Making Tax Digital (MTD) is part of the Treasury’s vision to digitalise the UK tax system, which simply means that businesses must ensure that they maintain digital accounting records as opposed to continuing to do tax-related activities on paper. Hopefully, going forward, this will improve the speed and efficiency of the UK tax system as well as reduce errors. You may have been exposed to the concept of MTD back in 2019, which we’ve been running for VAT from 2019 and the transition wasn’t that bad when you look back at it. For most of our clients, they were already using accounting software to report quarterly so it was a simple switch for them to MTD.
However, upcoming is MTD ITSA – quarterly reporting for Income Tax Self-Assessment. We understand this may sound a bit confusing and all of a sudden, there’s a lot of acronyms flying around so we’ve broken it down into some simple questions below.
When is it?
MTD ITSA kicks in at the start of the 2024-25 tax year. Now this seems a long way off, but it is a good time to be thinking about and being prepared for it, especially if you deal with multiple self-assessments as we do.
Who does it affect?
Nearly all individuals that file tax returns and that are sole traders, partners in an unincorporated partnership and those in receipt of property rental income. The usual criteria applies that the income must be in excess of £10,000 per tax year. It does not affect partners in an LLP or other incorporated businesses.
What it is?
Quite simply, reporting an individuals’ income, expenses and profit each quarter digitally to HMRC. An EOPS will also need to be filed by the following January 31 which replaces the tax return.
How is it done?
HMRC will require the taxpayer to prepare a digital record each quarter to report the information to them. This will be via approved accounting software in the same way MTD VAT is now being reported.
If you are currently reporting on a tax year basis, then the only change is to report your income and costs on a quarterly basis 4 times for the 2024-25 tax year and subsequent years, followed up by an EOPS (End of Period Submission). The EOPS is replacing the annual tax return and is where other changes, such as capital allowances and losses offset, other income etc, can be reported.
What doesn’t change is the payment due dates for self-assessment, being 31 January and 31 July each year, certainly not yet anyway.
The new reporting quarters fall in line with the tax year as follows;
However, if your accounting year for a sole trader or partner (rental income is rarely reported otherwise) has a different year end date than around the tax year, then MTD ITSA will replace BPA in the 1st year of MTD adoption.
Example – accounting year is to June 2022 and next is 2023
For the year ending June 2022, this is reported for the tax year of 2022-23 and this and the payment of tax is due by 31 January 2024 in the current traditional way.
For the year ending June 2023, these full profits are shown in the 2023-24 tax year and must be reported under MTD ITSA by 5 August 2023. Then each quarter after this is reported 30-31 days after the quarter end, so for quarter ending 6 October 2023 is to be reported by 5 November 2023.
For an accounting year ending 30 June 2023, for the entire 2023-24 tax year the full 12 months accounting year is reported plus the following 9 months, meaning 21 months’ worth of profit is reported in the 1st tax year under MTD. A year ending 30 December, as a further example, will be reporting 15 months of profits.
Does this replace BPA?
Yes, we think it does. For anyone changing from PAYE to self-assessment from April 2023 will be reporting on a real time basis instead of having to work out the complicated basis period adjustment.
Is it worth worrying about now?
It is worth thinking about this now and how best to position your client’s tax affairs, so that they can be prepared for any increase in tax to pay by January 2025. It would be reckless to not consider that some clients will have a burden, possibly at 175% of current liabilities.
If you’re a sole trader reporting a paper tax return, you will need to act soon to obtain the required software so that you can comply with the new rules when they kick in. You may even be better off registering with a tax accountant to deal with this new red-tape.
If you are first hearing about this here, please do let us know what your thoughts are around this subject and get in touch if you would like our help in planning your tax liabilities in years to come and how to better plan for tax in general.