MTD for income tax will be effective from 6 April 2024 for all sole traders, landlords etc. irrespective of when their current accounting period ends with MTD for general partnerships postponed to 2025. The change to the tax year basis has also been delayed until at least April 2024.
When does a business need to join MTD for income tax?
MTD for income tax will be effective from 6 April 2024 for all unincorporated businesses i.e. sole traders, partnerships, landlords etc. irrespective of when their current accounting period ends.
The base year for testing the MTD turnover threshold will be the tax year 2022/23. The turnover figures for 2022/23 will not be distorted by Covid-related grants so it should reflect normal trading beyond the pandemic for most businesses.
The background to MTD
Increasingly, businesses and agents see the benefits of digitisation. Millions of businesses are already banking, paying bills and interacting with their customers or suppliers online, and many are already using accounting software.
HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world and MTD is making fundamental changes to the way the tax system works – transforming tax administration so that it is:
- more effective
- more efficient
- easier for taxpayers to get their tax right
The move to digital integration will eliminate many of the existing paper-based processes, reducing errors and allowing businesses and their agents to devote more time to running their business. Many businesses use an agent and MTD allows agents to continue to provide a full service in supporting their clients.
The advantages of digital record-keeping
Businesses, regardless of turnover, can benefit from using software to keep digital records. Software not only helps the effective running of a business but also reduces avoidable errors in business records that can occur when manual calculations are performed, or information is transposed by hand.
By keeping up to date digital records in real time, businesses can also reduce the risk of errors due to lost or incorrectly recorded invoices.
Going digital makes managing business finances more straightforward. Millions are already banking, paying bills and interacting online – going digital with business records and taxes is the next step, giving business more control and better capability to forward plan with their finances.
We know that many businesses are severely affected by the coronavirus (COVID-19) situation and we are committed to supporting businesses during this time. However, MTD makes it easier to get things right, digital record keeping will reduce the risk of unwelcome and costly HMRC compliance interventions and help businesses to manage their cash flow more effectively.
Keeping business records digitally means that it’s easier for a business to share their records with their agent, saving both time and costs, and allowing agents to focus on more value-added activity.
Will the turnover threshold change for MTD ITSA?
Turnover threshold is not expected to change in the final MTD for income tax regulations. HMRC has made it clear that all unincorporated businesses with an annual turnover in excess of £10,000 will need to report income and expenses under MTD for income tax.
This turnover threshold takes into account income from all businesses, property and trades. A taxpayer with £7,000 of rental income and £8,000 of trading income will be required to report under MTD for income tax as their total turnover exceeds £10,000.
Will there be any grants available to cover the increased cost of compliance due to MTD ITSA?
There are no plans for the government to subsidise the cost of compliance with MTD ITSA for unincorporated businesses. Most small businesses & landlords will be expected to submit their own quarterly returns and seek assistance from their accountant with the end of period statement (EOPS).
Spreadsheets may play an important role in MTD for ITSA, but you need to ask yourselves as to whether the upkeep of these spreadsheets is going to cause an administrative burden when it comes to quarterly reporting. Accuracy of these spreadsheets will be essential for digital record keeping where formulas must be used for calculations and the ‘cut and paste’ function does not meet the digital link requirements
Will it be mandatory to align the VAT quarter with quarterly reporting under MTD ITSA?
No, it will not be mandatory to align the VAT quarter with MTD ITSA for unincorporated businesses however it does make sense to do so otherwise you may have two sets of dates when quarterly reporting is required creating additional administrative burden.
Will the start date of MTD ITSA be deferred?
Partnerships that only have individuals as partners will have to join MTD for income tax from April 2023.
However, there will be a deferral for MTD for income tax mandation for the following categories of partnership, it is not yet clear as to how long the deferral period will last for:
- – Partnerships containing a corporate partner
- – LLPs
- – Limited partnerships
Will there be any exemptions from MTD ITSA?
The latest MTD ITSA policy update indicates that the following taxpayers will have a full exemption from MTD ITSA:
- – Estates of deceased persons
- – Trustees of registered pension schemes
- – Trusts (including trusts with property income)
- – Non-resident companies
If an individual is digitally excluded, they may be able to claim an exemption from MTD ITSA.
What are the filing deadlines for MTD ITSA?
HMRC has confirmed that the quarterly filing deadlines for all unincorporated businesses filing under MTD for income tax will be: 5 August, 5 November, 5 February, and 5 May.
Those businesses with accounting dates of 31 March or 1, 2, 3, 4 April, will also file by these deadlines, so a business with a 31 March accounting date will have 5 extra days to file.
The first mandated MTD submission for the first quarter to 5 July 2024 will have to reach HMRC by 5 August 2024, which is a Saturday in the Summer Bank Holiday weekend in Scotland.
What will the quarterly submission to Hmrc consist of?
The quarterly MTD for income tax submission will consist of total sales income in the period and totals of expenses in defined categories. It is expected that those categories will be aligned with expense totals currently required for the self-employed section of the self-assessment tax return. Quarterly balance sheet statements will not be required.
Any accounting adjustments, for say capital allowances or losses, will be made on the final submission for the year – known as the end of the period statement (EOPS).
Recommended reading: MTD for ITSA FAQs
What will be the process to finalise tax position for the year?
The EOPS will have to be submitted by 31 January following the end of the tax year. HMRC hope that tax software providers will incorporate the EOPS into the tax software which also compiles and submits the finalisation statement.
It is the finalisation statement, that calculates the tax liability for the year, which effectively replaces the SA tax return. Any sources of income that have not been reported on the quarterly MTD submissions or EOPS is included in the finalisation statement.
Taxpayers who are not within MTD for income tax, but are currently required to submit an SA return (For ex: to report gains or taxable interest) will continue to submit a SA tax return.
How can MCL Accountants help?
Contact MCL Accountants Southend on 01702 593 029 if you have any queries regarding MTD for Income Tax (MTD ITSA) or if you need any assistance with the preparation and submission of your business accounts or self-assessment tax returns to HMRC.Tags: Making Tax Digital