Making Tax Digital Income Tax Self-Assessment is the new implementation that every UK-based business owner needs to know about. It’s a mouthful, to be sure, but you may know it under another name - “MTD for ITSA” may ring some bells.
It’s part of a new government scheme that’s transforming the way sole traders, partnerships, trusts and landlords do business, including monitoring and reporting their finances. Every business will need to learn the new rules and regulations in the coming years, if not months.
But what exactly is this new program, and what are the ramifications for UK businesses?
Making Tax Digital for income tax
It’s another example of the UK government creating unimaginative and wordy titles for new laws and regulations, but it does get straight to the point.
MTD for ITSA is part of a wider 10-year government process designed to transform the way earnings and taxes are reported to HMRC. It began in 2019 with VAT and will continue with Income Tax in the coming years.
In a nutshell, the UK Government wants to make all earnings, records and taxes digitalised. This means that your business will have to rely a great deal more on software and provide more regular updates (but you’ll find out more about that down below.)
Who will MTD apply to?
Sole-traders, Trusts and Partnerships are all under the scope of Making Tax Digital Self Assessment, as long as their gross earnings total over £10,000 a year.
Landlords who also declare their rental earnings through self-assessment also fall under the purview of MTD.
Individuals that receive rental income and self-employed earnings will also have to use MTD, providing that the total income from both businesses amounts to over £10,000.
Businesses that use an agent to complete their self-employed taxes in the UK, can request that their agent sign them up to MTD. Or via an alternative method, agents can sign their clients up for MTD.
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What are the changes?
Normally a business or sole-trader will complete their UK self-assessment once a year, calculate their tax and (hopefully) pay it. It is a stressful month for many self-employed businesses and frequently leads to enormous amounts of stress and paperwork every December and January.
With Making Tax Digital self-assessment, businesses will be required to report their finances much more regularly.
You will need to maintain updated, detailed reports of all income and expenses, use MTD-compatible software (more about that later) and submit these reports online to HMRC every three months.
Your MTD-compliant software sends these reports to HMRC every quarter, and in return, it shows how much tax you have to pay for each ongoing quarter.
When your accounting period ends, you finalise your business income and submit a completed final declaration that replaces your standard self-assessment at the end of the year.
Penalties for late MTD submission
As with all new implementations, a new penalty system has been created for businesses using the Making Tax Digital scheme.
The penalty regime is being enforced for all Income Tax taxpayers who are required to use MTD from April 2024, with other Income Tax taxpayers facing the penalties from April 2025. The penalties are for late submissions of quarterly reports.
Report Submitted Late
2% of due tax
31 days or over
4% of due tax, plus 4% per annum
There is also a £200 fixed penalty for each omission of data where the threshold for points has been reached. The threshold for quarterly Income Tax Self Assessment is four points and provided all return obligations are met, all points expire after 12 months.
When will MTD for income tax be introduced?
Making Tax Digital for Income Tax was supposed to become mandatory for all UK businesses that qualify for the scheme from the beginning of April 2023, however, this will not transpire due to recent global upheaval.
Under advice from stakeholders, and after regard for the damage, stress and complications endured by UK businesses following the Covid-19 pandemic, the deadline has been pushed back an entire year.
Now, businesses should be prepared to make the transition to MTD by 6 April 2024, and general Partnerships by 2025.
You can sign up for Making Tax Digital now!
Although the scheme is not set to be fully mandatory before April 2024, businesses may be eligible to sign up immediately. Some businesses plan to sign up to avoid confusion later or to get a jump start on learning and understanding the new process of Making Tax Digital for Self Assessment.
The UK government has launched a live pilot test for sole traders, landlords and accountants to try to acclimatise to Making Tax Digital and provide the necessary feedback for the program. You may be eligible to sign up for the early version of MTD early if you:
- Are a UK resident
- Are registered for Self Assessment
- Are up-to-date on all of your payments and returns
- You are a sole trader with income from only one business and/or are a landlord who receives rental income from UK property.
