Making Tax Digital was first announced at Budget 2015 in the government’s bid to improve the tax system by encouraging all businesses to keep their accounting records digitally and use this to file their various tax returns directly from the software. The government believe this will reduce errors in reporting tax due thereby reducing the ‘tax gap’, and reduce stress for relevant individuals as they will keep on top of their taxes though-out the year instead of focusing on a whole tax year that is potentially 9 months into the past all in one go.
We have had MTD for VAT and various re-alignments of the target dates for compliance by individuals.
From April 2024 self-employed individuals and Landlords with a turnover exceeding £10,000 must have signed up to MTD for income tax and use HMRC approved digital software to record their transactions and report profits quarterly to HMRC. HMRC will in turn update the taxpayer on much tax is due at the relevant periods throughout the year based on their submissions.
At the tax year-end there will be a final submission due by 31st January after the end of the tax year giving the taxpayer the opportunity to review all of their transactions and make corrections, final accounting adjustments and claims for reliefs before submitting the final report. The submissions must all be from HMRC approved software such as Sage, Xero or Quickbooks and not directly via the HMRC portal.
Businesses that already use recognised software such as Sage, Xero or Quickbooks and also have an in year bookkeeping/accounting solution will suffer the least stress as the accountant and bookkeeper will carry out all the work but will just make an additional four submissions per year. Individuals and Landlords that are still using paper records will be concerned about the cost implications of using an accountant for 5 submission per year instead of 1. Vat registered self employed individuals or Landlords may not be too pleased to have to make 9 tax submissions per year.
This legislation does seem to be targeted at those individuals that complete their own tax returns every year from their bank statements, invoices and other records. These may be individuals that feel intimidated by having to venture into the unknown and learn new I.T. skills. Although much of the advertising for software proclaims that the software does it all for you, I have yet to come across a piece of software that will accurately make decisions on a taxpayers transactions and 100% guarantee that those decisions are correct or insure against the fines that are still in place for errors. Remember that errors can result in overpaid tax as well as underpaid tax.
The key message is that Making Tax Digital is going to be implemented for sole traders and Landlords by April 2024 so if you haven’t already done so you need to be preparing to find software that you can get on with by that date. Therefore for a relatively pain free MTD journey we do advise starting with the software by April 2023.
Remember to ask an accountant for support you with training and guidance in relation to your new responsibilities. A good accountant will try to make this as pain free as possible and best case scenario the process will be enjoyable and beneficial to you.