Making Tax Digital (MTD) for Income Tax: What MTD for Income Tax Self Assessment means for you - and how to prepare
Contents:
1. Are you Impacted
Everyone regardless of whether they are employed, self-employed, investor or a business owner needs to tell the government how much money they have earned in a year. Currently, if you do not declare all your income via your employer, you do that via the Self Assessment system. i.e. you complete a tax return each year by the 31st of January each year to declare what you owe HMRC. Under Making Tax Digital for Income Tax this is all changing for sole traders, partnerships, property landlords and unincorporated businesses.
Making Tax Digital for Income Tax will apply to you if you earn over £10,000 per year as a:
The dates for the switch are:
- 2023/2024: Transitional tax year for any unincorporated businesses, partnerships or sole traders whose year-end is not the 5th of April
- Sole traders, unincorporated businesses and property landlords: April 2024
- Partnerships: April 2025
Are you Exempt?
Most sole traders, unincorporated businesses and partnerships will not be exempt. There are a few exceptions e.g.
– Non-resident companies
– Trustees, executors and administrators
– Foreign businesses of non-UK domiciled individuals
– Digitally excluded individuals or businesses, e.g., if they can’t access the internet from their home
– Businesses that are entirely run by practising members of a religious society whose beliefs are incompatible with using electronic communications or keeping digital records
1.1 - The change in basis period: What this means for you
As a sole trader, partnership or property landlord you will have a yearly accounting period. This is known as the basis period. Normally this aligns to the tax year, i.e. it runs from the 6th April to the 5th April. If this is you, you can skip this section!
If you use a different basis period, such as the calendar year, e.g. from the 1st January to the 31st December, you will need to switch your accounting period to the tax year, i.e. 6th April to the 5th April. Many partnerships, particularly in professional service firms have their year ending on the 30th April.
For partnerships and unincorporated businesses which need to change their basis period, the tax year 2023/24 is a transitional year. In this year, the business/partnership will need to
recognise two periods of time for profit purposes:
1. The profit on the 12 months’ worth of trading beginning with the start of the basis period ending in the transitional year.
2. The profit from the end of the basis period through to the 5th April 2024.
Previously a partnership/business would have only declared the profits
for 12 months of trading. This means that your partnership or business could potentially need to declare nearly 2 years of profit at the end of the transitional year.
Example
A partnership/business has a 12-month accounting period ending on the 30th April 2023. Under the basis period change it will be required to move it’s year end to the 5th April. This means in the 2023/24 transitional year it will need to declare the following profits, and be taxed on these:
1. Any profit generated from the 1st May 2022 to the 30th April 2023.
2. Any profit generated from 1st May 2023 to the 5th April 2024.
If you will need to change your basis period, then please contact us. We can advise on sensible tax planning
strategies and cashflow to minimise the impact on your business with the change in basis period.
1.2 - Self Assessment Tax Return vs Making Tax Digital for Income Tax
Self-Assessment
Making Tax Digital for Income Tax
12-month Accounting Period
Can be anything but normally runs from 6th April to 5th April, i.e. the tax year
Has to be the tax year, i.e. 6th April to 5th April
Business Records
You must keep 5 years of records showing your income and expenditure
You must keep 5 years of records digitally showing your income and expenditure. Your digital business records must have a ‘digital’ link with the HMRC tax systems.
Expenses
You can claim a tax reduction on some of the costs of running your business.
You can claim a tax reduction on some of the costs of running your business.
Profits
This is the money you keep after you have paid your bills and tax bill.
This is the money you keep after you have paid your bills and tax bill.
Tax Returns
You must declare your income, expenditure and tax owed by 31st January for the tax year which finished on the previous 5th April.
You must declare your income and expenditure 4 times in the year. You will also complete a formal declaration known as an End of Period Statement (EOPS) on the 31st January for the tax year which finished on the previous 5th April.
Income Tax Payments on Accounts
Yes
Yes
2 - MTD for Income Tax: What you need to do
1) Sign Up
There is no automatic switch over from Self Assessment to MTD for Income Tax. If we complete your personal tax return for you each year we will be in touch to talk about when we will sign you up to MTD for Income Tax.
You will need to sign up by April
6th 2024 if you are a sole trader or
property landlord and April 6th 2025 if
you are a partnership.
2) Keep your Financial Records Digitally
You will need to keep digital financial records of:
– Business income
– Business expenses
– Savings and investments
– Pensions
– Grants
Your digital financial records need to be on a system that can be digitally linked with HMRC’s systems. We recommend using accounting software like Xero, FreeAgent, Quickbooks, Sage or an MTD for Income Tax compatible software designed for property landlords such as Hammock.
3) Submit your Quarterly Updates
Every 3 months you will need to submit a quarterly
update to HMRC showing your business income and expenses. You will need to do a quarterly update for
each business you run plus any property income you receive. You only need to do one quarterly update for
all your property income.
Your quarterly updates do not need to be accurate. However, the more accurate you can make them the
easier it will be to see your tax liabilities going forward.
4) Submit your End of Period Statement (EOPS)
Your EOPS is where you finalise your taxable profit and loss for the year. This needs to be submitted by the 31st Jan for the year ending on the 5th April. This means you have 9 months to get your EOPS submitted. The first EOPS required under MTD will be for the first accounting period of the business beginning on the 6th April 2024. You will need to submit a separate EOPS for each property and trading business.
