Self-Employed? The Deadline to Make Tax Digital is approaching

* IMPORTANT UPDATE 28/09/21: In light of the difficulties businesses have faced during the pandemic, the Government have extended the deadline for MTD. The new deadline for Income Tax Self-Assessment clients is a year later, in the tax year beginning in April 2024. Read Financial Secretary to the Treasury, Lucy Frazer's full statement here.

Making Tax Digital for Income Tax Self-Assessment (MTD ITSA) will be coming into effect from April 2023 and it will be compulsory. You can, however, voluntarily sign up for this now and the process is much more straightforward than people initially thought it would be. But who will it impact and, if you complete a self-assessment tax return what does this mean for you?

Making Tax Digital has been threatened for quite some time and for any business that is VAT registered then they have had to submit their VAT returns via the MTD digital process for over 12 months now.

For a person that normally completes a self-assessment every year the process is changing. MTD ITSA is a new way of reporting your earnings to HMRC. You will need to use approved software to keep digital records and will have to send your information digitally to HMRC every quarter – not once a year.

This is all part of HMRC’s strategy to go paperless and also to recover some of the tax owed more quickly than the current process. If you want a cure for insomnia then you can download the latest draft regulations from HMRC here.

You’ll be thankful to know though, that we’ve summarised what we consider are the key points designed to help you understand the impact and how the change will affect you. Please keep in mind though, this information is based upon present HMRC draft proposals which may be subject to change.

Who will be affected by the upcoming Making Tax Digital?

• Self-employed individuals (including landlords) with a tax year turnover exceeding £10,000. This would be the level of income you would include on your normal tax return so if you have multiple sources of income then it is the combined total.

• A partnership that only consists of individuals….MTD ITSA has been deferred for the time being for a partnership with a corporate member, LLP or a Limited Partnership.

There are some exemptions and these are as follows:

• If your combined self-employed income (this is turnover, NOT profit) does not exceed £10,000.

• Income from a deceased person’s estate.

• Trustee’s for any registered pension scheme.

• Non-resident businesses.

There are also exemptions for individuals who are able to demonstrate that they are digitally excluded. So this could mean that they are unable to get an internet connection where they live or submit their return from. Digital exclusion can also apply if you have a disability that prevents you from using the digital software or you have a religious belief that impacts your use of digital software.

What does Making Tax Digital mean for me?

You will now need to submit a tax return several times per year. Currently, you have to file a single tax return once a year. Under the new rules, you will have five submissions - one at the end of each quarter.

So for an April 5th year-end, your first submission will be for the period to 5th July and you will have 1 month to make the filing and then each 3 month period thereafter. After this, you will then submit a “finalisation statement”. This is called an End Of Period Statement or EOPS. This will need to be filled by 31st January following the end of the relevant tax year in which you can include elements like dividend income or capital gains etc.

Keep in mind that you will be required to maintain all of your financial records in a digital form. Paper will not be accepted.

If you are working with an accountant who is already using digital software and management systems then you will receive a notification of when the information needs to be filed.

What are the key dates for Making Tax Digital?

So, what are the key dates? For this category, this will be starting from April 2023.

Your quarterly submissions will need to have been received by HMRC by the following dates:

• 5th August 2023 – covering the 1st quarter to 5th July.

• 5th November 2023 – covering the 2nd quarter to 5th October.

• 5th February 2024 – covering the 3rd quarter to 5th January.

• 5th May 2024 – covering the 4th quarter to 5th April.

• 31st January 2025 – you will have to submit the EOPS mentioned above with any adjustments by this date.

When will I have to pay any tax? Is it every quarter?

Currently, the answer is no. The draft proposal suggests the same deadline dates for tax payments of 3rd January and 31st July. As we’ve said above though, this could be subject to change. And let’s keep in mind, HMRC has plans to recover any outstanding tax more quickly than it currently does.

What will I need to include in the submissions?

As you do today, it will be details of any trading or rental income and expenses for the quarter period concerned. You may even need to have this broken down into the separate categories in a similar way to what is currently required. The main difference for you is having to do this more frequently.

One of the key impacts for you will be that under the new MTD rules you will have an understanding of the amount of tax that you owe at the end of each quarter as it is proposed there will be a year-to-date tax calculation.

What will happen if I don’t comply?

Financial penalties are likely to be imposed.

Don’t bury your head in the sand and wait until the last minute. Make sure you are MTD ready or you are working with an accountant who is. If you are in doubt or need some guidance then please contact the team. We work with clients here in West Bridgford, Nottingham and right across the United Kingdom.