Income Tax: Making Tax Digital (MTD)

In this blog we are discussing the key points of Making Tax Digital (MTD) for Income Tax. This will have an impact when it comes to reporting business profits and which became law in April 2024.

So firstly, who will this affect?

The people affected by the new legislation will be the self-employed businesses and landlords with annual business or property income above £10,000.
There are some exemptions such as certain types of partnerships, trusts and estates. If you think you may be exempt, it always makes sense to check.

When did the new legislation take effect?

People affected need to follow the rules for MTD for Income Tax from the accounting period starting on or after 6 April 2024.

What changes are we to expect?

You likely already submit your tax return via HMRC's online portal. However, Making Tax Digital takes things further. It requires you to use approved software for your accounting that can report information direct to HMRC. (We are here to help you with software choices if required)

Four key activities

1. Keep digital records and preserve them for the legal retention period.
2. Submit quarterly updates per income source to HMRC.
3. Submit an End of Period Statement (EOPS) per income source to HMRC.
4. Submit a Final Declaration to HMRC (instead of a Self-Assessment tax return).

Some software packages allow you to input data via a spreadsheet - however, once that's
been done, it can't be manually altered. Instead, data must be moved using digital links. This then creates a digital footprint that HMRC can follow.

Changes coming into effect

Personal Tax Account

HMRC will set up a Personal Tax Account for every individual. This will act as a digital central record for income, expenses, tax claims and tax affairs. (You may already have one if you currently file Self-Assessment tax returns).
There are three types of submission to be made over the course of the tax year: quarterly updates, an annual End of Period Statement (EOPS); and a Final Declaration (this replaces the current Self-Assessment tax return), we shall discuss this further.

1. Quarterly Updates

The quarterly submission is effectively a rough profit and loss account. It shows the totals for the quarter of:

Sales income for each individual income source.

Expenses, in defined categories, for each individual income source (the defined categories are the same of those on the existing Self-Assessment.

Please note you can submit estimated figures in the quarterly submissions as there no declaration of accuracy attached to the information.

The proposed quarterly filing dates will be the 5th of August, November, February, and May. When this comes into play on 6 April 2024, the first mandated MTD submission, covering the quarter to 5 July 2024, needs to be made by 5 August 2024.

HMRC have commented to say there will be no penalties applied until four quarterly submissions have been filed late, but they do expect some information to be submitted each quarter.

While the quarterly submission will be used to calculate an estimate of the business's tax liability throughout the year, the current timing of tax payments won't change.

2. End of Period Statement (EOPS)

Any accounting adjustments will be made on the EOPS, which must be submitted by 31 January following the end of the tax year. A separate EOPS will be required for each trade or property business.

3. Final Declaration

The Final Declaration pulls everything together. This is where you tell HMRC about any sources of income not reported via the quarterly submissions or End of Period Statement and claim any reliefs due.

Impact On Reporting

To summarise, the reporting element is set to increase from one submission per year to six - that would be a single source of income, resulting in four quarterly submissions, an EOPS, and a Final Declaration.

For example, if you are a sole trader and a landlord, then you will have to submit a quarterly return and an EOPS for each source of income, plus a Final Declaration, meaning your number of submissions per year will go from one to eleven.

How to prepare for MTD.

• Bank account: make sure all your business income and expenses flow through one bank account.
• Have a separate bank account per income source. For example, if you have sole trader and property income ensure that they both run through separate bank accounts.
• Expenses - lets split into the different categories:
• Personal expenses: keep these in your personal bank account and out of any business bank account.
• Business expenses: pay these out of the business bank account.
• Property expenses: pay these out of the property bank account.
• Receipts: Keep receipts for all business/property expenses.
• Drawings for owners: ideally take one regular one monthly or weekly amount to avoid confusion.

If you have any questions, please feel free to contact us and we would be happy to offer further advice that you may need.