Making Tax Digital

*Implemenation of MTD for Income Tax deferred*

Making Tax Digital (MTD) will be the most fundamental change to the tax system for decades and when introduced in its entirely the essential elements for businesses and landlords are scheduled to be:

Under the MTD rules paper accounting records will cease to meet requirements and will no longer be deemed as sufficient: In order to comply it will be necessary for the vast majority of 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.

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.

When does MTD become relevant?

VAT: If your business is registered for VAT then you should already be complying with MTD for VAT, and so keeping digital accounting records and submitting your VAT Returns using MTD compatible software.

Income Tax: This 'full version' of MTD (known as MTD for ITSA) has once more been deferred - this time from an implementation date of April 2024 to April 2026. Once in situ it will apply to the self-employed and larger landlords who receive gross trading income or gross rents of £50,000 per annum or more (originally this figure was to be set at £10,000). The following April the income threshold is to be lowered to include anyone receiving income or rents above £30,000 p.a. After that it is currently unclear regarding intended income thresholds or timings.

When it comes to general partnerships and LLPs it looks as though they will certainly not enter MTD for ITSA until after April 2026 although the exact timings are as yet unknown.

For partnerships it will be the total turnover of the business that defines income for MTD purposes, not the deemed individual partner share of turnover.

Corporation Tax (limited companies): Timings are yet to be confirmed. Some suggest that the Government may monitor the progress of MTD for ITSA 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 MTD for ITSA becomes mandatory it looks as though there will be an exemption for businesses and/or landlords that have a smaller annual turnover. This was to be set at £10,000 per annum although the Government's announcement (on 19 Dec 2022) suggests that they will be potentially looking at a starting point of £30,000, or at the very least looking at ways to lessen the impact of MTD for ITSA on those businesses.

It should also be noted that an overall mix of turnover must be combined for the purpose of assessing whether or not low turnover exemption applies. As example, if someone received annual self-employed fees of say £35,000 and alongside he/she also received gross property rents of say £20,000 then MTD would apply in April 2026 - i.e. the combined income would be £55000 and so it would exceed the initial £50,000 threshold.

For general partnerships it will be the total turnover of the business that defines income for MTD purposes, not the deemed individual partner share of turnover.

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