How MTD for Income Tax will affect small businesses
Updated: Sep 9
Starting April 2024, Making Tax Digital (MTD) for Income Tax will significantly impact self-employed businesses and landlords with income above £10,000.
The new rules essentially mandate digital record keeping so that all businesses can send quarterly updates to HMRC.
If you're a sole-trader, partnership or landlord keeping paper-only or spreadsheet records, then - to put it simply - you'll need to switch to digital (online cloud) bookkeeping.
For our top recommended bookkeeping apps, see our advice page: Bookkeeping Software & How-To
Making Tax Digital (MTD) for Income Tax - The Details
The following is what we know so far (per HMRC's latest update 23 Sep 2021: Businesses get more time to prepare for digital tax changes - GOV.UK (www.gov.uk))
MTD for VAT-registered businesses was first introduced in April 2019 (if you're VAT registered, you'll already be using compliant software, but you may be required to make additional electronic reports to HMRC)
Turnover test - MTD applies to businesses with a turnover above £10,000, including income from all businesses and property. So, a person with £6,000 of trading income and £6,000 of rental income will be required to report under MTD as their total turnover exceeds £10,000.
The £10,000 threshold applies to individuals. So, if you rent property jointly (splitting the income 50/50), you may not need to comply with MTD until your joint rental income exceeds £20,000.
Deferrals / exemptions - there are very few. Most sole-traders and landlords must be compliant from April 2024, Partnerships from April 2025. Partnerships with a corporate partner and LLP's will have a deferred sign-up date, and entities such as Trusts, Estates of deceased persons, Trustees of pension schemes and non-resident companies look likely to be exempt.
Penalties - penalties will not apply for the first year.
What info will be submitted to HMRC? - Total sales and totals of expenses by category. Year-end accounting and tax adjustments will be made via a final submission for the year known as the end-of-period statement (EOPS).
When will submissions be required? - The quarterly filing deadlines will be: 5 August, 5 November, 5 February, and 5 May (i.e. 5 May deadline for the final quarter ending 31 March - 5 April each year)
How will the tax position be finalised? - The EOPS will have to be submitted by 31 January following the end of the tax year, somewhat similar to the current requirement to submit a Self-Assessment Tax Return.
April 2024 (or 2025 for Partnerships) seems a while off yet. However, doing the following will help you to be prepared:
If you currently use a personal bank account for business, consider setting up another one and moving any personal payments, direct debits, etc., over to the new account; leaving only business transactions behind (this presumes you don't wish to set up a new business bank account)
Consider shortening your year-end from 5 April to 31 March (MTD will be easier to operate if you're working to calendar, not tax quarters)
To avoid teething problems, we'll encourage all clients to adopt their new online bookkeeping system at least one year earlier than MTD requires. Familiarise yourself with the best option for you: Bookkeeping Software & How-To
We invite our clients to get in-touch and discuss your arrangements for meeting the MTD requirements
Would you like help to pay less tax? Feel free to get in touch or check out our related posts 👇