Making Tax Digital coming in for self-assessment

In a Ministerial Statement issued on 23^rd September 2021, it was confirmed that Making Tax Digital (MTD) for income tax self-assessment (ITSA) is indeed coming but will be pushed back one year than initially stated to the tax year beginning April 2024. In this article we discuss this announcement in more detail and what sole traders and landlords need to be aware of.

What is MTD for Income Tax Self Assessment? 

The requirements of MTD for ITSA states that individuals who are currently subject to income tax on the profits of their trade, profession, vocation, or property will need to keep their accounting records electronically. This can be done either via specialist software or on a spreadsheet and file quarterly returns to the HMRC with details of both their expenditure and income with a final end-of-period statement submitted after the tax year has ended.

The frequency of the reporting is changing, however, the timing of tax payments is expected to stay the same. All sole traders and landlords with a gross income in excess of £10,000 and were in existence before 6^th April 2023 will automatically join MTD for ITSA from 6^th April 2024, regardless of their accounting period end.

What about partnerships? 

The rules for partnerships are slightly different, with the MTD being applied to general partnerships with business or property income that only have individuals as partners from the tax year starting April 2025. Other partnerships that have corporate partners and limited liability partnerships are not required to join MTD for ITSA in April 2025. They will be required to join at some point however this date has yet to be confirmed.

Why was the decision made? 

The government stated their intention to simplify the way self-employment income is taxed by changing the previously complex rules on “basic periods” which determine how profits are split between different tax years. Under the current rules, any taxable self-employment income for the tax year is the taxable profit from a set of accounts ending on a date in that tax year. This is proposed to change so that self-employment income for a tax year is the amount of income arising in the tax year itself, regardless of a business’s choice of accounting date. These changes are to align the rules for self-employment income with other types of income such as property and investment.

Why was it postponed? 

The announcement of the delay is welcome news to many as the changes suggested by the government led to many concerns raised by stakeholders about the rapid pace of these changes. A consultation was started to test the feasibility of the changes explained above. 27 meetings were held over a 3-week period in June 2021 involving a range of businesses and tax experts. Over 300 people were involved and over a hundred written responses were provided with feedback.

A number of specific concerns were revealed in these responses that the government needed to take into account. These concerns included:

• Individuals and agents not having sufficient time to plan for the change and ensuring their clients understand the changes
• The impact it will have on certain sectors, namely farmers, medical professionals and businesses with international connections that would potentially struggle to align their accounting date with the tax year
• The burden of submitting provisional figures in returns and then amending these at a later date was deemed a concern by many.

With the one year delay in the changes, the financial year 2023 to 2024 can now act as a transition year for individuals to get to grip with the new upcoming changes.

Are there any exceptions? 

In order for MTD for ITSA to apply, the individual must have business or property income of more than £10,000 per year. This amount refers to gross turnover and does not apply to simply profit. Individuals will also be excluded if it is not possible for them to use digital tools to keep their business records. For example, due to age, a disability or the remoteness of their location. These all are deemed as “digital exclusions”. In cases like this, the individuals will have to apply to the HMRC to claim an exemption. HMRC can grant or deny this request within 28 days of the application.

If an individual already qualifies for an exemption from MTD for VAT, they should also be exempt from MTD for income tax.

Business owners do not need to wait for the new MTD for ITSA legislation to come into force to switch to a more digital approach. The earlier you start, the longer you have to understand the system before the new method becomes mandatory. To learn more about how these changes will affect you and your company, please get in touch. Our team will be able to help you make the MTD transition as seamless as possible.