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Making Tax Digital – Income Tax

Making Tax Digital for Income Tax (MTDfIT) comes into effect for Sole Traders, Partnerships and Landlords from April 2024 (partnerships April 2025).

Making Tax Digital for Income Tax  (MTDfIT) is part of HMRCs overall Making Tax Digital programme:

  • Making Tax Digital for VAT – from April 2019
  • Making Tax Digital for Income Tax – from April 2024
  • Making Tax Digital for Corporation Tax – “not before 2026”

Please be aware that the details around MTDfIT are still emerging, both as regards HMRC regulations and guidance, and their practical implications.  This guide sets out our understanding as of April 2021, but there are still uncertainties, and aspects will change.

 

What Changes Will MTDfIT Bring in?  Who Does It Apply To?

MTDfIT comes in from April 2024 for:

  • Sole Traders
  • Partnerships (from April 2025)
  • Landlords

There is a £10,000 turnover exception.

The key obligations brought in by MTDfIT are to:

  • Keep Digital Records
  • Submit Quarterly Interim Returns to HMRC digitally, one month after quarter end
  • Submit final returns to HMRC by 31 January after the end of the tax year

 

More Detail – Who Does MDTfIT Apply To?

As mentioned above, MTDfIT applies to:

  • Sole Traders
  • Partnerships – The obligation to join MTDfIT applies to ordinary Partnerships only, not LLPs
  • Landlords

There is a £10,000 turnover exception, however there are some nuances with this:

  • In the case of Partnerships the £10,000 exception is per Partnership, not per Partner
  • For individuals the £10,000 exception is tested against the aggregate of:
    1. Turnover from all businesses they own as a sole trader
    2. Rental income from property businesses they own outright
    3. Their share of the rental income from properties owned jointly

Some examples will help illustrate how these rules work:

  • A two person trading partnership with £18,000 turnover would be caught
  • Two individuals jointly owning a property with £18,000 of rental income would not be caught unless they had other trading or property income
  • If one of those two individuals above also has another property with £5,000 of rental income, then they will be caught but their co-owner will not be

 

More Detail – Submitting Returns

Each trading or property business must submit five returns, being

  • Four quarterly returns, at the end of the next month – HMRC refer to these as “Income and Expense Updates”
    • The intention is these are automated from your software
    • These returns do not need to be as detailed as a Self Assessment
    • You will be able to see an updated tax calculation for the year at this stage, although payment timescales are not being changed
  • A Business Income End of Period Statement (“EOPS”) by 31 January after the end of the tax year
    • The EOPS is broadly equivalent to the Trading (SA103) or Property Income (SA105) Supplements that are supplied as part of Self Assessment currently
    • The EOPS is where annual adjustments are made, eg stock, debtors/creditors, Capital Allowances, Private use
  • The five return (4 quarterly and EOPS) obligation applies to each business, not per individual.  So if an individual has both a trading business and a property business, there will be a separate return cycle and EOPS for each of these (so 10 returns)

The individual then has to submit a Final Return called a Crystallisation:

  •  Crystallisation return by 31 January after the end of the tax year
  •  Contains miscellaneous income detail, eg savings and investments, income from employments, deductions like Gift Aid and pensions
  • Contains a declaration of completeness for the tax year
  • Broadly equivalent to the main Self Assessment return

Presumably, and there has been nothing from HMRC to the contrary, the existing Self Assessment regime applies to businesses and landlords with turnovers less than £10,000.

Taking a simple case of a Sole Trader under MTDfIT, their obligations change as follows:

  • Currently – annual Self Assessment by 31 January after tax year end
  • Under MTDfIT
    • Four quarterly returns, one month after quarter end
    • Annual EOPS by 31 January
    • Annual Crystallisation by 31 January
    • Total 6 returns

Taking a more complex case of a Sole Trader who also owns a rental property, their obligations change as follows:

  • Currently – annual Self Assessment by 31 January after tax year end
  • Under MTDfIT
    • Four quarterly returns, one month after quarter end for trading business
    • Four quarterly returns, one month after quarter end for property business
    • Annual EOPS by 31 January for both trading and property business
    • Annual Crystallisation by 31 January
    • Total 11 returns

 

More Detail – Digital Record Keeping

The expectation is that the major part of your business record keeping system is digitalised and updated regularly, and for links between different data sources to be automated.

As part of the automation there must be “digital links” between different parts of your accounting systems – this sounds daunting, but put simply there must be a minimum of manual keying, or cut and paste.  If you are using a programme or app then Digital Links are likely to be inherent, and the major implications here are for businesses using spreadsheets or businesses with more complex systems.

Generally the digitalisation requirement is from the stage that transactions are entered into your accounting system.

  • eg – suppose you run a cafe and people mostly pay by cash. You do not have a till. You are not expected to keep a digital record of each customers cash payment, but you must keep a digital record of the daily total from customers within your accounting system.
  • eg – as above, but the cafe has a stand alone till.  The daily z reading would be the entry to your digital records, not each customer transaction.
  • eg – as above but the till is a EPOS system linked directly to your accounting system – the transactions can be entered individually or as a daily summary; either way they are digitally linked.

 

Choosing Software for Digital Record Keeping

There are a few choices in respect of software for MTDfIT:

  • Our recommendation to clients is FreeAgent – which we believe gives a good mix of functionality verses usability for most smaller businesses.  We are able to offer our clients a negotiated discount against normal prices.
  • Other options for desktop / cloud programmes and apps include Sage, Xero and Quickbooks.
  • Feature bank accounts are coming on stream that combine banking with record keeping – our review of these suggests they need a bit more development yet before they are a reliable choice.
  • Spreadsheets – its not yet clear whether a spreadsheet can still be used. Its currently possible to use spread sheets for MTD for VAT, but (a) the spread sheet must be used with commercially available “Bridging Software” to connect to HMRC and transmit vat and (b) within the spreadsheet all internal links must be automatic – no re-keying or cut and paste. Whether this type of arrangement will be viable or allowable with MTDfiT is not yet known. The details will doubtless become clearer.

As a firm we are “open platform” so will work with your choice of software where possible.

We expect our clients to make available logins and passwords for us to access their cloud system if asked, and to meet the costs of any software supplier charges for accountants logins (some software companies charge, some don’t).

 

Our Involvement as Your Accountant

As you would expect, we are planning ahead.

  • We are aware that the support needs of our clients will vary, and in some cases the changes coming in are quite daunting.
  • It is clear that both ourselves and our clients will need to plan ahead for the implementation of Digital Record Keeping, including transition, training and support.

In terms of our fees our plan is a stratified approach with three levels of service:

  1. A Year End only service at similar fee levels to existing.  We would submit the annual year end reconciling return – the simpler quarterly returns you prepare and submit yourself.
  2. A Quarterly Check service – where we check and submit the quarterly returns as well as doing the year end reconciling return – expect additional fees for this to be roughly £50 to £100/quarter plus vat.
  3. A “Brown Envelope” service where we can take over all data entry and submission – this will be bespoke pricing, but as a guide would typically range between £50 and £250/m + vat.

For 1 and 2 you will need to budget for software / apps on top of this; with 3 we can incorporate the software into our agreement with you.  We are “open platform” as a firm, so will work, where possible, with your choice of software, but in the absence of any other  preference guide clients toward FreeAgent.