Making Tax Digital

Making Tax Digital (MTD) is the most fundamental change to the tax system for at least 20 years and the essential elements for businesses and landlords are:

Under the MTD rules paper accounting records cease to meet requirements and will no longer be deemed as sufficient: In order to comply it will be necessary for almost all businesses and larger landlords to use software or spreadsheets to keep their accounting records.

Quarterly reporting: Three-monthly reporting of VAT figures is now standard; although when 'full MTD' is implemented there will also be a requirement to submit trading data to HMRC each quarter directly from bookkeeping software or spreadsheets, and it must be sent within one month of the end of each quarter. These updates will include details of business (or rental) income and the related business expenses by cost type. Potentially the quarterly data submissions under full MTD will be fairly unrefined and so once we have prepared your normal annual accounts it will be necessary to overwrite the existing quarterly details by submitting an EOPS ('End of Period Statement') in order to bring the figures that HMRC already has in line with the annual accounts. The EPOS must be submitted by the earliest of 10 months following the end of your accounting year or the subsequent 31st January next. 

Naturally, we will try to help you through the changes that MTD will bring. However, the changes will be so fundamental that, ultimately, it will be necessary for you to become involved with the quarterly reporting to HMRC.

If you currently operate computerised bookkeeping then the procedural changes should be minimal and it is expected that most software providers will incorporate the necessary updates in due course; slightly more involved if your records are spreadsheet based as associated but relatively inexpensive 'bridging software' will also be needed; although, unfortunately, it will be a complete sea change for those currently keeping manual records.

When does MTD become relevant?

VAT: It started on 1st April 2019 and so if your business is registered for VAT then you should already be complying with MTD. And so keeping digital accounting records and submitting your VAT Returns using MTD compatible software. As a result HMRC's previous older style online VAT Return portal is now closed.

Income Tax: This 'full version' of MTD will apply to the self-employed and larger landlords who need to complete an annual self assessment Tax Return. The Government intends the full version of MTD to become mandatory for income tax reporting with effect from April 2024.

When it comes to general partnerships and LLPs it looks as though they will enter MTD in April 2025. However, partnerships and LLPs that include at least one corporate partner will have further time to comply; their MTD entry date is yet to be announced. 

Once the full version of MTD is in situ the annual Tax Return will disappear for those in MTD and, as well as the quarterly submissions and the annual EOPS mentioned above, there will be a requirement to submit a 'Final Declaration' each year. This will formalise matters for the tax year in question and will be made on an individual rather than a business basis.

Corporation Tax (limited companies): Timings are yet to be confirmed. Some suggest that HMRC may monitor the progress of MTD for income tax before concentrating on the corporation tax side.

Are there any exemptions?

In theory, there are exemptions (VAT) and there should be exemptions (income tax) for those unable to engage with the digital world for religious reasons or because of age, disability or location (e.g. no availability of broadband).

When full income tax related MTD becomes mandatory there is to be an exemption for businesses and/or landlords that have a very small annual turnover. At present the Government intends to exempt self-employed individuals who have annual turnover of £10000 or less and landlords who receive gross rents of £10000 or less.

For general partnerships it will be the overall business turnover that defines whether or not that business must be included in MTD, not the deemed individual partner share of turnover.

It should also be noted that the overall mix of turnover must be combined for the purpose of assessing whether or not low turnover exemption applies. As example, if someone received small annual self-employed fees of say £3000 and alongside he/she also received gross property rents of say £8000 then MTD would apply - i.e. their combined income would be £11000 and so it would exceed the £10000 threshold.

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