5) Final Declaration
By the 31st of January you need to make a final single declaration of your tax liability for the previous tax year. This means bringing together all the information from your business related income, e.g. via your EPOS, and non-business-related income, e.g. Pension payments, savings.
6) Pay your Tax
Similar to the Self Assessment Tax System you need to pay your income tax bill (as declared in your final declaration) by the 31st January. Similar to the Self Assessment scheme you may be required to make a payment on account by the 31st July.
3 - Year 1 and Year 2 Timelines
This is what happens when if your business or partnership has an accounting period which aligns with the tax year, i.e. 6th April to 5th April.
Notes:
1. Self-assessment tax returns and income tax payments for FY23/24 will be due on the
31st January 2025.
2. The EOPS and Final Declaration can be submitted earlier than the 31st January 2026
for the 2024/25 tax year.
4 - Preparing for MTD for Income Tax
1) Set up a Different Bank Account for rach Separate Business and a Different Bank Account for your Property Income
Completing 4 quarterly updates, EOPS for each of
your businesses AND then a final declaration is a lot
of administration. If you want to make the bookkeeping easier – particularly if we, do it for you – we recommend
a separate bank account for each of your businesses.
If you don’t already have a separate business bank account, there are many free bank accounts for sole traders such as Mettle, Tide, Monzo, Starling. These
bank accounts can be set up within minutes (although
it can take a few days on occasion.)
2) Ditch the bag of Receipts
You are now required to keep your financial records digitally and report on your business expenditure
and income quarterly. This means avoiding letting your receipts build up over the year ready for year-end.
We can advise you on different software that you can use, such as Dext, AutoEntry or Hubdoc, that will allow you to take a photo via an app on your phone. The software will then upload the receipt into your accounting software. No more losing paper-based receipts.
3) Send Invoices and Quotes Digitally
Every 3 months you will need to submit a quarterly
update to HMRC showing your business income and expenses. You will need to do a quarterly update for
each business you run plus any property income you receive. You only need to do one quarterly update for
all your property income.
Your quarterly updates do not need to be accurate. However, the more accurate you can make them the
easier it will be to see your tax liabilities going forward.
4) Use an Accounting Package which is Compliant for MTD for Income Tax rather than Spreadsheets for your Financial Records
Your EOPS is where you finalise your taxable profit and loss for the year. This needs to be submitted by the 31st Jan for the year ending on the 5th April. This means you have 9 months to get your EOPS submitted. The first EOPS required under MTD will be for the first accounting period of the business beginning on the 6th April 2024. You will need to submit a separate EOPS for each property and trading business.
5) Start Keeping your Financial Records Up-to-date Daily
If you use modern accounting software it is really easy to keep your financial records up-to-date daily. We can show you how easy it is to get receipts, expenses, quotes, invoices and even
your bank statements into your accounting software. Of course, you can still get us your accountant to tidy up your records weekly, monthly, or quarterly. You now have a responsibility to keep your records digitally and declare your income and expenditure quarterly. Ensuring you get your receipts, expenses and invoices into your financial records when you receive them or send them out will help reduce the cost and time of your business’s bookkeeping.
6) Talk to us NOW if you have a Year End which is not the 5th April
If your business will need to change its year end date, this has major implications for your tax bill AND your accounting records. Please call us TODAY to discuss the impact and what needs to happen.
5 - Benefits of using Cloud Accounting vs Paper Records or Spreadsheets
Using cloud accounting software which is compatible with MTD for Income Tax is the easiest way to ensure you comply with the requirements of MTD for Income Tax. You’ve got time between now and the 6th April 2024 to enjoy the benefits of cloud accounting software. By taking action now you can have an orderly transition rather having to learn new ways of working and software packages in April 2024. April 2024 may seem a long way off, but this will happen really quickly.
Here are the main benefits of using cloud accounting software:
5) Start Keeping your Financial Records Up-to-date Daily
If you use modern accounting software it is really easy to keep your financial records up-to-date daily. We can show you how easy it is to get receipts, expenses, quotes, invoices and even
your bank statements into your accounting software. Of course, you can still get us your accountant to tidy up your records weekly, monthly, or quarterly. You now have a responsibility to keep your records digitally and declare your income and expenditure quarterly. Ensuring you get your receipts, expenses and invoices into your financial records when you receive them or send them out will help reduce the cost and time of your business’s bookkeeping.
6) Talk to us NOW if you have a Year End which is not the 5th April
If your business will need to change its year end date, this has major implications for your tax bill AND your accounting records. Please call us TODAY to discuss the impact and what needs to happen.
5) Start Keeping your Financial Records Up-to-date Daily
Your data is kept regularly backed up and very securely in the cloud. Which means less chance of data being lost OR being hacked.
6) Talk to us NOW if you have a Year End which is not the 5th April
Cloud accounting software updates automatically, so you will always be on the most up-to-date version.
6 - How We Can Help You
If you are already a client of ours you will be receiving regular updates about your responsibilities with MTD for Income Tax. We will also be offering training sessions to help you understand your responsibilities and use our recommended cloud accounting software.
We can also help you with:
– Bookkeeping
– Moving you onto a cloud accounting software package
– Tax planning – particularly if you are impacted by the basis period change.
