise your business income
6. Submit a final business declaration instead of a Self-Assessment tax return.

    

 You must follow the rules if:

• You area UK Resident
• You’re registered for self-assessment and your returns and payments are up to date.
• You’re a sole trader with income from one business only.
• A landlord who rents out property

You can not sign up if you need to report

• Income from other sources
• Any taxable payments you make or that you claim tax relief on.