Some of you may remember Making Tax Digital for VAT, which was introduced in April 2019 and it required all VAT registered businesses to report their VAT returns through digital software. This in itself was quite a bit leap forward for some businesses, however they were already used to filing VAT returns quarterly so the big change was that it had to be done using digital software.
However, HMRC have now extended the requirements of Making Tax Digital to include Income Tax.
On 21 July 2020, HMRC confirmed that MTD for Income tax will be introduced from April 2023, for unincorporated businesses and landlords with gross income over £10,000. The rules will also apply to partnerships and trusts with business or property income.
The rules will also apply from April 2023 to partnerships with business or property income that only have individuals as partners. All other partnerships (e.g. those that have corporate partners and Limited Liability Partnerships) are not required to join MTD for ITSA in April 2023, but will be required to join MTD at a future date (to be confirmed).
Under the requirements of MTD for Income tax, individuals who are subject to income tax on the profits of their trade, profession, vocation or property business will be required to keep their accounting records electronically (either using suitable software or on spreadsheet) and file quarterly returns to HMRC with details of their income and expenditure together with any other information that HMRC specifies. A final end of period statement will then be submitted after the tax year to complete the individual’s tax affairs.
This represents a major change for people who are used to filing just ONE single tax return each year. Instead of ONE return, HMRC are now moving to FOUR quarterly returns and another final return so FIVE in total.
Although this is not being introduced until April 2023, some people may wish to get a head start with this and start using digital software.
The start date of April 2023 may seem quite a long time in the future now, but it is really important that clients start planning now for Making Tax Digital. NATA would recommend those self-employed individuals or companies who currently have paper-based accounting records or excel spreadsheet accounting records, to start considering changing to a digital accounting system before the beginning of their next accounting period. This will give you time to adjust to using digital accounting software and get used to the processes involved.
We are happy to give any advice and guidance but would recommend that clients take advantage of the many free software trials available with most software companies. What an accountant perceives as “easy to use” software is not necessarily what an individual would see as easy to use. So it is important for you to decide what works best for you and your business.
If we can help in any way, please just give us a ring on 01670 528416. NATA are here to support their clients through this major change in reporting to HMRC.
Just to end on a positive note, although the frequency of reporting is to change, the timing of tax payments will not and the current system of payments on account and balancing payment by 31 January after the tax year is currently expected to remain in place.
