With Making Tax Digital for VAT now here and MTD for Income Tax Self-Assessment (MTD ITSA) fast approaching, we know there are still many outstanding questions surrounding the changes.
In this article, you’ll find the answer to 6 of the key questions many have surrounding MTD.
First, let’s take a look at the timeline for Making Tax Digital…
From April 2022 All VAT registered businesses must retain digital records and submit their VAT returns to HMRC using ‘functional compatible software’, unless an exemption such as digital exclusion applies. This includes those below the VAT registration threshold (£85,000).
From April 2024 Self-employed businesses and landlords with business turnover above £10,000 are to report under MTD for Income Tax. This measure has been delayed by a year.
From April 2025 General partnerships join MTD.
Other partnerships: the date at which all other types of partnerships will be required to join will be confirmed later.
An MTD for Income Tax pilot is currently running (entirely voluntary).
From April 2024 Companies can start using an MTD for Corporation Tax (CT) pilot scheme.
From April 2026 Companies join MTD for Corporation Tax
MTD for VAT. Who Is Affected?
Since 2019, the vast majority of VAT-registered businesses with a taxable turnover above the VAT threshold (£85,000) have had to comply with MTD for VAT; keeping digital VAT records and sending returns using Making Tax Digital (MTD)-compatible software.
All remaining VAT registered traders were required to join the MTD regime from the first VAT period that began on or after 1 April 2022.
From this ‘digital start date’ the business must now:
- Digitally record key information from each VAT transaction (date, value and VAT rate or VAT to be reclaimed).
- Digitally transfer the data needed for the VAT return to MTD-compatible software, without manually retyping, copying or pasting any figures.
- Submit the VAT return to HMRC using MTD-compatible software.
How Can Small Businesses Comply to MTD?
HMRC has confirmed that a spreadsheet can be used as the primary digital record, but the MTD software needs to read the VAT totals from the spreadsheet and submit the data to HMRC. The VAT data required is exactly the same as currently submitted on VAT returns outside MTD.
There is a wide range of MTD compatible software on the market, so there should be a solution to suit all types of businesses. However, unincorporated businesses should look ahead to the filing requirements for MTDITSA and question whether their MTD for VAT software will also cope with income tax reporting.
Business owners who can’t operate computers will need to apply for an exemption from MTD filing on the grounds of digital exclusion. Accountants can apply on behalf of their clients.
MTD For Income Tax Self-Assessment. When Does MTD ITSA Start?
Get ready for the first wave of MTD for ITSA in April 2024. A taxpayer must keep digital records and submit MTDITSA reports from its digital start date. This is triggered when the gross turnover from their trading and property businesses exceeds £10,000, as reported on the last tax return. Most businesses will have 2 years to prepare and test the service voluntarily prior to its introduction.
For businesses in existence on 5 April 2023 the earliest digital start date will be:
- 6 April 2024 for sole traders and landlords.
- 6 April 2025 for general partnerships (not LLPs or corporate partnerships).
The business’ accounting period does not affect its digital start date, as all unincorporated businesses are required to switch to the tax year basis of reporting from 6 April 2024.
What Is Required for MTD ITSA?
Businesses and landlords who join MTD for Income Tax will need to send a quarterly summary of their business income and expenses to HMRC using MTD-compatible software. In response they will receive an estimated tax calculation based on the information provided to help them budget for their tax. At the end of the year, they can add any non-business information and finalise their tax affairs using MTD-compatible software. This replaces the need for a Self-Assessment tax return.
The taxpayer will have to submit the following reports of total income and expenses using MTD-compatible software for each trade or property business they operate:
- Four periodic reports (Quarterly Updates) –within one month of each quarter-end.
- One End of Period Statement (EOPS) – by 31January after tax year-end.
In addition, the finalisation statement, which replaces the current tax return, will have to be submitted by 31 January after the tax year-end. Only the finalisation statement and the EOPS must include a declaration that the figures are complete and correct.
Who Is Exempt from MTD ITSA?
Taxpayers will be able to apply for an exemption from MTDITSA on the basis of digital exclusion, but that application process will not open until late 2023.
All trusts and estates of deceased persons will be exempt, as well as specialist categories of income such as underwriting business and RIET/OEIC distributions.
What Penalties Will Apply?
Two new penalty regimes will apply for late filing and for late payment of taxes under MTD. They will come into effect for VAT from 1January 2023 and for income tax from the dates that MTD ITSA is introduced.
A point is levied for each late filing and a financial penalty of at least £200 is charged when a points threshold is reached. Points are wiped off the slate after a period of full compliance, which is normally two years.
The late payment penalties are more flexible than the current VAT surcharges, as the trader will have up to 14 days to pay, when no penalty will be charged, but interest will accrue. Where the VAT is paid between 15 and 30 days late, a 2% penalty will apply, and payment over 30 days late triggers a 4% charge.
HMRC will take a light-touch approach to the initial 2% late payment penalty in the first year of the new penalty system. Where the tax payer is doing their best to comply, HMRC will not assess the initial 2% penalty after 15 days. This will effectively give the taxpayer 30 days to approach HMRC to negotiate a Time to Pay agreement or pay in full, before a penalty is raised.
There many details to clarify around MTD ITSA, as we are still waiting for the final MTD regulations and the HMRC guidance notice, so it is important to pay attention for further announced changes.
To keep up to date with the latest news and updates to MTD, follow us on social.
Further reading: Making Tax Digital for Income Tax (bluerocketaccounting.com)
Our MTD Solutions for You
Since Making Tax Digital was first proposed over 6 years ago, we have undertaken extensive work in preparation to assist you in dealing with your MTD ITSA obligations. We already assist many VAT registered businesses with their MTD for VAT requirements.
To enable you to comply with the new MTD ITSA requirements our cost-effective solutions include:
MTD Digital Bookkeeping Services – we will take care of all your MTD ISAT requirements, so you can concentrate on running your business or property business.
MTD Compatible Software – we can provide you with MTD compatible software allowing you to either...
- maintain all your digital records and submit quarterly updates yourself, or
- maintain part of your digital records yourself, with us completing the balance and submitting the quarterly submissions on your behalf.
In both instances we would submit the End of Period Statement (or year-end accounts).
MTD Bookkeeping Training - we can train you on how best to keep MTD ITSA compatible digital records.