You can visit Gov.uk to sign up voluntarily for either your current accounting period or your next accounting period depending upon your preference and your business situation.
However, be aware that even if you sign up for Making Tax Digital from your next accounting period, you will still need to submit your standard Self Assessment from the previous tax year.
How will MTD help?
The new Making Tax Digital initiative has several positive effects when it comes to paying your Income Tax. There are also satisfying reviews from businesses already enrolled within the MTD pilot scheme who recommend it highly because of these positive effects on their business and financial planning.
The first bonus to MTD is an obvious one, and it affects the UK Government itself, as they introduced the initiative to prevent errors that cost the UK an estimated £10 billion in revenue every single year.
But you want to know the positive effects on your own business.
First and foremost, the ability to more accurately estimate your Income Tax every year is a huge advantage for your financial planning. Quarterly reports now inform you how much tax you have incurred each quarter so that your accountants or finance department can plan.
This may involve altering budgets or even reinvesting in certain areas depending upon your financial situation. Regardless of your financial choices, you will now build a clear picture of your owed Income Tax over each quarter and can make actionable financial decisions based on this clear, solid data.
The second excellent quality of the Making Tax Digital initiative is that it is so much simpler.
While quarterly reports sound like 4x the work - it is not. Any MTD compatible software does most of the legwork necessary to complete these reports. It also navigates the complexities of using Government Gateway to create self-assessments (which was and still is far from a perfect system!)
Ultimately, this not only reduces the scope for error but also cuts down on the administrative and financial processes. At first, it may not sound quicker - after all, you are sending multiple reports per year instead of just a single self-assessment, but thanks to the updated technology it can take no time at all!
Now your data is in one place, and the software takes care of all the laborious tasks for you!
What you need to sign up for Making Tax Digital
You don’t need a great deal at all to sign up for the MTD scheme. All you need is:
- Your Business Name
- Your Business Start Date OR Date you began collecting Property Income
- National Insurance Number
- Email address
- Accounting Period
- Accounting Type
- Ie. Cash or Standard Accounting
- To be registered for Self Assessment
- To be up to date on all Self Assessment payments
- Your Government Gateway ID and Password
Essentially all the information that businesses use to submit their self-assessment and generate their self-employed taxes every single year.
Aside from these essentials, you will also need one more thing. Your business will need to incorporate MTD-compliant software.
What about MTD-compliant software?
Making Tax Digital compliant software is a necessity for every business enrolling in the scheme. There are several available already for those who wish to sign up early. However, with the MTD scheme on the way to becoming compulsory in 2024, there are many more already in progress. So you should have a fair amount of choice!
Your MTD-compliant software must be capable of several things.
- To maintain your business records according to the rules and regulations made by HMRC.
- To prepare and send quarterly updates and the end of period statements using that information.
- To finalise your business income and submit your declaration after the end of the tax year.
- To communicate with HMRC via their Application Programming Interface (API) platform.
With all that said, here is a brief list of softwares that are already MTD compliant and ready to use.
APARI Software Ltd
Agents AND Businesses
Cirrostratus Exedra Ltd
Agents AND Businesses
Agents AND Businesses
Agents AND Businesses
This is far from a complete list. As the deadline for MTD becoming compulsory approaches, new software is being rolled out with increasing frequency. Each newly created brand of software is bound to include extra features as time goes on.
Need any more help with Making Tax Digital?
Finances can get tricky, and transitioning to something new is never easy. You have to invest hours of research before making your choice, and even then you have to spend even longer learning and adapting to the new system.
That is why Accountancy Cloud is here to help.
We understand finance, no matter your business. That is why we work with the smallest Startups to the larger brands! We offered professional, tailored services and oversight of finances to provide you with the clearest overview of your business incomings and outgoings. We’ll even save you money with R&D Tax Credits - just ask Dynamo Group!
So talk to one of our experts today and find out how we can help your business save money, grow and ensure that it’s on track with your taxes!
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