How MTD for Income Tax will affect small businesses
Updated: Dec 19, 2022
*** UPDATE: MTD for Income tax has been postponed again from April 2024 to 2026 ***
Starting April 2026, Making Tax Digital (MTD) for Income Tax will significantly impact self-employed businesses and landlords with income above £30,000.
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 19 Dec 2022)
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 £30,000, including income from all businesses and property. So, a person with £15,000 of trading income and £15,000 of rental income will be required to report under MTD as their total turnover exceeds £30,000. Businesses with a turnover exceeding £50,000 will be asked to join MTD from April 2026 after which the threshold of £30,000 will apply from April 2027.
The £30,000 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 £60,000.
Deferrals / exemptions - there are very few. Most sole-traders and landlords must be compliant from April 2026, Partnerships from April 2027. 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, after which the system will be points-based.
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.
⚠️ Prepare now
Act now to make the transition to MTD as easy as possible:
Separate your business from your personal banking: Choosing your business bank account 💳🏦💷 (masseyaccountingcompany.com)
Shorten your year-end from 5 April to 31 March (MTD will be easier to operate if you're working to calendar, not tax, quarters)
Find the best bookkeeping app for you and consider implementing at least 1 year early: Bookkeeping Software & How-To
We invite clients to get in-touch and discuss your personal arrangements for MTD
A BRIEF HISTORY OF MTD FOR INCOME TAX SELF-ASSESSMENT (MTD for ITSA)
2015 Chancellor George Osborne announces the "end of the tax return" to be achieved by Making Tax Digital (MTD) from April 2018. The focus soon switched from MTD for Income Tax to MTD for VAT.
April 2019 saw the introduction of MTD for VAT
February 2021 HMRC announces that all Income taxpayers earning over £10,000 must join MTD for ITSA by April 2023
September 2021 the Treasury announced that MTD for ITSA will be delayed until April 2024
December 2022 HMRC announce a further delay of MTD for ITSA until April 2026
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